EDITORIAL : THE HINDU, INDIA

A clean chit for now

The Reserve Bank of India's latest Financial Stability Report attempts to assess the health of India's financial sector in a holistic manner and pinpoint the incipient risks to stability that may arise in a systemic sense. Like its counterparts in the advanced economies, the RBI seeks to draw the right lessons from the interplay of the macroeconomic setting, policies, markets and institutions, for which it claims to rely on up-to-date techniques and methodology. The report declares that India's financial system remains “stable in the face of some fragilities being observed in the global macro-financial environment.” Growth has been slackening in most parts of the world and the risks arising from global imbalances and the European debt crisis show no signs of abating. The truth is that the causes for some of these persistent problems have never been fully addressed. India's growth momentum has moderated slightly on account of both domestic and global factors, but its economic fundamentals continue to remain strong despite concerns over inflation and the fiscal situation. The widening current account deficit also is not a matter of serious concern for now, although a slowdown in capital inflows could occur as the advanced economies exit from their accommodative policies. However, government expenditure needs to be more tightly managed as part of a well thought-out process of fiscal consolidation.

The domestic financial markets remain stress-free and are expected to be so in the near future. There has been a strong demand for credit and, consequently, liquidity has tightened recently. One subject of concern has been the currency mismatches that have arisen in the wake of domestic companies relying more extensively than before on external commercial borrowings. A related problem is that many domestic corporate issuers of foreign currency convertible bonds (FCCBs) might face refunding risks by March 2013, when it would be time for redemption. The conversion prices on many of these bonds are much higher than the current prices of the linked equity shares, and it is unlikely that the gap will narrow. The Indian banking system remains well capitalised, with both core capital adequacy and leverage ratios ruling at comfortable levels. Even as credit off-take has rebounded recently, asset quality has improved although certain specific sectors of the economy could pose problems. For now, a rise in net interest income has boosted the profitability of banks, but over the near-term rising costs may weigh in. Banks need to be vigilant in facing up to interest rate risks in the prevailing inflation scenario.

Old fears in Thai election

The July 3 parliamentary election in Thailand is the culmination of a bitter five-year-political battle that haunted the country, leading to constant unrest and uncertainty. In December 2007, a year after the Thai Army removed the billionaire Prime Minister Thakshin Shinawatra in a coup and banned his political party, its proxy, the People Power Party, managed to win the parliamentary elections impressively. However, within a year, it found itself outmanoeuvred, and the opposition Democrat Party led by Abhisit Vejjajiva put together a coalition and took office. Since then, there has been a rash of protests resulting in bouts of political paralysis. Last year, security forces put down anti-government protesters with bullets, leaving some 90 people dead. Clearly, in the coming election, Mr. Thaksin, who lives in self-exile abroad after fleeing Thailand to escape prosecution on corruption charges, is eager to avenge his 2006 removal. His party, now called the Pheu Thai, has fielded his sister Yingluck Shinawatra as the prime ministerial candidate. Evidently, the former Prime Minister hopes to run the country through her. There are fears that the election itself will not remove the tensions between the colour-coded political camps — Red Shirts, comprising mainly the rural and urban poor, for the Shinawatra clan; and Yellow Shirts, made up of the prosperous old ruling elites, for Mr. Abhisit and his Democrat Party — until Thailand addresses the deeper malaise of the military's role in politics.

The Royal Thai Army — which has carried out a total of 18 coups, and like the Pakistan Army, has played a backroom role supported by the monarchy during times of civilian rule — is a powerful player in this election. Army chief Prayuth Chan-Ocha declared recently that as a neutral entity, it had no intention of meddling in the election. But his warning that the monarchy was under threat and his demand that voters must elect “good people” have left no one in doubt that the Army has already made its choice. General Prayuth led the 2006 coup, and his televised speech came as polls predicted Mr. Thaksin's PTP in the lead. With the Army having helped put together the 2008 Democrat Party-led coalition, there is concern that if the Pheu Thai Party wins this election it will not be allowed to remain in office for long. On the other hand, it is certain too that the political roiling will continue should voters choose the Democrats — Mr. Thaksin has enough money and street power to ensure that the government will never have it easy. Either way, it appears that political peace in Thailand is still a distant prospect.