Covered in this report:
- Reaganomics (part 1)
- Global Liquidity Crisis (part 1)
- Global Crackdown on Black Money (part 2)
- India’s Informal Economy (part 2)
- Season of Bailouts
- Crisis Comes Home
- Crash Course in Demonetization
- The Global War On Cash
- The Great Indian Bailout
- PARA – A Centralized Bad Bank
- Once Upon A Time
Season of Bailouts
In response to the 2008 subprime mortgage crisis a law was enacted to bailout the U.S. financial system. The Emergency Economic Stabilization Act of 2008 authorized the United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, and supply cash directly to banks. President George W. Bush signed the bill into law within hours of its congressional enactment, creating the $700 billion Troubled Asset Relief Program (TARP) to purchase failing bank assets. There are plans afloat to create a similar program along the lines of TARP in India as well which we shall discuss in later parts. Analysis found the Federal Reserve had, by March 2009, committed $7.77 trillion to rescuing the financial system, more than half the value of everything produced in the U.S. that year. The Act was proposed by then Treasury Secretary Henry Paulson, who prior to his role in the Department of the Treasury was the Chairman and Chief Executive Officer of Goldman Sachs, the bank hit hardest by the crisis. Even the treasury staff member responsible for administering the bailout funds Neel Kashkari, was a former vice-president at Goldman Sachs.
Following the crisis notable financial institutions worldwide were severely hit. Many had to be taken over or merged with another financial institution, others nationalized by a government or central bank rest declared insolvent or liquidated. The only problem was there wasn’t enough liquidity in the markets. The not so lucky ones were gobbled up by the Chinese.
There has been a marked increase in Outbound Merger and Acquisitions (M&A) by India Inc. as well. Outbound M&A means, the Companies which has origin in India making an initiative in investments in the foreign based companies. The tables below generated from data from the Reserve Bank of India show the outflow of investments from India during the four years since 2008.
Observe the two distinct trends in capital flow visible here. First the acquisition of natural resources ensuring raw material supplies and second the flow of money into the world’s top tax havens. These numbers that you see above are deals brokered for India Inc. by the M&A branch of N M Rothschild & Sons, one of the controller families of the East India Company. Below is a list of India’s top M&A deals. As an exercise we would like our readers to make a column at the end called ‘M&A Advisors’ and fill it out. Don’t be surprised if you find the Rothschild family advising the Government of Indian itself!
A major landmark was booked by Tata Steel Limited by acquiring the UK based company, Corus Group for a whopping amount of $12.2 billion. For the deal $1 billion was loaned out by SBI in just 5 minutes. The money for these deals was mostly raised through loans from Indian public sector banks like State bank of India and others. Nationalistic sentiments were aroused in the media in favor of the deals. Why? Because it was public money that was being used to bailout US-EU multinational companies. For those of you who still didn’t get it bailout is an act of giving financial assistance to a failing business or economy to save it from collapse. Simply put it was the hardworking Indian taxpayers’ savings that was loaned out to India Inc. by the Indian PSU banks to bailout foreign companies.
Crisis Comes Home
Now you must be thinking its only a loan like any other which India Inc. will repay back with interest. That’s correct but only it isn’t that way. Most of these loans are classified in banking books as Non-Performing Assets (NPAs). In simple terms, an asset is tagged as non-performing when it ceases to generate income for the lender, meaning these loans became unrecoverable bad loans. But wait, when the companies themselves are making good profits how could their loans be termed NPAs?
According to the Comptroller and Auditor General (CAG) of India Shashi Kant Sharma, a significant part of NPAs amount to fraudulently obtained advances and a large part of these loans may now be irretrievable as they are likely to have been transferred abroad. He also said that in recent times, there have been frauds against institutions, frauds committed against banks, especially public sector banks that are struggling. NPAs do not just reflect badly in a bank’s account books, they adversely impact the national economy.
So what has the Government been doing about this? Well, simply writing it off the books. Government has been writing off such corporate debts in lakhs of crores of rupees under what is called ‘revenue forgone’ now known by a new fancy name ‘revenue impact of tax incentives’. Data presented by Santosh Kumar Gangwar in a question answered in Rajya Sabha on 2nd August 2016 show the extent of such revenue foregone in 2015-16 – this is estimated to be Rs 6.11 trillion. According to the ‘Revenue Forgone Statement’ corporate companies on an average get tax waiver of Rs 7 crore every hour or Rs 168 crore every day or Rs 5.32 lakh crore every year. It’s close to three times the amount said to have been lost in the 2G scam. About four times what the oil marketing companies claim to have lost in so-called “under-recoveries” in 2012-13. In the nine years from 2005-06 to 2013-14, the corporate karza maafi amounted to Rs 36.5 lakh-crore. That, in case you like the sound of the word, is Rs 36.5 trillion. This is how the richest 1% of Indians get to own 58.4% of the country’s wealth.
Now this debt write-off is also a major fraud and has been continuing on a regular basis since a long time. Even the Supreme Court has reprimanded RBI whose responsibility it is to keep a watch on this and ordered it to share the list of major defaulters which RBI didn’t had any information on.
So where has all the money gone? The US Department of Commerce estimates that each $1 billion in trade deficit translates to about 13,000 to 19,000 lost jobs for Americans – meaning that every $1 billion sucked out of India will stabilize atleast 13,000 jobs in the US. How many jobs would RS 36.5 trillion that the govt. wrote off save? Roughly around 80 lakh American jobs, enough to sustain entire US economy with job/wage guarantee multiplier effects setting in. This same 80 lakh jobs it was promised in 2011 will be created in India instead by FDI in Retail. No one asked from where the money for investment would come from when the entire US-EU economies themselves were running bankrupt?
Read this exclusive research on the Global War on Cash with an impact study of India’s demonetization drive with a push towards a Cashless society published in the Apr-Jun 2017 Demonetization issue of GreatGameIndia – India’s only quarterly magazine on Geopolitics and International Affairs.