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

Articles by C P ChandrasekharSubscribe to C P Chandrasekhar

Sovereign Default in the Core?

Rising sovereign or sovereignguaranteed debt followed on occasion by sovereign default was until recently a problem faced by developing countries. Now the pattern has turned upside down. It is the metropolitan centres of capitalism which are running up large debts and are experiencing a rapid increase in the public debt-GDP ratio. Some of them may even end up defaulting on this debt.

How Sound Is Indian Banking?

The Committee on Financial Sector Assessment has found Indian banking to be in sound shape. However, while liberalisation and financial integration may not have resulted in excess exposure of Indian banks to the toxic assets that originated in the US and Europe, there is still cause for concern since the behaviour of domestic banks - with lending shifting in favour of more risky assets - has begun to resemble that of banks in the advanced countries.

Must Banks Be Publicly Owned?

Even as analysts and policymakers in the United States and Europe are debating whether nationalisation is the best option to deal with the crisis in the banking system, governments have already opted to hold a majority of ordinary shares in the expanded equity bases of leading banks. Objections aside, the scale of the crisis portends that the need to inject more capital into the system will only grow. In addition, deregulation and the transition in banking from a structure that was based on "buy-and-hold" to one that relied on an "originate-and-sell" strategy almost certainly points to the need for a publicly owned banking system to ensure the proper functioning of the private sector.

Beyond Basel for Banking Regulation

The financial crisis has made clear that the accumulation of risk and the occurrence of crises are almost inevitable in a self-regulated financial system governed by a framework of the Basel kind. One solution is to monitor investment banks and hedge funds and subject them to regulation while seeking an institutional solution that would protect the core of the financial structure, the banking system. The bail out implemented in the US and some of the west European countries has been forced to take a form that perhaps provides the basis for such a transformation. Governments have opted for state ownership and direct influence over decision-making. Will this be temporary or a new form of banking regulation?

The Problem as Solution

The Subprime Solution: How Today's Global Financial Crisis Happened, and What To Do About It by Robert J Shiller

India's Sub-prime Fears

Is India heading towards its own sub-prime crisis? There have been a number of developments that suggest such an eventuality is possible. Bank credit has been growing very rapidly in recent years, the retail exposure of banks in the form of personal loans has increased sharply, exposure to the "sensitive" sectors (especially by the new private banks) has exploded, and securitisation of loans (during which diligence can slacken) has also risen. If the economic environment takes a turn for the worse - as has already happened - then the danger of bank loans turning bad increases manifold.

Continuity or Change? Finance Capital in Developing Countries a Decade after the Asian Crisis

Ten years after the east Asian crisis, the volume of capital flows to developing countries has exploded, but has vulnerability to crises been reduced because of the prudence built into the financial system? On the contrary, we are in fact witnessing trends, which imply an increase in financial fragility that can lead to further crises, with extremely adverse implications for growth, stability, employment and social welfare. New measures to govern finance and financial flows are a necessity.

Private Equity: A New Role for Finance?

India's experience with private equity is illustrative of the rush of this form of finance to the developing world. The acquisition of shares through the foreign institutional investor route today paves the way for the sale of those shares to foreign players interested in acquiring companies as and when the demand arises and/or FDI norms are relaxed. This trend of transfer of ownership from Indian to foreign hands would now be aggravated by the private equity boom. Private equity firms can seek out appropriate investment targets and persuade domestic firms to part with a significant share of equity using valuations that would be substantial by domestic wealth standards.

The 'Demographic Dividend' and Young India's Economic Future

Declining fertility rates have changed the age structure of India's population, resulting in a "bulge" in the working age-group. This "demographic dividend" has improved the dependency ratio leading to the hypothesis that the bulge in working population will lead to an acceleration in growth. However, recent employment figures indicate that the absorption of the Indian youth into the labour force is not as high as one would expect. This is perhaps due to the poor employability of the workforce, which is severely affected by a deficit in educational attainment and health. This needs to be remedied in order to take advantage of the opportunity for growth that the demographic dividend is supposed to give India.

Financial Liberalisation in India

The Indian experience with reform in the financial sector indicates that, inter alia, there are three important outcomes of such liberalisation. First, there is increased financial fragility, which the "irrational boom" in India's stock market epitomises. Second, there is a deflationary macroeconomic stance, which adversely affects public capital formation and the objectives of promoting employment and reducing poverty. Finally, there is a credit squeeze for the commodity producing sectors and a decline in credit delivery to rural India and small-scale industry. The belief that the financial deepening that results from liberalisation would in myriad ways neutralise these effects has not been realised.

Courting Risk

The expert group that was appointed to suggest ways of reducing the vulnerability of the financial system to speculative capital flows has instead recommended further financial liberalisation and openness. The dissenting view of the Reserve Bank, advising caution, has been virtually ignored by the finance ministry.

Beyond the Forex Proposal

Burdened with rising interest payments, the government finds itself increasingly short of funds for investment and development purposes. In the circumstances the Planning Commission's foreign exchange for infrastructure scheme which is an implicit advocacy of a monetised deficit is indeed welcome. But to strengthen its own case, the commission should possibly be more explicit and advocate both the repeal of the FRBM Act and the restoration of the practice of monetising a part of the deficit. In the short run, while efforts to raise the tax-GDP ratio are underway, these are the only ways of garnering resources for faster and more egalitarian development.


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