I4I Event: Panel Discussion on financing development in India
- 05 September, 2019
‘Ideas for India’ is hosting a panel discussion on ‘Financing development in India’ on Monday, 9 September 2019, at Desire Hall, Le Méridien Hotel, New Delhi at 6:30pm. The panellists are Prachi Mishra (Goldman Sachs), Andy Mukherjee (Bloomberg), and Ananth Narayan (SP Jain Institute of Management and Research). The discussion will be moderated by Pronab Sen (IGC India), and feature reflections from Minouche Shafik, Director, London School of Economics. In this post, Ashok Kotwal (Editor-in-Chief, I4I) outlines the key issues for deliberation.
Developing countries need resources to be able to develop – to build infrastructure, and human capital. It is always a difficult challenge to raise these resources in India even under normal circumstances because so much of India’s economy is informal. How then should the government finance development?
In the heydays of fast growth during 2000-2011, there was a great deal of effort to build infrastructure through public-private partnerships. Given the difficulties in expanding the tax base, it seemed like a good idea. Private sector firms could be enticed to build public projects like roads by pushing public sector banks to give them loans, and by designing the projects to generate private returns to the firm (for example, by making them toll roads). However, due to the countless obstacles along the way (for example, difficulties in acquiring land, satisfying environmental regulations, court delays), the projects got invariably delayed and the debt plied up. At some point in time, the project ceased being lucrative to the firm. Several projects were stalled and abandoned. This created non-performing assets (NPAs) on the balance sheets of the lending institutions as well as the corporate firms creating the ‘Twin Balance Sheet Problem’. It added to the NPAs created through bad loans given to corporates making the whole financial system fragile.
Given the difficulties in expanding the tax base, encouraging the Non-Banking Financial Companies (NBFCs) also seemed like a good idea. They raised funds through domestic and foreign investments that they could then use to finance infrastructural projects. IL&FS, one of the largest NBFCs, built tunnels, oil terminals, roads, and power stations. However, it turns out that it was badly managed and declared bankruptcy last year sending a tremor through the entire economy.
Banks and NBFCs are severely stressed. Saddled with so many bad loans, the banks have curtailed their lending. This in turn has dampened the consumer demand for houses and consumer durables like autos and two-wheelers. Corporates in the affected sectors have started laying off workers dampening the consumer demand further. This adds to the slowdown of the demand by the rural sector that was yet to recover from the shock of demonetisation.
And now with the growth slowdown, raising resources for development has become even more difficult. The government is in a bind. Many sectors in the economy are clamoring for help. Banks are stressed and need recapitalisation. Farmers would like loan waivers as rural India is in a distress. Corporates are laying off workers as their inventories are piling up. There is a demand for a fiscal stimulus. Due to the slowdown in growth, the tax collection is lower than expected. The government cannot engage in increasing its fiscal deficits as it is already at the margin of what is permissible by law.
What should they do? They got a reprieve as the Reserve Bank of India (RBI) transferred Rs. 1.76 trillion according to Jalan committee recommendations. But is that going to affect the credit ratings of the Government of India in case they have to borrow abroad as suggested in Nirmala Sitharaman’s latest budget? Is external borrowing itself problematic? Is it too risky? Is there a systemic problem in that commercial banks using short-term deposits and lending it for long-term projects ought not to be the vehicles for financing developmental projects? There should be a properly developed market for long-term bonds. How do we develop it?
There is a huge debate going on each of these questions. This is where panels like the one we are holding on 9 September are useful. Our panel members are experts who have thought deeply about all these issues.
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