Wednesday, November 19, 2008

Bail out for India Inc

TOI carried a story yesterday saying that Ratan Tata had written to the PM asking for a special fund to be created for Indian companies that have borrowed abroad in recent times but now face the prospect that loans will either not be rolled over or will be too expensive.

The report says that about $45 bn could become due for repayment by December- and much of this would now have to come from the Indian banking system. This amounts to a bail out by Indian banks for two reasons. First, it is not clear that Indian banks would take this sort of exposure of their own accord. Secondly, the cost cannot be very different from that of the earlier foreign currency loans, which would imply a subsidy.

The danger is that, in dealing with the present funds crisis faced by India Inc, we are left with an enfeebled banking system. A better solution would be to have a special fund supported by the fisc. Alternatively, if the banking system is to provide funds, the implicit subsidies should be borne by the exchequer. The banking system and the tax payer need to be protected from the costs of the excesses indulged in by Indian companies.

2 comments:

MVP said...

dear Mohan Sir,
i am on your blog for the first time and my first impression is i never saw it before and feeling unlucky about it - so full of fundamental reasoning which explains all the ills of our economy and the world economy in general.
bail our for India was always on as we got more and more integrated into the global space for technology, markets and capital. not too far back, we have done a US style bail out for our farmers to the tune of rs.60000 crores. now $45 bn is roughly 4 times the farmer bail out in exposure and even if the govt takes a 20-25% hit in terms of cost of capital/interest for those huge figures, it will put an obscenely gigantic fisc problem on us. its better to let the cos face it themselves with least help from the govt and whoever can succeed the hard times will be all true winners in entrepreneurship.
regards//mvp

Sindhura said...

its a nice one.Actually I dont know what is bail,but now I understood