Thread by @Noahpinion

1/Today's @bopinion post is about the economy of (arguably) the most important country in the world: India.

bloomberg.com/opinion/articl…

2/India's economy looked like it was in the fast lane, but there has been a rapid deterioration.

3/In fact, things may now be even worse than that graph suggests.
hks.harvard.edu/sites/default/…

4/What's going to save the Indian economy?

Probably not interest rate cuts.

5/And probably not structural reforms either (though these may be good in the longer run).

6/To fix the Indian economy, policymakers need to know what's wrong with it.

@arvindsubraman and Josh Felman have a new paper in which they say the big problem is a wave of bad real estate loans clogging up bank balance sheets (sound familiar?).
hks.harvard.edu/sites/default/…

7/The short version of the story: After the Great Recession, export opportunities dried up and there was a wave of corporate loans that went bad. Oil prices and fiscal stimulus provided a brief respite, but loans started flowing to real estate, and now those are going bad too.

8/Though India hasn't seen a rise and crash in prices like the U.S. or Japan did in their housing bubbles, a buildup of bad housing loans may be stopping Indian banks from lending.

9/So, this suggests an obvious course of action: Bail out the banks.

An easy way to do this would be QE. Have the central bank print money and buy housing-backed loans from banks. Of course, India's inflation is already rising, so this could risk stagflation...

10/But unless inflation gets worse, the risk seems worth it. Bail out the banks. The government can help too, by creating a "bad bank" to absorb bad loans. That will be less inflationary than QE.

11/But even if bank balance sheets are cleaned up, who will they lend to? Another export-based manufacturing boom would be the best thing, but that'll take a while to get started.

In the meantime, India could make a big push to encourage more urbanization.

12/There's some evidence that India doesn't have enough big cities.

nber.org/papers/w22002

13/A big drive to get people out of villages and towns and into big cities could yield big dividends for the Indian economy, in both the short and long term.

Agricultural productivity would go up. Wages would go up. And banks would have a new boom to encourage them to lend.

14/India's economic problems are complex and unusual, and the crisis is acute.

Bailing out the banks and pushing for urbanization are two policies that are worth a shot.

(end)

bloomberg.com/opinion/articl…