The Fall of Trust

Somewhere in financial history, the word ‘trust’ got replaced by the word ‘credit’ which divided the economic chronology into After Credit and Before Credit. Even though credit was present from before agrarian economies, it was used in an organised manner by Europeans from the 15th century which in turn fueled their scientific as well as political conquests.

Credit which is trust in future boomed when the trust was kept or got fulfilled by advancement in economies, which in return again fueled credit growth. This cyclical growth excited man and he made the cycle circle faster at each turn by lending, spending and printing too much. Obviously this made the Europeans champions of the world and hence the first to go bankrupt.

In the 21st century their credit cycle broke all of a sudden, and they found themselves staring at negative returns on the credit facilities. This meant the number of trusted parties who can avail credit had declined, resulting in the need to shell out in order to find parties willing to accept credit. This happens because the trust factor in future has declined as the number of defaulting accounts rapidly balloon and even lead to sovereign countries defaulting on credit.

Italy was in crown position of having world’s highest ratio of bad debts. This crown position was challenged by a country in South East Asia where everything happens prematurely. That’s India. Even though India saw organised credit surge and became the economy’s backbone very late only in the 20th century, we are staring at huge bad debts which is around 9.5% of the total advances, where in Italy the bad debts are at 8.5% currently down from 17% in 2015. We are facing this high ratio of broken promises for last few years and we planned many things.

Now in 2019, the bad debts have changed their status from the ‘result’ to ‘cause’. We were talking about why it happened for last few years but now we are discussing what it will result from now on. The CEO of NITI Ayog, Amitabh Kant said that trust is missing in the economy which, as we’ve seen really means credit is missing from the economy. So where did the trust go? Since 2005, we saw boom years for trust where we saw credit was flowing seamlessly and investments were soaring. We added capacity in infrastructure like power plants, airports, ports and roadways. We invested heavily in industries and we created immense capacities. This was all made possible by the basic emotion of credit or trust in tomorrow, that tomorrow will be better than today. Indians were also sure that our more than enough population itself will provide the required demand and hence the cycle of trust will be safe. Alas it wasn’t.

The lack of reforms in the Banking and Finance Industry and the policy paralysis in the second term for the UPA government started the cracks in our cycle of trust.

In the first half of the 2010s, PSB asset books were ripe with more than 10% NPA’s, this led to a fall in their lending and their share in lending was taken over by NBFCs which got their boom years from the beginning of this decade. This boom bank rolled the initial years of NDA govt where no one knows actual growth rates. Introduction of fresh initiatives by NDA such as IBC brought fresh life to the trust in future. But just like as GST, the IBC was also introduced half baked, and as of now, number of cases pending more than 270 days which was the defined deadline to be decisioned is 400. It became another Judicial system of India.

Then came the ILFS balloon burst. This took away the single engine on which the economy was running – the NBFCs. Funds became costlier or rare for the NBFCs and hence for the end users. Now we are celebrating one year of NBFC crisis and economy shows the effects. As nobody is there to fund, the demand worsened and the auto sector’s fall was first omens of impending doom. All sectors started cost cutting and the already worse unemployment hit another spike which again affected aggregate demand. This eroded the trust in tomorrow. Only trust eroded, not the money with banks. As trust in the economy eroded people are less likely to invest in the market and hence this money will go to less risky fixed deposits.

Obviously for a less trusted tomorrow, credit is not favorable and hence needs the rate cuts to encourage people who can afford a credit at this time to come on board.

Making all this worse is the attitude of the government of the day. The government is either ignorant, lazy or just in plain denial about the crisis. The actions of the government are nothing less than blunders. Perhaps that will make the cut to the second episode of this series.

Magellan’s Calendar

In the September of 1519, a sailor called Ferdinand Magellan set sail to navigate around the globe. This was at a time when earth was believed to be flat and very few thought otherwise, even fewer were ready to prove this by planning an expedition to circumnavigate the earth. Magellan is widely credited to have successfully completed the expedition. Of course, the truth is Magellan died on the islands on the Philippine archipelago and only 18 of the 241-member crew made it back to Spain to prove that it is not possible to fall off the earth by sailing over the horizon.

The fleet of 5 ships and 241 sailors navigated the Atlantic via West Africa and the coast of Brazil. By the time the ships resupplied on the islands of the Strait of Magellan, one of the ships; Santiago was destroyed in a storm and the crew of another called San Antonio had mutinied and returned to Spain. The three remaining ships had entered the South Pacific Ocean in the November of 1520.

 The winds and waves vanished, and the sails dropped. The silent sea as the Pacific is called offered no help. Men succumbed to the tricks of the sea and fell overboard; the crew came into fire from pirates in the sea and native tribesmen on land.  Months passed, and there was no hospitable land to resupply. The commanders of the ships were getting edgy and the admiral foresaw more mutinies.

The admiral decided, the best way to keep the crew from losing their minds over the time passed was to hide the calendar. History records that the captains of the 3 remaining ships were given calendars made by the admiral and they along with the admiral decided what day it was. The Admiral maintained one calendar for himself and his first officers that showed the real date and another calendar for the crew that showed a false date – a date that changed slowly and kept the crew thinking days passed slower than weeks.

The crew eventually crossed the Pacific after 4 agonizing months of navigating through the Pacific and landed Guam in the Philippines sea. When Magellan and his officers revealed that they had spent 4 months navigating through the pacific, the crew was shocked beyond belief. Some felt betrayed, some said they had an inkling, but they didn’t care much now as they had finally made port.


The economic conditions in India are bad. It doesn’t take a genius to figure that out now. Economic indicators like the GDP numbers, agricultural income growth, manufacturing growth, employment rate and the aggregate demand in the economy are all declining and have been declining for quite some time now.

Although the decline and the collective decline is concerning, the real concern is that the central government of India is not acknowledging it. What we hear from government and government representatives is that FDI numbers have been the highest, the problem is because of the time bombs left behind by the previous governments or that these are effects of the trade war and other global factors.

Economists, one after the other have said that the slowdown is India’s own doing. Demonetization and the hasty implementation of a half-baked GST is being blamed for the current slowdown in the economy. When the BJP came into power in 2014 we were at a cyclical boom period along with a global fall in crude prices. Our government didn’t see it fit to pass on the advantage to the consumers and saved millions, where are those millions now?

2014 and 2015 were drought years for the agriculture of India and it had just seen a little recovery in 2016 when the government announced demonetization to kill the rural and other unorganized sectors. The government followed one blow after another by the hasty half-baked GST thereby taking care of what was left of the unorganized sectors.

The effects of these hasty and impulsive policies are having an effect now. One may say the financial crisis in Banks and NBFCs was a gift of the previous government, but sadly the numbers say otherwise. While the NPAs was at 2.5 Lakh crore in 2014 it has now come to 8.5 Lakh crores in 2019. Inaction from the current government is the reason for the snowballing of the banking crisis.

There are a lot of problems in our economy and all of them can be fixed. We are the nation that escaped from the meltdown in 1991, we are the nation that averted being part of the global crisis in 2008; so we can definitely find our way around these self-inflicted wounds. If only we have the stomach to accept that there is a crisis.

The finance minister gets defensive and starts shutting down reporters, the home minister is busy plotting booby traps for the opposition leaders and the prime minister is busy planning for his next item number.

I quoted the story of Magellan and his fake calendars because I am a hopeful person inside. I secretly want to believe that no government of India can be so arrogant about its ignorance. I sincerely hope that our central government is holding a Magellan’s calendar in front of us to keep our hearts and is maintaining a genuine calendar for itself that shows the truth.