Economics books rarely open with as much impact as Urjit Patel’s Overdraft : “I’ve been in the news.” For someone with a reputation for being uncommunicative, he can say a lot in a few words. He has readers’ rapt attention instantly, but he discloses nothing about what we have been waiting to hear from him. And yet, it is a compelling, urgent book that has yanked the political economy discourse closer to reality.
Unwieldy mess
Gushing economist-authors have for years glossed over inconvenient political-economy home truths, mythologised India’s economic promise and lulled policymakers into complacency. Even the cautiously optimistic go only as far as saying: India can grow if it can do the difficult reforms. Overdraft is a liberating break from those false narratives. The book is focused on banks. Every economic crisis of recent years has involved banking and the allocation of credit. Crises are brought under control by the government and the Reserve Bank of India (RBI); their root causes are left unattended. For, far too much rests on the fraught system of cronyism for politicians and business. The mess has meanwhile grown way too big to tidy up.
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The Modi government dared to attempt a clean-up. It wrote and passed the Insolvency & Bankruptcy Code (IBC), its most significant reform initiative. Only to see it regress swiftly — to the advantage of the big loan defaulters that stood to lose the ownership of their firms under the new regime. Patel tells a transparent story of the early gains clocked against cronyism being at risk of becoming “a false dawn”. Willing accomplices, the RBI and banks, rolled back the IBC Framework and regulations for securing financial stability instituted in Patel’s tenure. Maximum exposure for banks to a business group permissible had been reduced. But it was relaxed. Recognition of bad loans for non-banking financial companies (NBFCs) and small companies has been allowed to languish. The case for how diluting its key features has robbed the IBC of credibility and reaffirmed the defaulters’ grip over the system is argued conclusively.
Political surrender
Patel devotes no more than a chapter to this narration, names no names and betrays no details. Still, the reader is left in no doubt over exactly what transpired and why. The drama unfolds, interspersed with passages discussing the economic consequences of the developments, written for most part jargon-free. Although the author could have been less sparing with the witty lines.
The book portrays the unyielding capture of policy thinking and decisions, including in courts, by big business without reading like an expose on those who thwarted the clean-up efforts. It is concerned principally with questions of why capital allocation in India remains chronically discretionary, state-dominated and resistant to reform; how the market is subverted; why attempts to replace bankers’ leeway for being soft selectively on big defaulters with a non-discretionary rules-based approach get sabotaged.
Patel argues that persisting macroeconomic rigidities have forced this abject political surrender. He shows that build-ups in non-performing assets (NPAs), losses, taxpayer-funded recapitalisation and bailouts recur frequently because governments rely on bank credit for pump-priming the economy. That is because there is never any fiscal room for spending to stimulate aggregate demand or private investments. Governments nag state-owned banks to provide credit liberally even if by going easy on defaulters. And so, despite repetitive failures to repay outstanding debt, big businesses secure fresh loans in a snap. The banking system stumbles from crisis to crisis, as governments seek to manage macroeconomic stress by choreographing a financial system dominated by entities they own and control—banks, insurers such as LIC and NBFCs.
Impact on growth
What kind of growth does this sort of credit allocation produce? India has been taxing the productive economy to arrange — via recapitalisation and bailouts — uncurbed bank lending for defaulters. Patel calls these errant borrowers the living dead for they survive even after failing to service debt. Who takes the tab? Taxpayers and savers; and borrowers who repay loans diligently in the form of higher price for credit. The rich and powerful pocket a disproportionate share of the largesse; the liabilities are distributed widely. The system is suited for rationing favours to a chosen few and resists modernisation.
But the party may have gone on long enough and could be drawing to an end already. New Delhi would be unwise to duck the book’s dire message when the COVID crisis is set to blow up what was already a disruptive build-up in NPAs. The book’s analyses render it easier for its author’s successors in the RBI to revive the derailed clean-up.
Overdraft ; Urjit Patel, HarperCollins, ₹599.
The reviewer is the author of The Lost Decade .
