Thread by @divyaguha

#mysteryofIndiasvanishinggrowth It's paywalled, so the hi-lites: I discovered whr a large part of India's growth vanished. #longtweet
opening fact: Institutional investors, eg US private equity funds/their local mgrs, route finance to India through offshore countries eg Singapor

eyeopening fact (IMPORTANT): Conventionally the overseas debt is 1st accounted for as equity until, like all loans, it comes up 4 repayment @ which point it goes on the books as debt. These loans are bonds, whose full technical name is the compulsory convertible debenture-CCD.

debenture=complicated word for debt;
the loans come w specific contractual clauses such as guaranteed time-bound repayments.
Sadly, developing countries (eg India) r unable to borrow in domestic currency, an existential crisis. Rupee bonds exist but not many investors want them

nope, not even non resident Indians (patriotic as they may be)-so we must borrow in $/eur/Y. Not so much a matter of choice as compulsion.
Since the dollar was Rs 45 circa the India Shining era (2004)/this Aug was Rs74.
This is a crap bargain+

So v borrow externally via foreign currency convertible bonds. By Oct 60% of our lending was via this route.
n, growing debt never hindered NBFCs frm making loans 2 evry kind of borrower (until now)
B4 becoming a trn $ industry the indegenous NBFC was the village moneylender.

lending 2 cover 1-off expenses-illness/accdnt/dowry/a loan 2 pay off other loans-expensive, but the resultant wealth remained in the village.
Then, along came global microfinance: loans so smol it embarrassed the developing wrld wot the poor could do w cash they considrd change.

Say an American lends to us in a microcredit programme: providing equity in US$...they expect payment of interest in $$, too. The transaction bw the microlender+borrower in India is done in Rs. The interest on the microloan flows back out of the village, gets converted to $+

this creates a drain on our forex rsrvs as the total arrears add up 2 several times the original investment inflow.
2 make up for this, India must, ideally, export goods/ srvcs 4 sale abroad. In the absence of that, here we r picking up the tab 4 home improvement+🏍️. Yet,

dvlpd countries CAN raise money in their own currencies. This is what economists call Original Sin.
Indians r tied to a long-term outflow of claims on their wealth concentration, gainful only to foreign interests & their local accomplices: TEXTBOOK coloniaIisation.

Earlier, NBFCs had to comply with anti-money laundering rules, but now only those NBFCs with public funds or with direct customer contact need do that. Further liberalisation: CCDs+foreign currency bonds (FCCBs) r excluded frm the definition of public funds, making VCs v happy.

VCs/PEs/local inv mgrs could follow their own internal policies 2 run NBFCs like shadow banks, incl repossessions/debt collxn by any means desired OR even hv their own NBFC.
govt'd hoped Indian black money flush NBFCs given all the liberalization+demonetisation, but it did not:(

Govt blames bad creditors, yet all NBFCs credit categories—auto/home+mortgage+loans against property—delinquency levels of NBFC borrowers w near/below industry averages, while they were neck+neck w public+pvt sector banks in total loan advances by December 2018. SO the reason

4 India’s mounting deficit r US$ loans—not poor asset quality.
Like the majority of the world’s retail borrowers, poor women, too, largely repay their loans.
So what does #NirmalaSitharaman do w illiquid assets? Sees an opportunity to deepen our junk bond mkt+gets PE insider+

Harsh Varshan (Bain & Co) 2 write up rules 4 our secondary (junk bond) mkt. Shortlived rallies greet the sovereign assurance that the highly leveraged sector bore enuff correlation to the beating <3 of the economy to merit a govt guaranteed rescue, if needed.

in the 2008 crisis, researchers had found fund managers w betting on Obama’s taxpayer-funded bailout+came out of the crisis unscathed despite holding mkt positions w incurred colossal losses on paper. Afterwards, this investment behaviour decreased.
2009, Pimco CIO Mohd El-Erian

of the world’s once-largest bond fund—big enuff 2 herd mkt sentiment said: “We looked for assets that we felt the government would eventually have to own or support.”
a decade later, this is seen as an indictment of financial chicanery.

Numbers: RBI Oct monetary rep: of the total bank+non-bank credit to the commercial sector 'til August, 59% w raised using external commercial borrowings or FCCBs, totalling Rs54,073 crore. This was part of the Rs2.06 trn raised frm FIIs vs Rs13,562 crore raised domestically

largest -ve outflows frm fin instns totalled Rs-1.28 trillion, follo'd by NBFCs at Rs-1.25 trn. The -ve flows also indicate banks r lending less than wot they r repaid on old loans. In short, credit is shrinking. Net Indian inflow was Rs90,995 v foreign borrowing of Rs2.06 trn.

And this is the sound of India's BOOM turning to bust.
Is it any surprise that the auto sector is flagging after the loans-on-tap party is over? READ
prime.economictimes.indiatimes.com/news/71829055/… via @etprime_com