A study by McKinsey ‘Debt and (not much) Deleveraging’ puts a figure of total global debt in 2014 to be $199 trillion , 286 per cent of global GDP. This is unsustainable. Global debt has grown rapidly since the financial crisis of 2008, and central bankers have encouraged it by printing money, and lowering interest rates to near zero. This is called zero interest rate policy (ZIRP).

Fuelling bubbles What it does is to encourage people to consume and discourage them to save since interest rates on bank deposits are too low, and probably lower than inflation. What it also does is to misdirect capital, since borrowing cost is low, and thereby create asset bubbles. When, finally, the bubbles burst, as did the Chinese stock market recently, it creates panic. The US Federal Reserve called a meeting of central bankers at the picturesque Jackson Hole in Wyoming last week. For a long time the US Fed has been suggesting a reversal of its ZIRP policy but does not have the gumption to do it. ZIRP harms economic recovery in several ways. Companies have used low interest rates to borrow money and buy back shares at high levels, enriching shareholders.

Pension and endowment funds need a return of around 8 per cent in order to meet their financial obligations. ZIRP is giving far lower rates, compelling them to invest pension money in risky assets like emerging market stocks or junk bonds, in order to get a better return. Once these risky assets collapse (that’s why they are risky) it is the pensioners who will ultimately suffer.

India advantage India is in a sweet spot in the global context. It has a large domestic market and is not overly dependent on consumption for its economic growth. Household savings rate is above 30 per cent, providing funds for investment, and an investment-led growth of the economy and of jobs.

India’s challenge is to ensure that these savings are used most effectively, by efficient producers. However, with 70 per cent of savings going to public sector banks, this is not always the case. Either due to a weaker appraisal process, or, more likely, due to directed lending, the NPA levels at PSU banks are far higher than at private sector banks.

The government must take a mature and long-term holistic view. The CBDT, striving to raise more tax, sought to levy MAT (Minimum Alternate Tax) on foreign investors otherwise exempt from capital gains tax. It is only when the stock market collapses that we, taking a longer term view that they are needed, change our stance and exempt them from MAT .

Why do we need a crisis to take a view? Unless we take steps to cleanse our economic arteries, we would have tepid economic growth. Witness the 8.4 per cent credit growth in June, the lowest in 20 years. The core sector grew at only 1.1 per cent in July, versus 4.1 per cent last July.

Last week, the Sensex closed in the red at 25,201.9. What next? The policy of low interest rates and ample liquidity to spur economic growth has not worked. Instead, the liquidity has gone into creating asset bubbles. Even falling prices of crude oil, thanks to Saudi Arabia’s policy to retain market share, has not provided the world with the boost to economic growth it expected.

It is only when the ZIRP policy is reversed that the value of money can be rightly appreciated. What we need is a slower global growth of 1-2 per cent for a few years, during which time people are encouraged, through higher interest rates, to save, and borrowing levels to come down. 

Janet Yellen needs to bite the bullet. Biting a smaller bullet would damage her teeth but biting a bigger one later, which may explode, would damage her jaw!

The writer is India Head, Euromoney Conferences

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