ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

DebtSubscribe to Debt

A Faulty Response to the COVID-19-induced Crisis

India’s response to the COVID-19-induced economic crisis is proving to be ineffective. The neo-liberal embrace of monetary measures that infuse cheap liquidity as a substitute for fiscal activism has not resulted in faster credit growth. The reliance on banks and credit to mediate the stimulus, rather than directly injecting demand through government spending, is not working. Agents overwhelmed by a demand recession are not seen by banks as creditworthy borrowers, and the former in turn are reticent to borrow, fearing that they will not be able to service the debt.

Lucrative Defaults by Hungry Corporates

The implementation of the Insolvency and Bankruptcy Code, 2016 has led to aggressive competition to acquire firms that have been subjected to the resolution process. This suggests that the default that required the creditors to bring these firms to the National Company Law Tribunal was not due to poor fundamentals. Moreover, the decision of the original promoters to try and enter the fray as bidders for defaulting firms indicates that they too do not see the firms and the activities they are engaged in as unviable. Yet, there is much pressure on the government to favour those who seek to game the system.

Should States Target a 3% Fiscal Deficit?

India’s current fiscal rules target a 3% fiscal deficit for the central and state governments. Though states have largely adhered to their borrowing ceilings, subnational debt is proliferating. A significant reduction in subnational borrowing is required to stabilise the states’ debt around the desired level of 20% of gross domestic product. Symmetry should not be forced on central and state borrowing flows, given their widely divergent levels of debt stocks.

Reforming the Risky Financial System

Other People's Money: The Real Business of Finance by John Kay; New York: Public Affairs, 2015; pp 352, $27.99 (hardcover).

Delinking Housing Cycles, Banking Crises, and Recession

The nexus of housing boom-busts, banking crises, and economic cycles is not unique to the last crisis and has been increasingly present in each of the major banking crises since the break-up of Bretton Woods in the early 1970s. Housing is a politically charged issue. A safer housing market, via planned fiscal intervention to steady supply, would do more to make the financial system safer than all of the other recent initiatives put together. Cheaper finance without cheaper homes only deepens housing inequality.

Calm before the Storm?

It is generally believed that India is doing far better than most emerging market economies in these times of global economic turmoil. Emerging markets are facing capital flight, with large-scale outflows, especially since the second half of 2015, with the trend expected to continue in 2016. India has been less affected than others, but is clearly vulnerable due to the large number of Indian firms that are exposed to external borrowings, a weak rupee, a year or more of declining merchandise exports, falling corporate profitability, and stressed corporate balance sheets.

Secondary Market to the Fore

The growth of the financial market in 2002-03 was much more marked in the secondary market than in the primary segment. Turnover in all three components of the secondary market - equity, debt and forex - continued to grow apace.

Twelfth Finance Commission and States' Debt Burden

Both the Tenth and the Eleventh Finance Commissions formulated certain schemes for debt relief to the states which, however, were not sufficient to deal with the magnitude of the problem. It is necessary that this issue be addressed more seriously while drafting the terms of reference of the Twelfth Finance Commission.

Redefining the Debtor-Creditor Relationship

While the ordinance on non-performing assets of financial institutions is a landmark measure to restore the balance between lenders and borrowers and thus move towards better risk-sharing between them, the provisions of the ordinance must be seen as one of a whole gamut of means available for restructuring/settlement of the overdues of the financial system.

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