Yet another fault line in the making!

In the book “Fault Lines : How hidden fractures still Threaten the World Economy”, the author Raghuram Rajan, former Chief Economist and Director of research at IMF, concluded that the financial crisis of 2008 in the United States erupted “because in an integral economy and an integral world, what is best for the individual actor or institution is not always the best for the system”. He varies craftily argues how the actions of apparent culprits, like greedy bankers, sleepy regulators and irresponsible borrowers, unfolded on the larger worldwide stage, that was and probably still is subjective to the imperatives of political economics.[1]
He cites three fault lines: domestic political stress, trade imbalances with other countries and the tensions produced when finances with very different structures interact as the dominant force which leads to the global economic slowdown of 2008. Lehman Brothers case study has become a part of the curriculum for many B-School and financial institutes, but it seems like the Indian Government and the private banks of India want to make a case study of their own. With all the three things done more or less in the same proportion, the Indian private banks have just added a new dimension to the craziness, loan waiver.
As many pundits view that the loan waiver will prove to be a vote bank for the upcoming general elections of 2019 and it might be a speedy way out of the distress to the farmers, it just doesn’t seem to hit the right cord when seeing from a future perspective. But before diving into the nitty-gritty and nuances of this scheme let’s draw parallels between the factors which lead to the 2008 financial crisis in the United States and why the loan waiver might prove to be just another fault line in the making.
The loan waiver was first proposed for the farmers of Uttar Pradesh as an incentive to them if the BJP government comes to power and it seemed very logical because if the BJP wants to continue, it’s dominance for yet another term, winning the state elections of UP is a pre-requisite. But this just gave rise to a dominos effect where states like Maharashtra, Madhya Pradesh, Punjab, and Karnataka followed suit. This will have a very adverse impact on the already struggling financial sector of India whose gross value of Non-performing assets are at an all-time high. So just like the housing sector bubble burst which lead the government to bail out the struggling banks back in 2008 in the United States, a similar situation might only arise shortly if proper corrective measures are not undertaken.
The production of various pulses and wheat where India is a global exporter in the world market has taken a hit, thanks to a very average monsoon last year. This will have an impact on the national exchequer as the trade deficit will expand leading to more lending of money from global financial institutes or extreme reliability on the FDI and FII, which is not suitable for health talking from a countries economic standpoint. And a loan waiver to the farmers which are directly or indirectly affected by the very poor monsoon last year is not a valid point to take.
Now, with all these factors summing up with a thrust provided by the Non-performing assets of the public and private sector banks augments the anguish of every citizen of the country as they are the ones who will be on the receiving end someday.
So let’s ponder upon the plausible solutions which might be a better alternative then loan waiver. First up, a better way to finance the loan for the farmers would be to finance them from a special purpose fund or to say contingency fund which should properly be regulated by an autonomous body. Let this be funded through revenues both from an explicit state government cess and from tax-exempt donations from businesses and individuals.[2] After all, giving back to the society in some form or the other is the best thing an individual can think of, and this certainly is not an absurd idea at all, if we can make select purpose vehicles to manage the nonperforming bank assets then why not do it here as well?
Secondly, the loan waiver scheme discriminates between those who paid their loan back and those who haven’t (though they are capable of paying it again). So a better idea will be to transfer instant fund relief to those who aren’t able to pay back the debt immediately which will bring in more transparency to the system which currently seems to be a bit biased to those individuals who have repaid their loan out of goodwill.
Thirdly, the loan waiver promotes the careless attitude of an individual where he/she becomes less bothered about paying the loan back to the back as they will be under the notion that the government will every time come to the rescue just like a super-hero from DC or Marvel comic. Hence there should be a proper mechanism or methodology by which the loan should be distributed. I guess the risk and disaster management team of the banks should be up on their toes to see to it that the need for loan waiver does not even arise shortly.
Moreover, the government should provide data backing their claim of providing relief of nearly Rs 10,000 crore from the Krishi Kalyan Cess and other schemes undertaken by the Union government of giving aid to the farmers cause eventually in the largest democracy of the world everyone has the right to share his “Maan Ki Baat.”

[1] Fault lines: How hidden fractures still threatens the world economy.
[2] Managing the loan waiver from the Indian National Interest by Nitin Pai.

Nihilist, wanderlust, a learner for life.

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