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The long tail of the 2008-09 global financial crisis stinging India. While the diagnosis at that time was that the US was the culprit whereas EMs were fine--remember the phrase "cleanest dirty shirt"--that wisdom seems not so wise. Most major EMs since then have slowed sharply.
Some have experienced serious crisis--eg. Brazil. India was lucky to avoid crisis thanks to decline in oil prices. Where did we go wrong? Could we have done better? What are the lessons?
1) The "mistake" was the explosive lending during the 2005-10 boom, in which almost every country indulged, bar Germany and few others. IN HINDSIGHT!
2) When you are growing 8-9% real terms and 15-16% nominal terms, growth takes care of a lot of ills and credit flows freely.
2) When you are growing 8-9% real terms and 15-16% nominal terms, growth takes care of a lot of ills and credit flows freely.
3) People began to project those growth rates forever into their lending/borrowing decisions. This is adaptive expectations plus Minsky dynamics.
4) When the 2008-09 crisis came, EMs for the first time ever had the capacity to countercyclical policies.
4) When the 2008-09 crisis came, EMs for the first time ever had the capacity to countercyclical policies.
5) EMs went overboard in stimulating--India was not an exception. Instead of ratcheting down expectations of sustainable growth, they enacted stimulus to restore pre crisis growth rates. Big mistake.
6) The result was worsening of current account balances and rise in leverage.
6) The result was worsening of current account balances and rise in leverage.
7) The EA sovereign debt crisis was another blow to EMs. EA's solution to the crisis was to run large CA surpluses--on the back of EMs! https://www.privatedebtproject.org/view-articles.php?Current-Account-Imbalances-Debt-Buildup-and-Instability-39
8) Result: fragile 5 in 2013.
9) Focusing on India. It was apparent in 2013 that a major course correction was needed.
8) Result: fragile 5 in 2013.
9) Focusing on India. It was apparent in 2013 that a major course correction was needed.
10) Bank NPA problems were apparent as was the need to bring current account into balance and moderate inflation.
11) We got a break with oil prices in 2014-16.
15) The right sequence should have been to force banks to recognize NPAs, restructure them, and then recapitalize them.
11) We got a break with oil prices in 2014-16.
15) The right sequence should have been to force banks to recognize NPAs, restructure them, and then recapitalize them.
16) Simultaneously, the government should have been running fiscal stimulus to allow the private sector to repair its balance sheet. I wrote about this way back in 2015: http://pragati.nationalinterest.in/2015/09/fiscal-push-to-propel-indias-economy/
17) Instead, we had tons of advice on reforms and reforms and fiscal consolidation. You cannot solve a demand side problem and a balance sheet problem by supply side measures! Economists should learn basic accounting and finance, and read Keynes/Minsky.
18) The worst policy was adopting inflation targeting. I critiqued it in the Indian context: https://swarajyamag.com/economy/monetary-policy-india-adopting-a-flawed-paradigm
and the damage it has done in the US context: https://privatedebtproject.org/pdp/view-hm-articles.php?Inflation-Targeting-Exorbitant-Costs-Meager-Benefits-6
and the damage it has done in the US context: https://privatedebtproject.org/pdp/view-hm-articles.php?Inflation-Targeting-Exorbitant-Costs-Meager-Benefits-6
19) We need to get growth growing ASAP. Need fiscal stimulus plus rescue of NBFC sector. We have established enough credibility on inflation and moral hazard. What good is credibility if you cannot encash it?
20) Right now NOMINAL GDP growth is below the 10-year rate. That is a bad sign for debt sustainability. The solution is not cutting deficits--that will make it worse. We are seeing some of it now as revenues weaken. Need to restart growth.
