It's the financial sector, stupid

Any strategy for recovery must focus resolutely on the financial sector. It's the NBFC crisis on top of a banking crisis that explains the state of the economy.

Negotiating one's way out of a financial crisis is a tall order. It cannot happen with a snap of the fingers. And, sorry, it has  little to do with "structural reforms". Deleveraging of corporates and resolution of NPAs takes its own time even in economies with private banking systems and well developed markets for stressed assets. In a public sector dominated system in which asset reconstruction companies haven't taken off and resolution of bankruptcy is still in its early stages,  recovery will take longer. Perhaps 2021-22 is when we expect growth to return to 7 per cent.

In the meantime, there are some positive signs in the financial sector. The resolution of Essar Steel has finally happened and bankers are due to get back around Rs 42,000 crore. And bank-led resolution has received a boost with banks taking a hair-cut of 52 per cent and SBI leading an effort to provide fresh loans to the company.

More in my article, Green Shoots in the Financial Sector?

Letting IL&FS fail was a policy blunder

(I return to my blog after more than 18 months. Several preoccupations, both personal and professional, kept me away from it. I hope to be regular hereafter. -TTR)

In September 2018, IL&FS failed. The consequences for the economy have been serious. It's not quite a Lehman moment in that we have not had a recession . But it's Lehman-like in the blow it has dealt to growth. The deceleration in growth - from 7 per cent prior to IL&FS failing to below 5 per cent in the last quarter- coincides exactly with the collapse. I am convinced that the IL&FS failure is the primary factor in the deceleration- never mind the babble about the lack of "structural reforms" holding up growth.

As in the case of Lehman, I believe policy-makers did not quite grasp the enormity of the impact the failure of IL&FS could have. Also, as with Lehman, they were wary of bailing out an allegedly tainted private entity at the cost of the tax payer.

There's a problem that is rather peculiar to our polity.Wherever there is a failure or loss, the media promptly raises the war-cry of 'scam'. That sends the government into a deep freeze. We saw this played out in the case of IL&FS. Whether there was a scam at IL&FS needs to be investigated by due process. But the perception that had been a scam should not have come in the way of a rescue- that was a decision to have been taken solely on the basis of the potential costs to the economy of a collapse.

It does appear that the failure on the part of IL&FS shareholders to infuse capital to deal with liquidity issues that had arisen contributed to the failure of the firm. Whatever the mismanagement at IL&FS, timely infusion of liquidity may well have averted the collapse

More in my BS column, IL&FS was  a Lehman-like moment.