Why India Is On The Cusp Of Explosive Growth, If Only We Fix Our Banks

There are two ways of looking at India’s problems: one is to look inward, where we will find a myriad problems, from stacks of bad bank loans to corporates unable to invest, to the slowdown in job creation, to a weak export market, to a violent crisis in Jammu & Kashmir, and so on and so forth.

The other way is to look at India outside in. The world is a more troubled place than India. The central banks have failed to reverse the gloom that began in 2008, terrorism is raising its ugly head in Europe and the refugee crisis is threatening to make things worse, West Asia is a war zone in many places, Chinese banks are about to implode, Russia is struggling due to low commodity prices, Japan is about to try its nth stimulus package.

The biggest thing is this: barring China, interest rates are close to zero in the big, developed economies. This is unsustainable. Money has to find profitable investment somewhere.

The biggest companies in the world, which were the main beneficiaries of the unlimited flow of free cash from central banks, now have over $7 trillion in cash reserves and nowhere to invest, unless they spend it all in internal mergers and acquisitions. That $7 trillion in cash was counted around mid-2014, and could now be even larger. America’s tech biggies, from Apple to Microsoft and Google, collectively hoard more than $400 billion in cash. The top 10 US cash hoarders hold over $650 billion between them – one-third of India’s GDP; over 5,000 corporations around the world held nearly $5.7 trillion among them in end-2013. The cash mountain has only gotten higher since then, as most tech giants have spun more money out of thin air.

This money has nowhere to go but India and China and a few smaller emerging markets, unless the US Fed and the European Central Bank start raising rates and make it worthwhile for companies to continue hoarding this money rather than investing it.

If rates do go up, the markets will crash, forcing investors to again seek places where the crash will be reversed faster – India is one obvious candidate.

Logically, India should be the biggest recipient of both direct and portfolio investment, both in equity and debt. As long as the rupee is reasonably stable, money will come.

A few weeks ago, HDFC managed to raise Rs 4,500 crore through masala bonds – bonds issued to foreign investors that are denominated in rupee. Indiabulls raised Rs 1,300 crore, and LIC Housing Finance may be next with Rs 1,000 crore. This growing appetite for rupee debt shows that FIIs are willing to take a punt on India despite exchange rate risks.

The only thing not going right for India is its weak banks, but this needs just one bold step to fix. Recapitalise public sector banks, and fresh cash will be available for fresh lending for growth.

A temporary abandonment of the fiscal deficit target for this year, with Rs 50,000-75,000 crore going purely to boosting bank capital, may be just the bold step needed to get growth beyond eight percent once again. And it could sustain.

The Reserve Bank may be forced to retain high interest rates, but this will only spur more inflows of foreign money, which will, in turn, boost the currency, deflating the imported element in inflation. Boldness is the solution, not a problem.

The huge investments made by Reliance Industries in its Jio mobile internet strategy – investing over Rs 1,00,000 crore single-handedly over the last two years - will spur investments by rival players. Together with central investments in infrastructure, we may be about to see a resumption of the virtuous cycle of investment and consumption revival from early 2017.

It is only our fears that are holding us back. With a few bold steps that sidestep the economic Cassandras and economic theorists, we may be on the cusp of fast growth once again. If at all there is a time to abandon excessive fiscal caution, it is now, when the West is in deep trouble.

Our time has come again. Are we going to blow it? India is one of the few games in town for the West’s capital hoard. We should grab it with both hands.