Financial Markets and the Economy - Intersections

 (The following article appeared in BQ on May 14, 2020 - URL below: https://www.bloombergquint.com/coronavirus-outbreak/covid-19-a-samudra-manthan-of-our-financial-sector ) Making Our Financial Sector Fit for Growth Delhi, we have a problem   Our financial services ecosystem is in trouble.   Even before Covid-19, beyond the smokescreens, the true Gross Non-Performing Assets (NPAs) across banks and NBFCs probably stood at 12% of the INR 140 lakh crores of advances. Covid-19 could well push this to 20% of advances. This fear is reflected in the current state of savings, lending and credit markets.   Status quo and forbearance can at best keep the ecosystem undead. Instead, we need the ecosystem to be fit enough to fuel our growth aspirations with adequate flow of credit.   China’s credit to the non-financial sector is at 259% of GDP. India’s is at 126%. When credit fuels jobs and output, it can trigger the virtuous cycle of supply, consumption, investment and savi...

( The following article appeared on CNBC TV18 online on April 18, 2020 https://www.cnbctv18.com/views/view-govt-needs-to-print-money-and-spend-to-lift-economy-out-of-covid-19-mess-5720931.htm ) Fiscal Deficit, Monetisation & the Way Forward Let’s revisit some basic questions regarding our interest rates. Despite ample banking liquidity, and with overnight rates so low, why are Government of India (GOI) and State Government Bond yields still so high? What can we do to bring down these yields? The State of Our Fiscal Our fiscal deficit for the current fiscal year 2020-21 (FY21) will be far higher than budgeted. This is not up for debate – only the quantum of slippage is. The government’s receipts are going to plummet in these Covid-19 impacted times. Even after cutting back on some capital expenditures, we will also have to spend more than budgeted to stave off a humanitarian and economic crisis.  In FY19, the estimated total borrowing across central, stat...

( The enclosed article appeared on CNBC TV18 online on April 18, 2020: https://www.cnbctv18.com/views/view-easy-to-call-banks-lazy-but-one-needs-to-ask-why-arent-they-lending-5720721.htm) Banking Liquidity & Lending This may be a good time to ask some basic questions all over again.  Let’s start with liquidity and lending. The RBI Governor yesterday reminded us that banks are currently sitting on large amounts of surplus funds. What are these surpluses, and why aren’t banks lending them out to their clients? Surplus Banking Liquidity  The banking “surplus liquidity” – INR 6.9 lakh crore as on April 15 - is the extra balance that banks have in their CRR accounts with the RBI at the start of day, over and above statutory requirements. Since CRR balances earn 0% interest, banks today deploy these surpluses with the RBI at the LAF window and earn the reverse repo rate.  The banking system cannot “lend away” these surpluses.  Every loan g...

( The following article appeared on Bloomberg Quint on April 16, 2020: https://www.bloombergquint.com/coronavirus-outbreak/covid-19-response-can-modern-monetary-theory-come-to-indias-rescue ) Can Modern Monetary Theory come to India’s rescue? As Covid-19 pushes the world economy into recession, key developed markets are throwing between 5% to 20% of GDP of additional fiscal spend at the problem. India’s policy makers, however, are in a bind. Our economy and fiscal balance was far weaker than we cared to admit, before Covid-19 hit us. We must spend more now, just to stave off a humanitarian and economic crisis. But should our rallying cry be to “do whatever it takes”, or a more constrained “do whatever minimum we can survive with”?  One heterodox economic policy framework that could justify a higher fiscal spend is Modern Monetary Theory (MMT), advocated by the likes of Dr. Randall Wray. Critics of MMT such as Dr. Thomas Palley warn that MMT will sound especia...

( The following article appeared in Bloomberg Quint on March 30, 2020, link below: https://www.bloombergquint.com/coronavirus-outbreak/all-that-needs-to-be-done-to-fix-a-covid-19-wrecked-economy  ) Policy at the time of Covid-19 When a financially constrained household is hit by a severe medical emergency, it faces a dreadful, unspeakable dilemma – balancing monetary cost with the human outcome. With Covid-19, whole nations, India included, face this predicament.  Whatever choices we make, we will likely incur significant humanitarian and economic costs. In addition, the duration and extent of this crisis remains very unclear as yet. Against this backdrop, we need a two-fold economic policy response. First, we need an emergency response to avert a humanitarian disaster. At the same time, we have to consider life after Covid-19. Our already vulnerable economy will suffer a body blow, and in the end, we could find ourselves at policy crossroads.   ...

( The following article appeared in Cogencis on March 23, 2020, link below: http://www.cogencis.com/newssection/chome/covid-19-and-indias-fisc-monetary-options/ ) Covid-19 and India’s Fiscal & Monetary Options  Covid-19 is first a medical challenge, with a sizeable human cost. Even as our good doctors & health authorities address the crisis though, we must consider the implications for the economy, financial markets, fiscal and monetary policy, and regulatory interventions.  Addressing the Economy – Fiscal Response The war against Covid-19 could be long and arduous. Livelihoods will be lost, demand will slump, and businesses will struggle. Economic activity will sharply reduce, before eventually limping back once the medical emergency has been addressed. This could take a long time. Even fiscal hawks (present company included) will attest that we need a pump now to make up for lost economic activity. In a war, we have to borrow from our future....

( The following article appeared on Moneycontrol on March 13, 2020, link below: https://www.moneycontrol.com/news/business/economy/policy-indian-economy-is-fighting-two-battles-but-its-not-that-bad-5029431.html ) The Indian economy is battling a war on two fronts now – the global market dislocation on the back of the covid-19 pandemic, and the vulnerabilities of our own domestic economy.  The Bigger Global Battle The first – and bigger battle for now - is clearly the fluid worldwide risk-off context. As it is, amidst trade wars and geopolitical flashpoints, the world had entered 2020 fearing an economic slowdown. The added battle against the covid-19 pandemic will almost certainly result in a sharp reduction in worldwide economic activity. That could result in bankruptcies, layoffs, and credit defaults, even as whole societies battle serious health hazards.  As these primal fears play out, markets are experiencing sharp dislocation. Yesterday’s 10% fall in th...