The Roots of India’s Shadow-Bank Crisis
The country still hasn’t figured out how to pay for the billions in infrastructure it needs.
Government money alone can’t solve the problem.
Photographer: Pratik Chorge/Hindustan Times/Getty Images
When one of India’s largest shadow bankers — an institution with 169 subsidiaries that calls itself Infrastructure Leasing and Financial Services — admitted to a series of defaults last week, Indian markets came close to a crisis. Fearing that a prolonged investment slowdown would intensify, the government invoked a little-known clause in India’s Companies Act and appointed a new board. The rot the defaults revealed is about more than one organization, however, or even this particular moment in the Indian economy’s fragile recovery. Behind the messy descent of IL&FS from a gilt-edged, quasi-sovereign debt issuer to the object of a bureaucratic bailout lies one unpalatable truth: India hasn’t a clue how to pay for infrastructure.
It’s not as if the government hasn’t tried. Soon after taking power, Prime Minister Narendra Modi’s administration doubled down on public spending on roads and Indian Railways, hoping the investment would pay for itself in a revival of private-sector activity. It hasn’t, and now the government is running out of fiscal space while bond yields are soaring.