What is double financial repression?

The term financial repression has a history of many decades in India. From the early 1970s onwards, the government has imposed a condition on the banking system called the Statutory Liquidity Ratio. As per this requirement, banks have to keep a given percentage of its NDTL (Net Demand and Time Liabilities- simply take it as deposits) as liquid assets in its vault. The governments’ objective here was that under this provision, banks will be investing a part of their money in government bonds. What was the implication of SLR on government or how it has worked in favour of the government?

  1. Banks have to keep a part of their deposits as liquid assets.
  2. Here, government bonds have an advantages as they qualify as liquid assets
  3. If banks hold their assets in the form of government securities, it will give a little interest to them. Anyway, better than keeping cash as liquid assets.
  4. Advantage for the government is that they can sell the unattractive bonds (because of low rate of interest on them) to the banks in the pretext of SLR requirements.

What is Financial Repression?

The SLR was 38.5% in the early 1990s. Similarly, CRR was 12%. Again there was the priority sector lending norms. All these imply that banks can give only 40 per cent of their loans in a competitive manner to the private sector.

Altogether, banks in India were doing their business in a very uneasy, unprofitable situation during that time. This period hence is known as the era of Financial Repression.

In the 1980s a committee that was appointed to study the working of India’s monetary system (Chakravarthy Committee) called the SLR as a tax on the banking system and a fraud prepared by the Ministry of Finance. The banking system was used as a wing to carryout government’s debt management programme. Later many committees suggested the abolition of SLR but it is yet to happen.

Economic Survey 2015 and the coinage of double financial repression

The architect of the Economic Survey 2015 was Ex Peiterson Institute economist Arvind Subramanian. There were two volumes and they contained some critical observations (including a remark about the ‘Puzzling’ GDP estimate for 2012-13). He was bold in highlighting some of the issues in governing the economy in the survey (despite being working with the Ministry of Finance). .

In the Volume I of the survey, there was the term double financial repression, to indicate the vulnerability faced by the Indian banking system. According to the survey, the challenges in the Indian banking system fall into two categories: policy and structure. Financial repression is the problem on the policy side or it is created out of policy.

Financial repression is double as it is on both the asset and liability side.

Financial repression on the asset side

In the present context, high SLR and priority sector norms and rising NPAs are chains on the hands of the banking system and they constitute financial repression on the asset side.

Financial repression on the liability side

Financial repression on the liability (deposit) side is due to high inflation. Often higher inflation discourages savings or deposits as the real rate of interest is low or negative (During high inflation, rate of interest by banks seems to be little as value of money falls greater and people may turn to physical assets like gold). According to the Survey, the liability side of repression is getting weaker. Hence the government has to settle the asset side which is created out of its own policies.