India’s Growth Slowdown:
Goodbye, Financial Liberalisation,
Hello Financial Crash?
Kunal Sen
IDPM, University of Manchester
The End of India’s Growth Miracle
Falling Investment
40
2002
1993
35
30
25
20
15
10
5
0
1950
1960
1970
GFCF
1980
PUB
1990
PCS
2000
HHS
2010
No sign of turnaround
Cause of decline in fixed investment:
stalled projects (“alarmingly high and
dominated by the private sector”, ES
2015)
Manufacturing’s share of stalled
projects rapidly rising
Deeper symptoms of stalled projects:
Investment bubble driven by overexuberance financed by lax credit
Balance Sheet Mismatches: “An
Uniquely Indian Syndrome ” (ES)
Most of the debt of the private sector
owed to Indian public sector banks,
who are now stacking up a lot of NPAs
So this peculiarly “unique Indian
syndrome” due to too much
financial liberalisation or too less
financial liberalisation?
Quick recap of India’s financial
liberalisation since 1991
• By 1994 commercial banks and term-lending
institutions were completely free to set their own
lending rates.
• Opening up of the banking sector to the entry of new
private banks.
• Substantial deregulation of the stock market, especially
the operation of the new issues market and relaxation
of restrictions on the entry of foreign portfolio
investors.
• Indian firms with good track records have been allowed
to issue bonds and equity in foreign capital markets.
Incomplete Financial Liberalisation
• The statutory liquidity ratio – mandatory
requirement that Indian banks a share of their
resources in liquid assets such as government
securities – in effect, a mechanism to finance
the fiscal deficit. Currently 25%.
• Priority sector lending requirement – 40% of
credit has to go to agriculture, small scale
industry, etc.
• Entry of private banks very difficult in India.
Dominance of Public Sector Banks
Private Banks Outperform Public
sector Banks, but wide variation in
performance in PSBs
Public financial corporations as the
absorber of capitalist risks
Hello, Financial Crash?
Two Routes out of the current malaise:
• A) More liberalisation. Highly unlikely.
• B) Some tinkering at the edges, but more of the
same.
• The political equilibrium favours the status quo
(both large business and PSBs are caught in a
low level equilibrium trap).
• Not surprising that the current govt sees public
investment as the way out, rather than reforming
the banking system, restructuring corporate debt,
and punishing errant large business.