India’s Subprime Crisis?

There is a lot of talk about the bad loans crisis that the public sector banks are reeling under over the past few years. Credit Suisse had earlier looked at the issue from the perspective of the top 10 corporate houses in terms of bank borrowings. We present here a continuation of their analysis with some simple graphs. [Data Source: CMIE’s Prowess.]

I present here a plot of two important variables for a corporate house. One is the amount of bank loans taken in a particular year and the other is whether the firms were financially healthy enough to take the loan in the first place.

The latter is measured by whether they made enough profits in a particular period to even cover the interest payments accrued on past debts. As we all know any loan you take has two parts when the repayment starts: the principal (total loan amount) and the interest accrued on it (interest amount). For a firm to be financially healthy, it should make enough profits to cover for both [hedged firm]. On the other hand, an unhealthy firm is one which does not even cover its interest payments [ponzi firm]. It’s anybody’s guess that the latter should not be given more loans as that is sure shot recipe for disaster.

In financial jargon, the health of a firm is measured by what is called the Interest Coverage Ratio (ICR). It is a ratio of net profits (I am not going to bore you with definitions of net profits) to interest payments due. It being less than 1 is a danger sign for the lender because it means that the firm is not even making enough profits to pay for its past interest payment commitments.

Let’s look at the top 10 corporations (in terms of borrowing) identified by the excellent Credit Suisse 2012 report on the House of Debt. Firms are organised from the worst to worsening conditions of health here. I will present here one graph a day for each of these corporate houses for the audience to appreciate the importance of the issue at hand.

The blue line represents the health of the firm (ICR). Its fall is a sign of bad health but when it goes below the horizontal line, it’s a danger zone (ICR less than 1). The red line shows the amount of bank loan that the firm managed to freshly secure during a given year. Ideally the loans should fall with the deteriorating health of a firm but what we will find over the next week or so is the exact opposite for almost each of these corporate houses. If you find a scissor in these graphs, that’s an immediate sign of trouble. Let me draw an analogy here. It shows that with increasing diabetic problems in a patient (ICR falling), doctors (banks) are injecting more of sugar (loans) to the body of the patient! Let me start with the first one.





A Resistance Against the Assault on Thought: A Lesson for the Left

Development Vs Hindutva

Before the last general elections, two supposedly contrasting images of Mr. Modi was projected by the media: Modi, the development man and Modi, the Hindutva crusader. It was argued that he won the elections because the former dominated the latter. There was, therefore, a dichotomy created in the minds of even the most liberal of the intellectuals between these two images of Mr. Modi. Many of them have argued that the second image dominates or comes to the fore when the first does not deliver. I would like to first dispel this notion of two ‘contrasting’ images because that lies at the core of blunting any resistance to the assault on thought that is being forced upon in India today.

It is easier to explain how these two images of Mr. Modi go together by looking at his pet project, Make in India. This model is premised on India gaining, at the cost of its competitors, a share in the international market. This can only happen if the costs of production in India are made relatively cheaper than its international counterparts like China. This can be done in many ways, some of which India is targeting: suppressing real wages and/or increasing the productivity of labour (labour market reforms); making natural resources available at throw away prices (land acquisition bill etc). So, even if such a growth were delivered, it will invariably be exclusivist as it is premised on tilting the distribution of income and wealth against the working people of the country.

Such a development by encroachment of resources from the working people by its very definition creates fertile political grounds for a discourse of ‘us vs them’ which has a transformative potential, the best example of which was the 99% (working people) vs 1% (ruling elite) slogan of the Occupy movement in the US. But what is transformative for the working people, for the same reason, is disruptive for the ruling elite. Therefore, the latter looks for an alternative category of ‘us vs them’ based on religion, caste, colour,race, country, which can be employed to divide the working people and rule. The creation of a Hindutva crusader is essential for such a development man.

While these two images go together, from time to time one of them might dominate the other, for e.g., the Hindutva crusader becomes more dominant especially if the development man does not deliver. And it seems to be the case not just for the first two years of his term but for the rest as well especially since the international markets remain elusive as the global crisis continues unabated. Such a possibility increases the need of the State, which cannot even hide behind a facade of ‘national’ performance, to nip the transformative discourse in the bud. Hence, the assault becomes even more pronounced. This is what is happening today in India.

With the lack of a facade of high growth, a false symbol of pride needs to be resurrected, which in this case is jingoism parading as nationalism. Such jingoism never ends well. In history it has either ended in fascism or a war or both and the scary thing is that both are possible in the case of India. If this situation continues, which is what it is headed towards, for getting a second term, this government can even orchestrate a war against its neighbours. Such a political discourse might get further strengthened if the politics in the US moves even more to the Right with a Donald Trump coming to power against odds. So that the political discourse is not set on these lines, it is imperative on the progressive minded people to challenge this ‘us vs them’ with our own ‘us vs them’.

From ‘Lal Salaam’ to ‘Jai Bhim Lal Salaam’

Their‘us vs them’ can only countered with our‘us vs them’ when we get over some of our ideological baggages, one of which is giving primacy to a self-declared principal contradiction based on just the issues of class. There are many contradictions in the political system we live in, as they have existed earlier, and the need of the hour is to give them all equal primacy because no one contradiction with its solution necessarily solves the others. Let’s take the case of caste or gender or religious or other identity based contradictions. Would they disappear or even get muted if the class contradiction is resolved? Many erstwhile socialist countries are a living testimony to the fact that this was not necessarily the case. In fact by making such an argument about a principal vs non-principal contradiction, we undermine the transformative possibilities that our‘us vs them’ might throw up.

If the ‘them’ can be aptly captured in various combinations of an image of a brahmin upper class male, the ‘us’ should surely be a combination of a dalit, an OBC, a non-Hindu, a female and the working class and not them segregated along these categories. And I think it’s primarily a theoretical lacuna because all political praxis after all flows from a particular theoretical construct. Let the political opposition both in theory and praxis be a genuine and an organic combination of these theoretical constructs which has the potential of producing a powerful resistance. I saw this with my own experience in JNU. The slogan of lal salam of our days has been transformed into ‘Jai Bhim lal salam’, which has a huge potential for the progressive movement in general.

But I think so far, this opposition, at least in its intellectual discourse, seems more like a common minimum programme rather than a genuine amalgamation of ideas flowing from these different strands of thinking, some of which are marxist or subaltern or feminist in nature. A common minimum programme has taken us thus far but no more. With time and engagement, it has the potential of becoming an intersecting unity as opposed to an alliance.The job of the opposition is to creatively engage with these debates and instead of seeing them as fissures in the advance of their respective movements sees them as having a transformative potential even for their own respective agenda. The ruling establishment realises that, so, they want to nip it in the bud, something that became amply clear in JNU earlier and HCU now. It is time that those who stood with JNU should stand with HCU as well if they want this political project to materialise.


Aren’t Rajan and Jaitley on the same side?

Rumour had it that there was a split between the RBI and the Finance Ministry till January 15 when the RBI decided to announce a cut in the interest rates. Well, not rumours quite as they were fuelled publicly by the finance minister himself by blaming the RBI for the slowdown in the Indian economy. Early on there was also talk of removal of Rajan who was a Congress appointee. Let’s see if they actually were (are) at loggerheads?

Let’s first lay down the basis for the news of conflict. According to this view, the RBI controls the flow of credit (broadly speaking) in the economy. In this, it has the twin objective of controlling inflation and inducing growth in the economy. It can control inflation (created by demand exceeding what can be supplied) by reducing credit availability to those who spend, thereby, bringing demand for goods in balance with what can be supplied. It can induce growth by relaxing credit availability again to those who can spend, thereby, creating market for goods. With the lull in GDP growth continuing with the current dispensation, the Finance Minster (FM) shifted the blame on the RBI for it. He argued that the ‘acche din’ (read high growth) were around the corner if only the RBI could make credit available for this purpose. This, it was argued, is specially true given that inflation had abated and was not showing signs of rising any time soon.

In its defence, the RBI had said that they will wait for a rate cut till not just inflation comes down but there are visible signs of it staying low in the future as well. In addition, they wanted a commitment from the FM towards fiscal consolidation (i.e. keeping its deficit under control). Both these reasons have been quoted by the RBI governor during the announcement made yesterday.

To those outside the (boring) world of Economics but politically interested, this seems either like a deep-seated conflict or a subject not worth a discussion (latter more likely). My attempt here is to draw the latter into this discussion as it has important ramifications for the people and the former to see through the smokescreen created in the process.

Let’s look at whether credit availability (through the interest rate cut) will usher in ‘acche din’. The operative word here is availability. While the RBI can influence its availability (potential credit supply), credit will actually come into being only once it is demanded in the economy. The assumption, therefore, is that with the fall in the cost of loans, there will be an increase in spending by the corporations on their unfulfilled investment plans as well as consumers on durables (like cars) and housing. With the increase in such spending, other things remaining the same, there will be an increase in growth and consequently in employment.

However, these spendings might not increase.

For the corporations, it is not just the cost of loan but the expectations about sales (in most cases it’s primarily the latter that matters) that determine their decision to increase spending. An automobile or software corporation will not increase spending if its existing plants, offices are under-utilised. And in a depressed economy, the expectations about sales are likely not to be high.

For the consumers, it depends on their current and expected income streams (which itself will depend on the level of overall past spending in the economy) and not just how cheap are the home or consumer loans. If I don’t have a job or a poorly paying job as a result of a depressed economy in the past, any amount of cheapening of loans is not going to induce higher spending. Also spending particularly on realty depends on speculative gains associated with the purchase of a property which is likely to be low in an economy where such purchases in the recent past have not been high.

What is possibly true of a rate cut in an economy where the spending is anyway high might not hold true generally. It will not take a genius to see that this is a chicken-and-egg problem. This vicious circle cannot be broken unless there is some exogenous intervention through direct spending rather than an indirect signals through rate cuts.

Such direct spending, which is not a victim of this vicious circle (i.e. it does not depend on the past level of spending itself) can only be the expenditure by external agents, external to this circle, i.e. the State or foreigners (export demand). The growth regime followed by the current dispensation which believes in the State withdrawing from spending (fiscal consolidation) has hardly any scope on the first count. On this, both Rajan and Jaitley are unequivocal but their concerns could not have been more misplaced as discussed here. As for the latter I have discussed the limitations in my last post.

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Prof. Bhagwati has got it wrong

Prof. Jagdish Bhagwati has written an invited article on the front page of Economic Times today (Jan. 9). He has made a strong case for Narendra Modi’s Make in India (and sell abroad) campaign and has urged the Prime Minister to overcome the ‘populist’ anti-reformers both politically and intellectually. His is an attempt, self-confessedly, of providing the latter and in the process, he derides all those critical of export-oriented growth as paper tigers. Mine is obviously a ‘paper-tigerly’ response to his arguments.

One, there is a fallacy of composition in the strategy of export-oriented growth as a panacea for growth of all the economies. All countries cannot be export-oriented at the same time as they cannot all be exporting to Mars. Obviously some of them would have to be import-oriented to be able to accommodate others’ export-oriented growth. And if there are limited markets abroad to compete for, more difficult will be the export-oriented strategy more are the number of players. Moreover, there is a first mover’s advantage.

Two, this strategy has to be in contradiction with a domestic demand driven approach. This is so because it requires a continuous decline in the cost of production, a significant proportion of which is the wage cost, to outcompete the rivals. Two ways in which you can keep the relative wage costs down is by depressing the wages and/or increasing the productivity of labour relative to the competitors. Both these involve a fall in the share of wages in the economy (as has been the case with the Chinese or other such experiments). This squeezes the domestic demand in the economy in the long run either through a fall in incomes (wage fall) or unemployment (through labour displacing technological expansion). This contradiction is clearly visible with the Chinese today, who are finding it difficult to move from an export-oriented strategy towards a domestic demand driven strategy. And in this race to the bottom, if you don’t win, you end up losing on both ends, neither will there be an external market created nor a domestic market remaining.

Three, the other part of the cost, raw materials, requires the corporates to be given a free-hand in terms of exploiting the natural resources. Corporate scams across the Third World today are mere reflection of how desperate they are to grab the resources without paying for the same, all in the name of outcompeting the ‘external’ rivals in this race. The extent of environmental degradation domestically coupled with exploitation of the resource-rich-but-politically-weak countries abroad surely should be a matter of concern even for these export enthusiasts.

Four, even if we assume that growth is delivered, it will surely be inequitable for the working masses in general for the second reason. What Prof. Bhagwati misses is that he equates the interests of the corporates who surely benefit from such a strategy with the majority of the population. His argument is so unabashedly anti-working class that he says that the mistake Clinton made in the 1990s was that he didn’t crush the labour unions once and for all so that they could never raise their ugly head again finding voices through some of the democrats elected during Obama’s time!

Five, his argument that growth is a radical pull up because it generates resources for social spending for those left-behind is also flawed because these policies also come with a baggage of controlling government deficit (broadly tax income less expenditure). If this is coupled with concessions in taxes for the corporate sector (in the name of incentivising production), there is a twin attack on fiscal expenditure. Add to this a downward inflexibility in military expenditure in the name of ‘nationalism’, the axe invariably falls on the social sector spending itself.

Last but not the least, all this growth, if delivered, would still be in control of the importing nations. If for some reason, they hit a roadblock in terms of providing a market, as is happening today, it will have a cascading effect on the export-oriented economies who would have lost the fall back options in the very process. Chinese talk of a ‘new normal’ and difficulties in achieving it is merely a recognition of this problem.

Here I have not even discussed the implications of ‘parking’ of funds by the foreign institutional investors in the capital markets in the emerging economies. I have kept the focus purely on the trade side of it as Prof. Bhagwati has. I am sure these are yet again paper tigers for him but such economists need to be told every now and then that they should be upfront and say that they are talking on behalf of the rich and the elite instead of calling names to those who stand with the working people.

PS: His anger against Prof. Sen (the only Nobel Laureate in Economics from India) is quite intriguing though!

Posted in Musings in Economics | 5 Comments

GPD on Tiananmen Square

GPD: What has happened in Tiananmen Square in Beijing has nothing to do with socialism. How does it matter if the cat is black or white if it catches mice, Deng had asked. The cat has killed the students, but to argue that it has done so because it is red is patently untenable. Read on by clicking on the following link.



Union Budget 2012: Goodbye Aam Admi

Continuing with the iniquitous agenda of the last budget, the Finance Minister has presented a budget which increases indirect taxes, which will be passed on to all sections of the population through price rise. This is a classic case of regressive taxation. By doing this, it fails to address the back-breaking price rise and inflation that the people have been suffering from. At a time when the Indian economy is reeling under high inflation, especially in food and fuel items, the least that was expected in the budget was some relief. Far from this, the budget has added to the woes of the poor people of our country.

There are many reasons for the spiraling inflation, at the receiving end of which are the people of this country. First, deregulation of fuel prices announced last year has anyway led to cost-push inflation because of the increase in production and transportation costs. Second, the volatility in the supply of food grains both due to limited production and illegal hoarding leads to increasing inflation.

In light of this, a cut in the subsidies, which by cushioning the producers against cost increases keeps the cost-push price under check, and a simultaneous increase in indirect taxes are bound to adversely affect inflation.

On the subsidy front, there is a decline in petroleum subsidy of approx. 25,000 crores (Expenditure Budget Vol 1). Add to this the increasing international oil prices, which would, either due to price deregulation (like in the case of petrol) or through cut in the subsidy, get passed on to the consumers. Also, the fertilizer subsidy has been cut by 6,000 crores. While there has been a marginal increase in the food subsidy (of 2,000 crores), it would not have a dampening effect on inflation both because increase in the fertilizer and fuel prices would far outdo any direct increase in food subsidy.

On proposals related to the indirect taxes, a dramatic increase of indirect taxes to the tune of 1,06,000 crores, a whopping increase of 26 percent over last year has been proposed. The least that was expected was a decrease in the indirect taxes on fuel and fuel products. On the contrary, the Finance Minister’s stubborn insistence on increasing both the excise duty and the service taxes by 2 percent each and obduracy in moving away from the ad-valorem duty structure on petro products coupled with the cut on fuel subsidy by Rs. 24000 crores indicates significant increase in fuel prices, and hence inflation in general, in the days to come. While focusing on indirect taxes, he has chosen to leave the corporate taxes out of the ambit of resource mobilization, whereas the latter would have less likelihood of increasing inflation.

While the world economy is yet to recover from the global crisis, the effect of which is visible on India, a more responsible budget was required which could address the twin concerns of slowdown and inflation in the economy. Contrary to these requirements, the Finance Minister has chosen not to do address either.

Overall, Budget 2012-13 is a budget that seeks to favour the corporate interests, while adding to the misery of the working people of our country. Far from a government of the aam admi, this budget has shown the true character of being a government for the khas admi while pursuing the neoliberal agenda.

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Salsa made easy!

This is for those who love Mexican salsa. Essential for any party with friends who love appetizers more than the main course! I do not claim to have the best recipe as you would sure find some professional sites giving you the recipe. However, I can tell you for sure that mine is damn easy to make.

Ingredients (for 4-5 people):

  1. Tomatoes: 4-5
  2. Green Pepper: 1
  3. Garlic: 10 cloves (yes, that’s the key)
  4. Fresh Basil Leaves: 5-6 (grow it. An extremely useful spice which grows easily)
  5. Olive Oil: 2 tbsp
  6. Vinegar: 1 tbsp
  7. Salt and Chilli powder to taste
  8. Coriander Leaves: Lots


  1. Roast the tomatoes and green pepper one at a time on the gas stove till their skin becomes black. The easiest way to do this is to pierce a knife through it and place on the stove and rotate it once or twice. Peel off the outer skin (use a fork to hold them and just pull the skin off for the tomatoes). Cut them into pieces and put them in a grinder.
  2. Add all the other ingredients except coriander leaves. Run the mixer on low speed till it becomes like a chutney. Taste it and see if it is similar to what you have eaten in a Mexican restaurant. If not, the missing ingredient generally is basil (gives an aroma and a distinct taste) or garlic (adds a spicy and pungent taste) or vinegar (adds tanginess). Moderate these according to your taste. Be careful with vinegar as it might spoil your salsa. Take it out in a bowl.
  3. Cut coriander leaves into small pieces. Add them. Keep it under refrigeration till it becomes cold. Remember, salsa is hot only in taste.

You are done. Enjoy it with Lay’s Mexican/ American sweet and onion chips (use low fat Aamir Khan chips if you are watching your weight).

Posted in Culinary Skills | 4 Comments