OT India:
Here is an intereting email commentary from one of my "opinionated" IIT graduate freinds, Jas Jain. (BTW, Jas is a mega bear....)
In one word -- Debt.
By Jas Jain
During my recent visit to India, one thing that was even more distressing than the sad state of education in several parts of India was how the population was drowning itself in debt by borrowing at exorbitant rates of interest. Increasing proportion of this borrowing is for consumption purposes. I got a much better picture of debt situation in India than most observers would have because many of my relatives are in money lending business (lending at usurious rates, I might add) and chance encounter, in a long train journey, with some bank officials.
Before I get into the issue of debt in India, I would like to point out there are lots of similarities between America and India. America and India are the two largest democracies in the world today. If we exclude the poorest segment of the population in both countries, lot higher % in India, obviously, there are lot of similarities in behaviors of the two populations because Indians are imitating Americans in many ways. India has its Bollywood imitating Hollywood. Both have lots of software, or high tech, billionaires thanks largely to Scam Markets and Scam Options. Both are losing manufacturing jobs to China! So much for the theory of lower wages as the cause of loss of manufacturing jobs to the Chinese. All in all, India is a poor imitation of America.
Back to the subject of debt in India. I am attaching an article that talks about the public debt problem in India – a blessing of democracy like in many other democracies. I will focus on the private debt problem.
Q: How do Citi Group, a US-based giant financial conglomerate, and other leading banks in India collect on very lucrative consumer debt, a business growing at 30% a year rate, when payments are overdue?
By employing a gang of goondas, or bullies, who will use violence and intimidation to coerce the borrower to pay! These goondas are on the banks’ payrolls and hang around in offices until they are called for duty! How do I know? I was told by a middle level manager who works for one of the 12 leading Indian banks, ICIC. He said it matter-of-factly. To him, it was normal. And it is normal in India – everyone does it! So, I inquired if the leading international banks who operate in India, including American banks, such as, Citi Group, do the same. I was told that they do. After all, they must compete. Competition brings morality to the lowest common denominator, it seems.
Private debt in India has been growing like crazy for many years, both for business and for personal consumption. People, including successful doctors in private practice, borrow at 30-40% effective APR. Any economy where businesses can borrow at 30-40% and still make profits is a very inefficient economy. I don’t have the data, and I doubt that data on private debt can be available (lot of it is off the books), my best estimate is that debt is growing at a rate far greater than the growth of the economy. It is entirely probable that like the US, almost all the growth in India over the past many years is a result of debt growing at much faster rate than the economy. The question is: how long can it go? Not much longer. Debt is an albatross around the necks of democratic societies. I doubt that democracies can survive in America and India for another 20 years! Because things have gone too far to be corrected by democratic process. Yes, things can be taken too far; something that is common in human behavior, especially, when there is lack of authority and discipline, as it exists in India and America. There is always a payback time for irresponsibility
Democratic faithful equate democracy with freedoms. While, in reality, democracy leads to licentious and irresponsible governments and population over time. The greatest thinker on the subject of democracy, Alexis de Tocquville, foresaw some 170 years ago what form democratic governments might take. He speculated on the future of democracies and described the present government in America verbatim! His characterization of such a government? Despotic. There are too many words that begin with d that apply to democracies. Depression anyone?
One must be blind not to see the connection between debt and democracy (the case of public debt must be obvious). Democratic minds get addicted to short-term. The tenure of elected officials is short-term too!
Jas
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World Bank: India May Face Medium-Term Fiscal Crisis
Mon Jul 21, 5:42 AM ET
NEW DELHI -(Dow Jones)- India faces a full-fledged fiscal crisis in the medium-term if economic growth remains slow and public finances continue to deteriorate, warned the World Bank (news - web sites).
In a report reviewing the country's development policies, the bank called on the government to take measures to strengthen public finances and improve fiscal management.
"India's large fiscal imbalances pose a serious threat to sustained growth and development over the medium term," the bank said in a report issued over the weekend.
The Indian government is targeting a budget deficit of 5.6% of the gross domestic product in the current fiscal year, lower than the 5.9% deficit in the previous financial year which ended in March.
"The persistence of current fiscal trends will, at best, limit growth and job creation. And slower growth would, in turn, speed up the deterioration in debt dynamics. If this negative cycle continues, a full-fledged fiscal crisis cannot be rule out over the medium term," the report said.
If reforms are undertaken, the World Bank estimates that the combined federal and state governments' fiscal deficit will be limited to 10% of GDP (news - web sites) in the current fiscal year, compared with 11.1% if the government's fiscal reforms are weak.
For its part, the government hasn't given an estimate for the combined deficit of the center and the states.
For the World Bank, a high priority reform area is the elimination of tax exemptions. The bank specifically wants to see services and agriculture brought into the tax net.
Higher revenues from direct taxes are needed to offset lower indirect tax revenues, such as customs duties, which have declined following the liberalization of the economy over the past decade.
The World Bank noted that India's federal tax revenues fell to 8.6% of GDP in fiscal 2001-2002 from 10.3% in fiscal 1991-1992.
The government's large subsidy bill also needs to be cut by reforming - among other things - the power sector. The bank recommended raising power tariffs to reflect the cost of supply and accelerating the privatization of power distribution companies.
The World Bank called for reduced investment by banks and financial institutions in government debt, stating that Indian banks have one of the highest ratios of government debt to deposits. As a result, funds available for private sector investment are limited.
"A fiscal adjustment would clearly help and also relieve crowding out," said the bank. Higher private investment, in turn, will lead to accelerated growth, it said.
The Reserve Bank of India expects the economy to grow 6%-6.5% in the current fiscal year, a recovery from a 4.3% expansion in fiscal 2002-2003. However, the higher growth estimate is still way below the government's target of average 8% growth under its latest Five Year Plan for the economy, which started in 2002.
-By Shumita Sharma, Dow Jones Newswires, 91-11-2307-4020, shumita.sharma@dowjones.com |
