India's Booming Growth Narrative is Hiding an Uncomfortable Truth and it's Deeper than the Missing Private Money

India’s debt situation looks alarming, as for the biggest corporate lenders in the country, stressed assets account for anywhere between 100-350% of their net worth. Essentially, if the economy does not get better from here on, and in the absence of substantial capital infusion, these banks could well be forced into liquidation. That’s too harsh an assumption to make, though. When and how fast the economy will improve is in question, but the government has the liberty to print currency or misallocate taxpayer money and keep the minister-banker-promoter nexus afloat.

The Indian banking system has been through this before. In 2001, bad loans of some public sector banks were three times the current level, while capital adequacy was much lower. What helped companies and banks pull out from the abyss was the global bull run that lasted from 2003 to early 2008. Cheap foreign capital as well as global demand played a vital role in the recovery.

That’s where the worries begin this time. Major corporates are burdened with debt and thus not in a position to invest and banks are too stressed to take on risks and lend aggressively to cover their bad loans. Developed markets are not in great shape. In fact, if the Fed tightens, it can only make things go from bad to worse.

Growth, thus, will have to come from domestic consumption. The Seventh Pay Commission will put additional money in the hands of some consumers, but that will result in a higher fiscal deficit. In any case, the government needs to allocate funds to capitalise banks. With falling tax collections, how much burden can the government really bear without putting the rupee in jeopardy?

This issue’s cover story that starts on page 26 is focused on the debt problem of major corporates and its implication on the banking system. Most bankers on Wall Street got away easy after making sub-prime loans. In India, it will not be any different for public-sector bankers. They will go on to get their pensions or postings in the private sector. There was never a better time to be an unaccountable banker, credit risk and project viability be damned.