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HomeEconomyGovt bailouts are a moral hazard, Chief Economic Adviser Krishnamurthy Subramanian says

Govt bailouts are a moral hazard, Chief Economic Adviser Krishnamurthy Subramanian says

CEA Krishnamurthy Subramanian said govt bailouts create a possibility of a situation where profits are private but losses are socialised.

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New Delhi/Mumbai: Government intervention in the private sector creates a moral hazard, India’s chief economic adviser warned, a statement that could temper expectations of a stimulus for cash-strapped Indian businesses.

Speaking in New Delhi on Thursday, Krishnamurthy Subramanian said India has been a market economy since 1991, when it opened up to foreign competition. Sectors in market economies run through the spectrum of a sunrise-to-sunset phase, after which many businesses tend to fade away, he said.

“I think we expect the government to use taxpayers money to intervene every time there is a sunset phase,” Subramanian said. “You introduce possible moral hazard from too-big-to-fail and possibility of a situation where profits are private and losses are socialized, which is basically an anathema to the way the market economy functions.”

Calls for a fiscal boost from the government for sectors like automobiles have been growing in the past few weeks after the budget from Finance Minister Nirmala Sitharaman failed to provide much of a support to either consumption or investment. Both have dragged down growth in India, which slowed to a five-year low of 5.8% in the January to March period.

Latest high frequency indicators show that there are little signs of a recovery. The central bank has cut interest rates and lowered its forecast for gross domestic product growth to 6.9% for the year to March from 7%, noting that risks were tilted toward the downside.

The subdued growth numbers won’t be surprising given auto sales have fallen off the cliff and spending on hair oil to biscuits have waned as consumers fret over their jobs amid a broader global slowdown. A shadow-banking crisis has also weighed on private consumption which contributes nearly 60% to GDP.


Also read: RBI launched massive crackdown on NBFCs amid cash squeeze last fiscal


 

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5 COMMENTS

  1. Sir India company oil. Mining. Auto mobile. Bank. Airlines. Middle class business people losing money please immediately take action

  2. At a conceptual level, this would be unexceptionable. However, a few caveats are in order. One, as pointed out by Ms Meena, is that when the government keeps loss making PSUs / PSBs aloft, it distorts the level playing field for their private sector competitors. Air India is a good example. 2. In some cases where the government’s take by way of taxes, etc is savage, telecom and airlines being notable examples, sector specific relief is merited. 3. The steady deterioration of the economy, to which the goverment has contributed a lot – demonetisation, GST, fiscal profligacy, refusal to undertake reforms, starting with power and banking – has steepened the gradient for businessmen / industrialists. So a little carrot in place of the big stick that has become the norm would be deeply appreciated.

    • Vaise dekha jaaye toh there is no greater moral hazard than a farm loan waiver. Some will be quick to draw a comparison with loans given to industrialists, but I think the two are not strictly comparable.

  3. Impending recession will be the ultimate test for Modi administration. Will he indulge in Keynesian quackery leave it the gods in the name of classical economics is to be seen.

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