Get On With Re­form of Banks’ Bad Debts

The Economic Times - - The Edit Page -

On Au­gust 1, the 30-share BSE Sen­sex closed at a his­toric high of nearly 32,600 points; the Nifty 50 closed at a record 10,115. As mar­kets shut on Fri­day, Au­gust 11, both in­dices had been beaten down: the Sen­sex by 4.3% and Nifty by 4%. Should we worry? Some an­a­lysts say that the mar­ket had over­heated – in eight months, eq­ui­ties had shot up nearly 20% --and a cool­ing off was due. This is par­tially true. The ex­u­ber­ance was also jus­ti­fied by fac­tors like the BJP’s vic­tory in Ut­tar Pradesh. It was as­sumed this vic­tory would give the Modi gov­ern­ment po­lit­i­cal heft to carry out dra­matic re­forms. There were also hopes of a turnaround in cor­po­rate earn­ings, which have been be­lied. The price-earn­ings (PE) ra­tio shows whether stocks are priced rea­son­ably or not. The PE ra­tio for the Sen­sex is now 23.6, a his­toric peak that over­shad­ows the 22.61 num­ber of 2007-08, be­fore the global fi­nan­cial cri­sis broke. The trig­ger for Fri­day’s fall is an ad­mis­sion, made in the Eco­nomic Sur­vey Part II, that growth is likely to fall be­low the pro­jected 7.5% rate. Yet, In­dia’s medium-term prospects are in­dis­putably bright. We be­lieve gov­ern­ments should in­ter­fere min­i­mally in mar­ket op­er­a­tions. But it is re­spon­si­ble for re­forms and poli­cies that en­cour­age in­vest­ment, jobs and growth.

The roll­out of GST, de­spite its im­per­fec­tions, is a pos­i­tive. But a fis­cal deficit around 3.2% and in­fla­tion un­der 4%, point to de­fla­tion­ary risks. One neg­a­tive ef­fect of de­mon­eti­sa­tion has been a wave of write-offs of farm loans by state gov­ern­ments. This is ex­pected to knock 0.7 points off growth. The gov­ern­ment must tackle the bad debt prob­lem in our banks, and cre­ate jobs – by sup­port­ing labour-in­ten­sive ac­tiv­ity – for our rest­less youth try­ing to en­ter the em­ploy­ment mar­ket.

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