Money Gone Wrong

Money Gone Wrong

The EU economies and the US alike, are paying for running up mountains of debt, largely in the past, but continuing still, to prevent a collapse of their over- leveraged financial systems. This is helped very little by current rates of miniscule growth, and rank price-band uncompetitiveness.

All this has happened, and continues to happen, on the back of cheap money, and borrow-and-spend economics, inclusive of major wage hikes for employees, also funded alas, with borrowed money.

This despite the Americans and Western Europeans having many gems of technological excellence that have high export and collaborative potential. But being stewards of very high wage zones they are trapped with the bloated end- pricing of their wares.

Demand for aeronautics for example, is now taking the shape of joint ventures with foreign entities who want the manufacturing moved to their countries along with the technology transfer and future upgrades. Volvo for another example, is now Chinese owned, as jaguar/ Land Rover is Indian.

India and China with their sizeable appetites are obviously prime potential customers, but they now have the leverage, and need not necessarily pay the exorbitant prices being asked. Meanwhile, to add urgency to the deliberations, unemployment rates continue to surge in the EU and the US.

Unemployment statistics from there are anywhere between 10% to 25% amongst the eligible work- force, and crests at more than 50% in extreme pockets.  This is exerting a hurtful pressure on their governments and private enterprise alike.

The tectonic plates of world power are shifting inexorably, as is the balance of power, and perhaps the only silver- lining for the Western economies including Japan is in the weaknesses coming to light in the emerging market economies as well. This tends to even the balance to some extent at least for the time being.

India’s banking system is relatively small and underdeveloped. It is also under stress both from bad debt and non-performing assets (NPAs) and malpractice of the money laundering kind.

It is long rumoured that the Chinese banking system is also riddled with NPAs, but being a relatively closed society the extent is not generally known. Also, the remedies and purges, if any, will have to come from their own all-embracing communist party. China has massive potential problems with its currency valuations pegged at a largely fixed rate artificially, and a slowing economy with worrisome future growth projections. There has been and continues to be a lot of unproductive asset-building. There is also the balance of trade issue, hugely tilted in favour of China, waiting to find a more equitable solution.

But let us, for the moment, worry about ourselves.

The NPAs in India are a consequence of apparent collusion between banking professionals eager to sanction loans against inadequate collateral and then writing them off the books when the borrower fails to pay up. Public sector banks (PSUs), are reportedly writing off Rs. 15,000 crores of bad debts annually now!

With a loan written off, the borrower also escapes prosecution by the CBI because the matter is seen as an exigency of business gone wrong rather than deliberate intent to defraud. Our PSU banks are burdened with unprecedented levels of bad debt and non-performing assets. Witness this:  “Over $ 15 billion or more than Rs. 83,000 crores of corporate loans have turned into bad debts in less than a year- and- a-half, according to a report of the parliamentary standing committee on finance  which expressed concern on the phenomenal rise in non-performing assets (NPAs) of public sector banks.”   So this too has all the markings of a major scam with government action to control NPAs failing miserably.

It is also seen that a lot of the government bank loans to the corporate sector gone bad, are made to influential entities backed by politicians, including ministers and their families. Mr. Bansal, the erstwhile Railway Minister, figures in a recent report but is hardly the only one.

On the money-laundering front, the problem first brought out by investigative website Cobrapost and subsequently corroborated by the government including the RBI, the issue is tax revenue lost, even as the money is entering the productive economy.

Some would argue that “black”, unofficial money entering the “white” official economy via a number of private banks is not such a bad thing. Defrauding a corrupt system of taxes seems almost like a good deed along the lines of something Robin Hood might have done. Besides, the inflow is not just from individuals and businesses but also from the cooperative banking system funnelling cash into the mainline banks, thereby obscuring the names of the original launderers.

With a wobbly public banking system both under capitalised and over exploited and of inadequate size on one side, and massive government debt on the other, we may have a problem, a debt trap, closing on us anytime soon. This could take the shape, as it did in the West, of serial bank collapse or worse, its collapse leading to crippled businesses and destroyed lives on Main Street, or in our case, Mahatma Gandhi Road. There is an MG Road prominent in all our cities after all.

Now let us add the government’s massive welfare bill to the rest of its poorly run list of activities and we begin to see the gargantuan size of the tsunami that could engulf us.

Corruption and collusion has led India into very dangerous territory indeed. We have little time to lose to put things right.

(911 words)

May 14^th, 2013

Gautam Mukherjee