Friday, June 27, 2008

Does anyone remember how to laugh?

More on socializing capitalism…. Governments in India tend to be unduly charitable in an election year. A sort of mind game the ruling coalitions play on the electorate so that the voters’ recent memory will be only of the government’s generosity – that helps beat the anti-incumbency factor. This year, our UPA government came out with the biggest of them all – farm loan waivers of about $18 billion and further $3 billion largesse to govt. employees by accepting generous recommendations made by the VIth pay commission. I’ve already blogged about that here.

Both commercial and cooperative banks in the state are facing the problem of loan default during the 2007-08 fiscal and the amount defaulted could be around Rs 5,000 crore. The percentage of recovery for cooperative banks is just around 10 per cent, while for commercial banks it is 10 to 30 per cent, he added.

Now there’s the outcome. Banks to which farmers owed all this money have stopped paying up and they face a liquidity crisis. They may not be able to pay their depositors if Government does not infuse large doses of capital into these cash starved banks immediately. This will bite them badly since the intention of the government was to announce the waiver scheme early (before the code of conduct enforced by the Election Commission kicks in) and win the farmers / govt. employees’ votes. When it comes to replenishing the banks, it needs to deal with the problem only if it gets another term at office [that is increasingly looking unlikely, given the rising inflation, crude price impact and slow growth rates] or smartly leave it for the new incumbent to deal with it and collapse under its weight before long. But who ever thought it will come back to haunt them so soon...

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