Credit crisis could benefit India

On the virtues of making haste slowly

V Anantha Nageswaran would smile when he sees the Economist Intelligence Unit concede that:

Ironically, the current global situation is also making India’s measured pace of economic reform look wiser than before. At a time when Western countries are frantically nationalising banking assets, the Indian government’s reluctance to sell more than 49% in its state-owned banks—which control some 70% of banking assets—now seems reassuring. In addition, India has not yet introduced full capital-account convertibility, which protects its currency, while its careful control of foreign borrowings by domestic companies limits dependence on the global financial system. Regulators have also periodically introduced curbs to slow the formation of potential asset bubbles, such as higher provisioning and prudential requirements on real-estate lending.

The EIU believes that while there would be some short-term worries, Indian companies are likely to use the crisis to make overseas acquisitions.

12 thoughts on “Credit crisis could benefit India”

  1. Ordered and started reading NN Taleb’s “The Black Swan”. And he too undersocres the prudence of building in redundancies, of going the extra mile to safeguard core systems etc to ward off ill-effects of Black Swan events (which are by definition, both unpredicatable, game-changing and not that uncommon).

    Seems like India’s fin system has taken the sensible ‘middle path’ on many issues. Wish India’s politiocal system too had done the same rather than swing so blatantly away from the center and towards the left. Some prudent correction is overdue on that scale, IMHO.

  2. thanks, Nitin. Yes, it does make me smile that RBI has been recognised for the very good work it did. More importantly, it is the last and the penultimate sentences that should make us feel that RBI did the right thing.

    Before financial market/banking sector reforms, India needs fiscal reforms and it does not look like getting one. Worse, on fiscal, as in many other matters, India has regressed.

    That is one of the reasons – do not look for direct causation – why the Indian asset markets (stocks and property) are cratering now.

  3. This analysis (by Economist) reminds me of the saying: A stopped clock nevertheless shows correct time once in 24 hours. RBI works under intense political pressure and has been slowing monetary reforms which gives us a illusion of stability. But in reality the total policy apparatus (Fiscal and monetary) might achieve the unique combination of stiffling growth while at the same time leaving our banks and FIs with tons of bad assets 2-3 years hence in the form of insolvent farm loans and oil bonds. Also, right now private or productive investments have got crowded out in the credit crunch in the Indian financial system; there is no way we are going to achieve 7% growth rate this year despite a good monsoon.
    This has been a consistent trend for almost 50 years since we began nationalizing the financial sector with the birth of LIC.We have followed a tight monetary policy and so called “prudent regulatory norms” thereby limiting credit for financing productive asset creation. But our regulatory oversight is never good enough to prevent periodic scams and collapses ranging from Mundra scam in 50s, loan melas in 70s, sickness of banks and DFIs by 90s (DFIs continue to be sick till today), involvement of PSU banks in 1992 stock market scam, bankruptcy of UTI in 2000, failure of cooperative banks and so on. US and European financial system might be in turmoil today but it can hardly be disputed that for most part of the last and current century it has funded growth and have been prudent and in good health for most part since the beginning of financial globalization. Indian financial system on the other hand might be unique in that it has failed to fund growth while at the same time managing to build bad asset books. I am surprised how come an experienced banker like V Anantha Nageswaran is so proud of our incompetence 🙂

  4. Just to add to this, to say that Indian companies will be able to make acquisitions abroad in this market is laughable. All acquisitions made by Indian cos in last 2-3 years have been funded on cheap dollar/ euro debt not on their intrinsic cash flow position. In the current scenario, all of them will see financiers vanish before they can say “Axon”. Just watch the fun

  5. Shashi, I think HCL wants Axon for Rs1000 crores more. I am not sure how its funding the deal though.

    But I have to agree with your larger point. I think it’s kind of silly for EIU to argue that because the west is injecting capital into finance companies to take care of an abnormal market scenario that somehow the socialism is good thing!

    Occasional suboptimal response to a crisis does not validate a permanent suboptimal status that stifles growth, innovation, and, more importantly, productivity of PSUs banks.

    Fiscal situation may be an issue for currency and capital controls but it doesn’t make the case for why PSU banks need to PSUs?

  6. Shashi its inteersting how one can be right and wrong at the same time.
    The RBI’s pusillanimity is predictable as it is driven by political leaders whos only interest is in keeping the status quo — because they then become the decision-makers of doling out favours. At the end of the day, and particularly given our current political dispensation, we’re still ruled by nehruvian stalinists.

    However, you’re equally wrong about the cash flows of indian companies. Many of them are sitting on mountains of cash. Infosys, i think had over a billion in cash reserves.

  7. Infosys has cash, HCL does not. Infosys true to its character withdrew from Axon when it realized that it might have to get into a bidding war, HCL true its belief in dare devilry, stuck on though it does not have the cash. Lets see what they do when they have to make the payment and try to raise pound denominated debt 🙂
    Tatas buying AIG? is that a joke or do you mean AIG stake in Tata AIG?

  8. @shashi,

    I got it slightly wrong, it is AIG Asia (here). It’s still not a joke dude, so you need to update your opinions.

    Not sure if Tatas would want to buy AIG. AIG Asia is standing on firm ground and is a good buy.

  9. @Udayan
    Interesting… Tata’s acquistion of Corus and JLR is causing them problems already, but you have to give it to their pluck. OTOH, if AIG Asia is available at distress price they might yet make money on this one

  10. I am confused.
    Slow reforms, which will ensure only around 1% of the population benefit over a period of 15 – 20 years, then “is expected to” trickle down to majority population over the next many years
    is being appreciated against
    faster reforms, which benefit majority population over a short period, though with some shocks, which can be monitored and actioned upon.

    Compare home ownership in India [due to complex rules right from financing to realty] with home ownership in US or other western countries [40 – 65%]

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