1. India’s Growth Slowdown: Goodbye, Financial Liberalisation, Hello Financial Crash? Kunal Sen IDPM, University of Manchester

2. The End of India’s Growth Miracle

3. Falling Investment

4. No sign of turnaround

5. Cause of decline in fixed investment: stalled projects (“alarmingly high and dominated by the private sector”, ES 2015)

7. Manufacturing’s share of stalled projects rapidly rising

8. Deeper symptoms of stalled projects: Investment bubble driven by over- exuberance financed by lax credit

9. Balance Sheet Mismatches: “An Uniquely Indian Syndrome ” (ES)

10. Most of the debt of the private sector owed to Indian public sector banks, who are now stacking up a lot of NPAs

11. So this peculiarly “unique Indian syndrome” due to too much financial liberalisation or too less financial liberalisation?

12. Quick recap of India’s financial liberalisation since 1991 By 1994 commercial banks and term-lending institutions were completely free to set their own lending rates. Opening up of the banking sector to the entry of new private banks. Substantial deregulation of the stock market, especially the operation of the new issues market and relaxation of restrictions on the entry of foreign portfolio investors. Indian firms with good track records have been allowed to issue bonds and equity in foreign capital markets.

13. Incomplete Financial Liberalisation The statutory liquidity ratio – mandatory requirement that Indian banks a share of their resources in liquid assets such as government securities – in effect, a mechanism to finance the fiscal deficit. Currently 25%. Priority sector lending requirement – 40% of credit has to go to agriculture, small scale industry, etc. Entry of private banks very difficult in India.

14. Dominance of Public Sector Banks

15. Private Banks Outperform Public sector Banks, but wide variation in performance in PSBs

16. Public financial corporations as the absorber of capitalist risks

17. Hello, Financial Crash? Two Routes out of the current malaise: A) More liberalisation. Highly unlikely. B) Some tinkering at the edges, but more of the same. The political equilibrium favours the status quo (both large business and PSBs are caught in a low level equilibrium trap). Not surprising that the current govt sees public investment as the way out, rather than reforming the banking system, restructuring corporate debt, and punishing errant large business.