The finance minister of India Mr. Arun Jaitley announced a bailout package of 2.11 lakh crore (US$ 2.11 Trillion) for the public sector banks of India yesterday saying that this will boost their lending activities, which is right now under pressure because of their huge non-performing assets (default loans). The logic behind boosting lending of these PSU banks is that right now private investment in India has hit rock bottom level and, according to Keynesian demand management equations, it is necessary to compensate this fall in private investment by public (government) investment.
This Keynesian demand management logic and policy are wrong. This bailout package is only going to add kerosene into fire that is already raging. The insolvent bankrupt (PSU) banks are only going to make their situation worse in future when this 2.11 lakh crore rupee will also turn into non-performing assets; when new Vijay Mallayas, Reliances, Essars, L&Ts, Adanis etc., will take billions of rupees loans and never return them! You cannot repay your debt by taking on more debt. The problem that started with this printing and spending of rupees by the government cannot be solved by the very same printing and spending. Government spending and PSU bank investment via these fiduciary phony credit is not real investment. Real investment comes via real production and real saving by the society’s productive members. The government is a parasitical non-productive sector of the society that lives off the hard earned resources of the productive members of the society. This bailout package is nothing but a massive theft of productive tax payers of India.
The real issue here is why the private investment is dead in India. It is dead because the Modi government has created an environment of extreme uncertainly via their reckless policies of demonetization, GST, harassment of businesses by the tax officers etc. No businesses will like to invest in present or future when they are not sure whether they will be able to make profit. Businessmen invest when the future uncertainty is manageable by their business acumen and when their profits are secured from any predatory policies of the government i.e., when their property rights are secured. As long as this secure environment is not present in India, business investment will not revive. Any government effort to compensate this investment by their spending will only result into disaster because it is all artificial. Governments can’t replace market’s voluntary activities. Their forceful actions will only create more chaos in future.