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Business News/ Opinion / Views/  First Adani and then SVB have left India stirred but not shaken

First Adani and then SVB have left India stirred but not shaken

Thank regulators and households for prudence and our apparently reduced vulnerability to crises

First Adani and then SVB have left India stirred but not shakenPremium
First Adani and then SVB have left India stirred but not shaken

India has faced many tough situations. However, the country’s long-term resilience, macro policy reform opportunities and improving standards of regulatory governance have ensured that India has always recovered from a crisis. As the former Reserve Bank of India (RBI) governor Raghuram Rajan remarked in his maiden speech as the central bank’s chief, the words ‘India’ and ‘crisis’ should never be used together in a sentence.

Be it a situation brought about by self-goals, as in 1991, 2000, 2013 and 2016-2018, or driven by external events, as in 1998, 2008 and 2020, India has always been ‘stirred but not shaken’ (apologies to James Bond who likes his martini cocktail the other way around).

The fact that real Indian GDP growth has averaged above 6% over the past four decades is a testament to this. In the last 20 years, India’s stock indices have returned twice what US indices have and grown much more than China and other emerging markets, to the dismay of global investors who stayed under-weight on India with fund allocations.

Yes, India is chaotic. It is a democracy, has corruption weeded in its governance and has under-achieved. However, in this chaos lie opportunities; in Indian democracy lie checks and balances; in its corruption is scope for a clean-up; and India thus continues to disappoint both optimists and pessimists alike.

India suffered from the stock market scams of Harshad Mehta (1992), and Ketan Parekh (2000) and learnt enough to build a world-class stock and bond market trading and settlement system. The mutual fund busts of CRB (1996) and UTI (2003), liquidity and credit episodes of 2008, 2013 and 2018, and rampant mis-selling in the early 2000s have meant that regulations are strong and retail investors are returning in droves.

The recent Adani jitters, given the group’s size and scale, would have had a heavy impact on the entire market in earlier times. Given the maturity of institutions and regulations now, however, it caused a ripple but no system-wide worries.

The Indian insurance and pension industry, though, given its relative lack of investor-oriented reforms, has had continued problems of mis-selling, high costs and a deficient professional investment philosophy. It is clearly losing out to other forms of investment.

Having suffered the shame of having to pledge gold in 1991, RBI managed the external crises of 1998 and 2008 with prudent regulations. The central bank seemed to have lost control when India was part of the ‘fragile five’ in 2013, but appears to have regained credibility.

The country went through a bad asset quality cycle between 2014 and 2020 which impacted the financial sector and culminated in a credit crisis that enveloped a few banks, shadow lenders and mutual funds. The 2018 IL&FS solvency crisis was India’s ‘SVB’ event in a way. India initially dilly-dallied on a resolution, but with the threat of contagion, it moved to recapitalize, shut down, sell or resolve the impacted entities.

RBI’s macro-prudential regulations now are almost similar for a bank and non-banking financial firm, big or small. Banks have limits on wholesale liabilities to reduce the risk of bulky bank runs. India follows Basel-3 norms on capital adequacy. Learning from the 2013 dollar-funding crisis, it now requires all external corporate loans to be hedged or provided for with enough capital buffers.

India’s financial system held up pretty well during the covid crisis as well. One particular reason was the large presence of public sector banks (PSBs). Though it has impacted credit creation and they were also responsible for bad lending and poor asset quality, PSBs go a long way in shoring up depositor confidence and aiding financial stability. As we saw, the government has recapitalized many PSBs over the last 5 years. It also always a PSB that rescues a failed private bank.

India should improve PSB quality, but also ensure that a third or more of all bank assets are always with PSBs, as this would assure the system safety.

The lesson to be learnt from America’s SVB crisis, though, is on the speed of resolution. India now has a bankruptcy code to deal with corporate failures. It needs a financial resolution code to quickly resolve financial-firm failures.

Finally, India’s main resilience comes from Indian households. Though rising, household debt is well below other countries’ averages. Also, Indian households are smart asset allocators. About 50% of their holdings are land/property; about 30% is held as cash, deposits and insurance; and another 15% is in gold. These are stable assets, as compared to volatile stocks and mutual funds. This is not a complete picture, of course, as the bulk of Indian households do not have disposable incomes that are sufficient to invest or save. But for those who do, this represents a decent balance of earnings and spending.

These households and small Indian businesses have also overcome severe shocks in recent years, starting with the disastrous decision to demonetize 86% of all currency notes. They have adapted to cumbersome GST compliance requirements, withstood a credit shock and survived a terrible pandemic.

India does have its frailties and share of disappointments. But in a world of uncertainty, India does its own thing and offers predictable outcomes to investors ready to take a sensible approach.

Arvind Chari is chief investment officer, Q India (UK) Ltd, an affiliate of Quantum Advisors Private Ltd.

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Published: 15 Mar 2023, 10:50 PM IST
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