One day Raja Krishnachandra, the 18th-century zamindar of Krishnanagar, Nadia, in today’s West Bengal, decided he wanted a Lake of Milk to be spun into sweetmeats for his people to eat and sell far and wide, spreading happiness and wealth. Earthworks complete, Krishnachandra said that on new moon night, each householder should pour one pot of milk into the excavation. Everyone agreed.
But on the given night, Chaturanan thought it would be smart for him to pour a pot of water into the lake. With everybody else pouring milk, who’d be the wiser? Well, next morning, Krishnachandra was aghast: his lake was full, but with water, not milk. Everybody had reasoned the same way as Chaturanan, and the king’s grand project was a flop.
The brilliant economist Mihir Rakshit told us this tale long ago, to illustrate something called ‘the paradox of composition’. Sometimes, decisions that are rational for one person, lead to disastrous outcomes if everybody acts likewise.
John Maynard Keynes never met Raja Krishnachandra. But the heart of the economist’s diagnosis and cure for the Great Depression of 1929-40 hewed closely to this story. He reckoned that in shrinking economies, belt-tightening and ‘save more’ strategies would fail. If everybody became tight-fisted together, demand would crash, jobs lost, businesses bust and hopes — or ‘expectations’ — for a better tomorrow evaporate.
At the heart of Keynes’ diagnosis was the supreme role played by our expectations about the future: the optimism of a salaried person that led her or him to take a mortgage on a home, the ‘animal spirits’ that impelled business to invest for higher returns, etc.
If this spirit left an economy, the outcome is a death spiral — falling demand, sales and inventory pileups, unpaid debt, bank distress, finances drying up, layoffs across sectors, repeat ad infinitum. Keynes had lived through all this in the interwar years.
Then, it was said, New York hotel clerks booking guests would ask, ‘For the night, sir? Or just for jumping?’
The New Abnormal
Here, folk theorem on the streets is gloomy. Manufacturing and farm growth have dropped off a cliff, construction, the largest employer of ‘contract’ workers — more than 90% of labourers — is stalled. Many of our largest builders and shadow-banking lenders are technically belly-up.
Even the government has wearied of trying to conceal unwelcome numbers. Last week, the Central Statistics Office (CSO) released pan-economy growth numbers for the April-June quarter. We are now crawling at 5%, the lowest growth since 2014-15, when Prime Minister Narendra Modi first stormed to power.
Credit Suisse (CS) is a global financial giant that publishes the state of bad debt in Indian companies. From 2012, when it circulated its first report, ‘House of Debt’, these reports illuminate the murky landscape of corporate debt, dispute settlement and lenders’ health.
These papers have appeared more or less every year since. They show how companies borrowed to build projects that never materialised — either because of sarkari apathy, tardy policy implementation or managements’ eagerness to bite off more than they could chew — and pushed financial markets into a corner.
Loans from banks, insurers, shadow banks and so on have to be repaid with interest, otherwise, underperforming shareholders have to exit, companies taken over and assets sold off. Today, India has a mechanism to clean up. It’s called the Insolvency and Bankruptcy Code (IBC), to shake out non-performers and get stalled companies back on their feet. On August 22, CS published its ‘India Corporate Health Tracker’. This says that between April 2018 and April 2019, companies’ bad loans fell from 12% of total debt to 9.5%, a good thing. But between April 2019 and now, it has gone up to 9.6%. Worryingly, another 3% of debt will soon turn sour unless lenders carve up their burden of woe and share it.
This mechanism is called inter-creditor agreements (ICAs) and is the only so-so option now left to recover a few paise from every rupee lent. Assume lenders can’t agree to ICAs, of which 70% is anyway unrecoverable. Then, total corporate bad debt climbs to more than 12% of all loans. Remember, the corresponding number for China, around 4%, is about a third of ours.
Three years ago, the government brought IBC into law. Assumed to be a silver bullet to resolve debt and management hassles at the time, it has proved to be anything but. CS shows the IBC now takes 450 days to get through a case, compared to 250-odd days in March 2018. After all that struggle, the system manages to recover about 15 paise from every rupee lent, compared to 70 paise last March.
The Keynes to Success
Today’s crisis is the grinding fallout from the destruction of positive expectations after the notebandi of November 2016 and policy blunders afterwards. Keynes would have told New Delhi to revive public funding for programmes like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) scheme, pump funds into healthcare and other areas where it can make a difference.
The alternative is gloom, belt-tightening — and Raja Krishnachandra’s horror on finding a lake of water instead of one brimming with milk.