Editorial Analysis 12 June

Economy

India’s looming financial crisis

Source: The Hindu

Context

• The article discusses the dangers of rapid credit growth, drawing parallels with historical financial crises. It explains how such growth, often fuelled by "irrational exuberance" and the belief that "this time is different," leads to financial instability and economic downturns. This pattern is seen as a siren song that promises prosperity but ultimately leads to crises.
• India is experiencing a surge in credit growth, driven by digital infrastructure and financial innovation narratives. This growth is applauded by international and domestic analysts, despite the underlying issues of job deficits and human capital deficiencies. The article warns that the focus on credit growth masks deeper economic problems and risks leading to a financial crisis.
• The article criticizes India's financial services industry for being chaotic and poorly regulated, with many providers pushing unsecured loans. This has led to high household debt-service ratios and increased financial vulnerability. The piece calls for policy changes, including downsizing the financial sector and adjusting the exchange rate, to prevent an impending crisis.

Details

Key Points

Economic Concepts and Theories

• Credit Growth and Financial Crises:
  • Rapid credit growth often leads to financial crises.
  • Historical examples: Financial booms framed as innovation, ending in crises.
  • Robert Shiller's concept of "irrational exuberance".
  • Carmen Reinhart and Kenneth Rogoff's analysis: "This time is different" mantra.
• Household Debt Dynamics:
  • High household debt does not enhance productive capacity.
  • Bids up domestic prices, reducing competitiveness.
  • Atif Mian and Amir Sufi's research: Higher household debt burdens lead to steeper crashes.

India's Financial and Economic Context

• Current Credit Growth in India:
  • Driven by digital infrastructure and financial inclusion narratives.
  • Applauded by IMF and domestic analysts despite risks.
  • Personal loans surge, while industrial lending lags.
• Household Debt Issues:
  • Rapid household lending growth, especially in unsecured loans.
  • High debt-service-to-income ratio (12%).
  • Comparison to pre-2008 financial crises in the US and Spain.
• Financial Sector Structure:
  • Chaotic financial services industry with a mix of large banks and NBFCs, and smaller, dubious players.
  • Emergence of FinTechs offering high-interest loans.

Policy Implications and Recommendations

• Current Policy Issues:
  • Emphasis on financial services to boost GDP growth.
  • Overvalued exchange rate as a metric of national strength.
• Recommended Policy Changes:
  • Downsize the financial services industry to match productive borrowing needs.
  • Devalue the rupee to expand exports and cushion economic downturns.
  • Align finance with growth, following Joan Robinson's dictum.
• Potential Crisis and Socioeconomic Impact:
  • High risk of a financial crisis due to unsustainable credit growth.
  • Likely macroeconomic contraction and cascading defaults.
  • Socioeconomic impact: Increased job shortages, greater inequality and regression of the workforce to agriculture.

Case Study and Real-World Examples

• Case Study: Rohan's Debt Cycle:
• Example of a young borrower caught in a debt trap through credit card usage.
• Highlights issues with aggressive lending to low-creditworthy individuals.

• Comparative Analysis:
  • Compare India's situation with other countries that experienced financial crises due to high household debt.
  • Examine policy measures taken by those countries to mitigate crises.

Sources:

The Hindu

Internal Security

Redrawing the red line

Source: Indian Express

Context

• The article discusses the persistent threat of terrorism sponsored by Pakistan in Jammu and Kashmir (J&K), particularly during significant events in India. It highlights recent attacks on pilgrims and analyses the motives behind such actions, emphasizing Pakistan's ongoing investment in destabilizing the region.
• It outlines the measures taken by India to counter terrorism in J&K, including neutralizing terror networks and implementing security measures. However, it also acknowledges the challenges faced in maintaining stability, such as the possibility of a pushback from the Pakistani deep state and the need for continuous vigilance.
• The article addresses the need for a strategic response from the Indian government to prevent future terrorist attacks and manage public pressure. It discusses the importance of holding assembly elections in J&K as a symbol of democracy and India's intent, while also considering security concerns and the effectiveness of past responses to terrorism.

Details

Key Points

Terrorist Threat in Jammu and Kashmir

• Pattern of Terrorist Attacks:
  • Pakistan-sponsored terrorists exploit significant national events to convey messages and project relevance.
  • Recent attack on pilgrims on the Reasi-Katra road underscores the ongoing threat despite India's counterterrorism efforts.
  • Reference to past attacks during important events, such as the Chittisinghpura massacre in 2000.
• Motives and Strategy of Terrorist Organizations:
  • Terror leadership perceives the J&K situation as temporarily on hold but continues efforts to remain relevant.
  • Attacks aim to prevent any perception of J&K being resolved in India's favour and to exploit vulnerabilities in Indian security.

Counterterrorism Measures and Challenges

• Indian Counterterrorism Efforts:
  • Five-year efforts to counter terrorism post-Article 370
  • Neutralization of various terror networks, including terror financing, media, and over-ground workers.
  • Previous low-level strikes and recent targeting of security forces in the Pir Panjal region.
• Challenges and Pushback:
  • Anticipated pushback from Pakistani deep state to reclaim lost influence in J&K.
  • Challenges in maintaining security, especially in vulnerable areas south of Pir Panjal.

Policy Implications and Recommendations

• Policy Responses to Terrorist Threats:
  • Importance of holding assembly elections in J&K to counter negative narratives and demonstrate India's commitment to democracy.
  • Need for enhanced security measures, especially during sensitive events like the Amarnath Yatra.
• Response Strategy:
  • Examination of the effectiveness of past responses like surgical strikes and aerial strikes.
  • Consideration of options for responding to future attacks, including covert actions and international pressure.
  • Need for pragmatic war gaming to develop effective response strategies while managing public pressure.

Public Perception and Government Response

• Public Pressure and Government Actions:
  • Need to address public pressure while maintaining a firm stance against terrorism.
  • Limited options for the government, with emphasis on maintaining strategic thresholds and red lines.
  • Importance of a balanced approach that considers both security imperatives and public sentiments.

Sources:

Indian Express