C. P. Chandrasekhar’s Blog

A common refrain in assessments of India’s current economic predicament is that the economy is performing below potential because of a lack of ‘liquidity’. Often, this is merely a means of stating that an inadequacy of credit flow is choking up demand, operations and investment in the real economy. Influenced by such a reading of the current economic situation, the government’s crisis response has focused on measures that could enhance financial flows, spur credit growth, and ensure that all agents, large and small, are serviced. In the most recent of such initiatives, Finance Minister Nirmala Sitharaman said that it has…

In an unusual and ill-advised move, the Reserve Bank of India issued a brief ‘clarification’ on October 1st which said: “There are rumours in some locations about certain banks including cooperative banks, resulting in anxiety among the depositors. RBI would like to assure the general public that Indian banking system is safe and stable and there is no need to panic on the basis of such rumours.” That move was unwise because it unnecessarily drew attention to the possibility that recent developments in the banking sector, especially the stringent limits set on withdrawals from the failing Punjab and Maharashtra Cooperative…

Mid-September saw some unusual developments in US money markets, which gave market players and monetary authorities the jitters. Over three days, a key short term interest rate rose sharpy to reach levels last touched about a decade ago, when the world was hit by the financial crisis. The overnight repo (or repurchase agreement) rate, which is normally expected to remain close to the benchmark Federal Funds rate set at between 2 and 2.25 per cent, suddenly and unexpectedly soared to 5 per cent and then peaked at 10 per cent, before being brought down through aggressive action by the US…

In another instance of lack of clarity in economic decision making, the NDA government seems to be drifting into signing on to the Regional Comprehensive Economic Partnership (RCEP) Agreement potentially involving 16 Asia-Pacific partners. Under discussion for 7 years now, the agreement is slated to be sealed by a November 2019 deadline, for which negotiations have been fast-tracked. Expectations are that in a best-case scenario from the perspective of the Agreement’s advocates, signatories would include, all 10 ASEAN countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam), and their free trade agreement (FTA) partners Japan, South…

The government has finally admitted that the Indian economy is on a steep downturn. For some time now, even the business community, which tends to shower all praise and disapprove any criticism of the reformist Modi dispensation, has expressed concern about deteriorating economic conditions and the absence of any decisive action on the part of the government. This was seen as a signal that the ‘business friendly’ government had to act, though there appeared to be no clarity in the policy establishment of what needs to done. It was only after experimenting with a range of half-hearted measures, including a…

On August 30, as the media waited for the release of the second quarter growth figures that would reveal severe growth deceleration, Finance Minister Nirmala Sitharaman sought to pre-empt any adverse response with a major policy announcement. Ten public sector banks (PSBs) were to be merged in different combinations to reduce them to 4. The aim, clearly, was to convey an impression of decisive and far-reaching action. That came through when, by adding on the merger of the State Bank of India with its subsidiaries and the Mahila Bank and the forced merger of Dena Bank and Vijaya Bank with…

Two years after its implementation, the extent to which the Goods and Services Tax (GST) regime is an improvement upon the earlier system of multiple excise and sales taxes remains unclear. As of now, there are several worrying trends. The first is that gross GST collections are short of expectations. Thus, as against a target of Rs. 1,12,000 crore a month set for 2018-19, average GST revenues fell short of Rs. 1 lakh crore a month in that year. The shortfall is a problem especially for the states, because, while they have given up a significant part of the taxation…

On 31 July, the United States Federal Reserve System (US Fed) announced its decision to cut its benchmark short-term interest rate by one quarter of a percentage point to a target range between 2% and 2.25%. It also announced that it would put an end to its policy of selling chunks of its holdings of securities, so as to unwind its bloated balance sheet. The rate cut was indeed the first in a decade, as the global financial media reported. But, that was not why the reduction was newsworthy. It was because with the cut the Fed was, rather early,…

The Indian government’s effort to resolve by force its banking crisis with the help of the Insolvency and Bankruptcy Code (IBC) has hit yet another roadblock. Even when major secured creditors agree to a resolution plan, because they have to take a smaller haircut or loss, the IBC process may not work. This is because the tribunal at the apex of the specially constructed resolution architecture has chosen to reinterpret the Code in a manner that could make it difficult to implement that solution. The unravelling of the IBC has occurred in the long-standing Essar Steel debt default case, where…