Dire States: Does India Have A Hidden Debt Bubble?

In Latur, Maharashtra, India
In Latur, Maharashtra, India
Alaric Moras

The western state of Maharashtra, home of Mumbai and the biggest regional economy of India, announced this month that it will waive farmer loans worth 1,140 billion rupees, or nearly $18 billion.

The June 12 measure will leave only 800 billion rupees, or about $12 billion, in the state's coffers until the end of the fiscal year, the Indian Express reported. The state government said it would cover its expenses by borrowing.

On its own, this news might not be so alarming. But taken together with recent state borrowing trends, it is cause for concern — and some have even warned of a looming debt "bubble."

Borrowing by state governments has risen consistently since 2007. Between 2015 and 2017, 18 of India's 31 states and territories exceeded the permitted gross fiscal deficit (limited by a 2003 national law to 3% of gross state domestic product).

And there is more to make an economist's hair stand on end. Around 70% of India's banking sector is in the hands of Public Sector Undertaking (PSU) banks, relics of the country's flirtation with socialism until 1991.

Between 2012 and 2015, 27 PSU banks wrote off the same amount of 1,140 billion rupees worth of bad debts, more than the total of write-offs in the previous nine years. Economic measures such as last year's demonetization, the prohibition of liquor in certain states (though liquor makes up a quarter of some states' income) and the banning of beef (which, as a recent paper suggests, could deduct 2% from the annual GDP growth) have not helped.

What is the debt financing?

A projected increase of foreign direct investment in India by $3.5 billion has allayed fears, but this is not likely to cushion the investment shortfall, warns Dr. V. Anantha-Nageswaran, of the foreign policy think tank Gateway House.

Many also look at the shrinking central debt under the government of Prime Minister Narendra Modi and see cause for optimism. But interest payments already consume one-third of the Indian central government's tax revenue. And though Modi seems keen on meeting fiscal targets, he campaigned and won in the state of Uttar Pradesh on the promise of more loan waivers for farmers, which he duly kept.

This leads to the obvious question: while debt in itself is not a bad thing, one must ask what the debt is financing. Investment to improve productivity is critical. But waiving farmers' loans will simply lead to a repetition of the same situation years from now, unless agriculture reforms follow.

Populist promises like loan waivers lead to short-term relief but long-term strain on India's economy. And though the Reserve Bank of India was once a force to be reckoned with, it now produces no more than irritated noises. Thus, state and national politicians can carry on with their unabashed profligacy, which inevitably lead to inflation.

If the Modi government intends to actually improve India's economy, it must not stop with the Goods and Services Tax (a nationwide tax that will absorb central, state and lower-level indirect taxes) , or with meeting national fiscal targets. Improving India's credit rating (stuck just a notch above "junk" status) and improving India's Ease of Doing Business Index score (beyond hemming and hawing over World Bank reports) would actually get the country's gears moving. Debt bubble or not, the real economy is something that can ever be written off.

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!

Dutch Cities Have Been Secretly Probing Mosques Since 2013

Revelations of a nationally funded clandestine operation within 10 municipalities in the Netherlands to keep tabs on mosques and Muslim organizations after a rise in radicalization eight years ago.

The Nasser mosque in Veenendaal, one of the mosques reportedly surveilled

Meike Eijsberg

At least ten Dutch towns and cities have secretly used a private agency to probe mosques and other local religious organizations, Amsterdam-based daily het NRC reports in an exclusive investigation.

The clandestine operation — funded by NCTV, the National Security Services, the Netherlands' leading counter-terrorism agency — was prompted by the social unrest and uncertainty following multiple terror attacks in 2013, and a rise in Islamic radicalization.

The NCTV, which advises and financially supports municipalities in countering radicalization, put the municipalities in touch with Nuance by Training and Advice (Nuance door Trainingen en Advies, NTA), a private research agency based in Deventer, Netherlands. Among the institutions targeted by the investigations, which came at a cost of circa 500,000 euros, were Mosque 'Al Mouahidin' in the central Dutch town of Ede, and 'Nasser' mosque east of the city of Utrecht, according to NRC.

Photo of people standing on prayer mats inside a Dutch mosque

Praying inside a Dutch mosque.


Broken trust in Islamic community

Unlike public officials, the private agency can enter the mosques to clandestinely research the situation. In this case, the agents observed activity, talk to visitors, administrators, and religious leaders, and investigated what they do and say on social media.

All findings then wound up in a secret report which includes personal details about what the administrators and teachers studied, who their relatives are, with whom they argued, and how often they had contact with authorities in foreign countries, like Morocco.

Leaders of the Muslim organizations that were secretly probed say they feel betrayed.

It is unclear whether the practice is legal, which is why several members of the Dutch Parliament are now demanding clarification from the outgoing Minister of Justice and Security, Ferd Grapperhaus, who is said to be involved.

"The ease with which the government violates (fundamental) rights when it comes to Islam or Muslims is shocking," Stephan van Baarle, member of the leftist party DENK, told De Volkskrant, another Dutch newspaper.

Leaders of the Muslim organizations that were secretly probed say they feel betrayed. Hassan Saidi, director of one of the mosques investigated, said that the relationship with the local municipality had been good. "This puts a huge dent in the trust I'd had in the municipality," he told the Dutch public broadcaster NOS.

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!