How India Tackled the ILFS Crisis

How India Tackled the ILFS Crisis 

By Dr. Lalit Kumar Setia |  @drlalitsetia  |  drlalitsetia@gmail.com  |  Created October 26, 2018; 

Updated December 16, 2018

Whenever any company becomes sick, there are two alternatives either get it recovered by taking necessary steps or sell it to someone who is capable to manage it better than present owners. In liquidity crunch i.e. shortage of cash in the economy; every company suffers with lack of capital. In last quarter of the year 2018; the companies located in India, reported various problems due to liquidity crunch in India. The Corporate Affairs Ministry and National Companies Law Tribunal supervises the status of companies on basis of their Asset-Liability Management (ALM) position. The housing and infrastructure companies borrow through rising commercial papers and through external commercial borrowings (ECBs) to manage their working capital level which is must to meet the short-term obligations. The management of each company look for balancing their loans, maintaining sufficient liquidity, and strengthening the balance sheet. The housing and infrastructure companies are funded by banks, big corporate people, and in case any such company fails to meet its financial obligations; the sign becomes negative for all such stakeholders. In 2018, the IL&FS defaulted in making payments of its short-term loans and a crisis happened. 

IL&FS Crisis

The IL&FS crisis happened due to liquidity crisis because the company had invested money in long-term projects and required to pay the liabilities for which it had less assets to be converted into cash. The liquidity ratios i.e. Current Assets Ratio and Liquid Assets Ratio had not maintained in IL&FS which are required to be maintained in each business so that such crisis cannot be happened. Seeking loans and financing for the growth of business, is very good and must for an entity but at the same time, it is also must to maintain the short-term interest payments for servicing of the debt.

Monitoring and Control over Liquidity

In India, the monetary policies of RBI controlled the quantum of liquidity in the economy. The liquidity is monitored on daily basis and banks are directed according to the situation for maintaining the bank reserves, foreign investment flows, and growth rate of Indian economy. The income tax department asked the citizens and corporate entities to pay the advance taxes and to invest in tax-saving insturments, particularly to reduce the liquidity in Indian market. On the other hand, the financial assistance to IL&FS and banks to deal NPAs, waiving off farmers’ debt, safeguarding export-oriented companies like textile firms etc; are particularly to increase the liquidity in Indian market. With each step of increasing liquidity, it is required to keep in mind the threat of rise in inflation and with each step to decrease liquidity, it is required to keep in mind the impact on citizens and corporate entities. Further, the Cash Reserve Ratio (CRR), Statutory Reserve Ratio (SLR), Repo Rate, Reverse Repo Rate, and other tools are used by the Reserve Bank of India to contain the inflation by reducing the liquidity in Indian market.

Tackling Liquidity Crisis of IL&FS

In the crisis of IL&FS, for safeguarding the whole economy by continuing the works of infrastructural development, the RBI intervened on directions of the central government to tackle the liquidity crisis. Due to this crisis, government paid more interests to small saving investors and increased the burden of interest payments. The threat of financial instability also be seen by various economists to alert the Indian government only due to such intervention. It is must to improve the cash supply to reduce the defaults of corporate entities and it is also necessary to control the liquidity to contain the inflation.

*Copyright © 2018 Dr. Lalit Kumar. All rights reserved.

Economic Problems of the United States

Economic Problems of the United States

By Dr. Lalit Kumar Setia |  @drlalitsetia  |  drlalitsetia@gmail.com  |  Created October 03, 2018 
Updated Sept 14, 2019

Around the world, countries are facing new economic problems. The China is lack of children due to its earlier decision of family planning. Now it is looking for the solutions to keep the economy growing without affecting the economic growth rate. The Singapore is also facing problem of 'getting labour forces older' and productivity is started to fall and it decided to foster technical skills training for older workers to boost the city's productivity. The economies of whole world, are becoming worried due to less rate of economic growth.

The Context of Debt-trap:

The economy of Unites States is one of the largest economy of the world. In terms of per capita GDP (PPP), it is sixth highest economy of the world. It has highly developed and technologically sound sector of services holding 80% share of its output, which made it so strong in the world. Apart from services sector, it has 15% manufacturing sector. The biggest advantage to the economy of United States is its citizens, who are well-educated and productive in terms of businesses. The politically stable government along with strong legal system provides stable business environment for the entrepreneurship, innovation, research and development. In 2008, the economy faced a major recession and till date it is not recovered completely from the economic recession. The economy is suffering from various factors like high consumer indebtness, low interest rates, and widespread mortgage lending which led to collapse of the housing sector in United States and collapse of various banks. In order to recover, the government intervened and purchased the mortgage-related assets. The growth of economy is still low and there is widespread unemployment.

The Current Account Deficit of United States:

The current account deficit (CAD) is also a great concern for the United States economy. The United States' President Donald Trump is taking initiatives for reducing the CAD. The CAD means the goods and services are being purchased more from the abroad than the value of goods and services being sold to the abroad countries. The imposition of import duties on the goods being imported from China, is an initiative to discourage the imports so that the goods and services which are made in USA can be safeguarded from the competition of China products.

Dependence over imported Oil:

The United States produces the oil but due to higher energy needs, it depends upon the imported oil. However, the economy increased the oil production to a great extent and now reduced its dependence on imported oil to a great extent. Due to increasing debt of United States which became $21 trillion on 31^st March, 2018, the country is facing problems and being seen as unable to meet its debt obligations in near future. In case, the further crisis came in the economy, the economy can become bankrupt as Iceland.

Problem of maintaining liquidity:

Due to developed nation, the economy requires to make efforts to keep the liquidity in the economy so that the recession may be avoided to make a suffering again. Government finds out the areas to spend more particularly in the areas of social security and medical services to the citizens. The economy is surviving due to raising funds from issuing United States debt at higher rate of interest. The investors purchased the United States bonds at higher rate of interest and it also increases the liquidity in the economy. The issue of United States bonds also increases the demand of Dollar, and the value of Dollar is going up now-a-days in terms of other currencies. But issue of United States bonds is not a permanent solution to the economic situation of United States.

What can be done to make a permanent recovery?

The permanent solution can be to increase the exports and decrease the imports which is possible only after cutting the spending of American citizens. It is very difficult to control the expenditures which are being spent by the citizens. Further, the generation of jobs for the Americans can also boost their earning capacities and increase in the tax collections. Thirdly, it is required to improve the entrepreneurship skills by cutting costs and enhance the profits of the enterprises settled in United States.

Do you think something more the United States can do? Please tell your views?

*Copyright © 2018 Dr. Lalit Kumar. All rights reserved.