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How Not to Fix the Banking Sector

The King of Good Times has taken flight!

VJ Mallya’s dramatic March 2016 exit from India to London, the global hub of tax evasion and offshore funds and money laundering, generated plenty of headlines. However, behind the scenes there is a deeper unease about the Indian banking sector. There is a growing awareness that his dramatic departure signalled a set of deeper underlying problems. This malaise was signaled by the announcement of another departure, that of the head of the Reserve Bank of India Raguram Rajan, whose tenure will end on September 4th, to the profound unease of many financial pundits. He left after the shortest tenure of any RBI governor since 1992, after political attacks on him led by the BJPs Subramanian Swamy.

This is perhaps unsurprising, since Rajan was well known for his strong views on what was needed in order to set the Indian banking sector back on track: The large corporate houses were to be made to pay back their bad loans, since this was what was truly holding back the growth rate in India. This earned him praise from international bodies like the IMF. This was a policy to be pursued even if this meant a fire-sale of assets for the corporates that were in debt, leading many commentators to believe that this was why he was pushed out.

This move leaves many uneasy questions unanswered, such as How will such huge unpaid debts affect the Indian banking system? and How much of the Indian banking systems loans are secured with things as flimsy as the value of a brand? It also raises more fundamental questions like - how and why was this allowed to happen in the first place?

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The 'Make in India' Gambit

Marred as it was by the JNU controversy, February 13th - 18th, 2016 was meant to be "Make in India" week. This was to mark the culmination of sixteen months' of efforts towards the "Make in India" initiative, which the official Make in India website states is intended to "transform India into a global design and manufacturing hub.".

But is Make in India going to work? In this briefing, we explore the challenges that lie before this initiative, and the extent to which the policies that form part of Make in India are likely to tackle them. What we find is that this initiative is not only unlikely to reach its goals, but it may also lead to a worsening of some of the basic structural problems of India's economy. These include poor infrastructure; poor levels of public services, particularly health care and education; and the very low income levels and consequent low purchasing power of most Indians.

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The Deepening Roots of Corruption and Cronyism: February 2015

Corruption is one of the oldest and most significant issues in India's administration and politics. In every election, politicians pledge to clean up corruption. It is widely held that the previous national government lost the elections after a series of very large scams were unearthed by government auditors. Moreover, the policymaking presumes a reasonably effective and efficient state, and in India's case these are eroded by arbitrary and perverse decision making.

The question is: what are the spaces for corruption and cronyism in the Indian system? Where do they spring from? And, most importantly - are they expanding or shrinking?

In this Thematic Briefing, the India Study Group looks at these questions. We find that the spaces for corruption in India's institutional framework are centered around some basic problems, and these problems are getting worse. The possibilities for graft, cronyism and arbitrary decision making in India are expanding  This expansion is very rapid in some institutions - such as the judiciary, intelligence services and natural resource regulation. Overall, erosion of institutions in India appears to be accelerating.

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Threats to Investment: 4 December 2015

After a wave of favourable and supportive commentary in the wake of the election of the Bharatiya Janata Party (BJP) in 2014, much economic policy commentary has turned more uncertain of late. There is considerable frustration at the central (federal) government's failure to enact certain policy changes.

The ratings agency Standard and Poors' recently threatened to downgrade its rating if economic reforms are seen to be "straying"; business leaders called upon the government to "press the pedal on reforms"; while practically every English newspaper has run editorials calling for the Modi government to show more "focus" and "courage." After the defeat of the BJP in the elections in the State of Bihar, such commentary has intensified.

However, most of this commentary focuses on a narrow range of policy instruments - especially the Goods and Services Tax, easier land acquisition, and the fiscal deficit. These measures do not take into account deepening trends that are likely to threaten India's eventual investment climate. The roots of these threats predate the present NDA government. But the NDA appears to be systematically exacerbating them.

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How "Faster" Land Acquisition and Environmental Clearances May Harm the Economy: November 2014

Glance at any "top five" policy list in India's business media and you're likely to find "faster environmental clearances and land acquisition" - or some variation on that theme - in the list. For instance, Fitch Ratings claims "tough environmental clearances and regulatory approvals" are "key challenges" before the country.

By Manoj K (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsSuch logic certainly looks attractive. In a country with crippling shortages of basic infrastructure, and with a severe crisis of underemployment, don't we need quick access to natural resources for "development"?  Therefore, shouldn't the government institute an "easy", "single window" approvals process - coupled with "generous" compensation to "farmers" to address any opposition?

In this briefing, we examine these issues more closely. What we find is precisely the opposite of what is usually claimed: in reality, land is underpriced and acquisition is too easy; clearances are guaranteed and given quickly.  Rather than addressing the real root cause of the problem, the 'reforms' being pushed at present are likely to:

  • Increase cronyism and non-transparent, arbitrary allocation of resources, as in previous "mega-scams";
  • Fail to address delays and resource bottlenecks for necessary infrastructure, inducing more delays;
  • Increase impoverishment and resultant social conflict (now affecting at least a quarter of India's districts), particularly in resource rich areas;
  • Increase the risk to India's financial system from bad loans, investor defraudment and overall volatility.

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