16 OCTOBER 2018
The Bhutan vote
As the country prepares for the second round of elections, change is certain
The results of Bhutan’s general election will have significant repercussions for South Asia. The first round held in September has already delivered a surprise verdict, with the ousting of the incumbent People’s Democratic Party. The two parties left in the fray represent opposites in terms of their experience. The Druk Nyamrup Tshogpa, that won the maximum number of votes in the first round this year, is a political neophyte. The Druk Phuensum Tshogpa, on the other hand, won the first Bhutanese elections in 2008, and the first round of the election in 2013 before losing to the PDP. It maintains a strong traditional base. The first round of the results also threw up some glaring trends. While the ordinary voter who queued up to vote at the polling booths favoured the PDP, ultimately the postal ballots, used by government officials and their families as well as military personnel, swung the vote in the other direction. Another outcome, which may be disquieting for whichever party comes to power, is that votes in the first round of elections were polarised between more prosperous Western Bhutan and less developed Eastern Bhutan. The DPT, for example, won all but one constituency in the east, while winning only two in the west; the DNT and PDP won seats only in the western half. The vertical split doesn’t just denote a development divide, it points to a feeling of discontent in a country generally known as a whole for its Gross National Happiness quotient.
Regardless of which party wins on Thursday, India-Bhutan ties are expected to be accorded their customary priority by New Delhi and Thimphu, given that Bhutan’s monarch, Jigme Khesar Namgyel Wangchuck, retains a considerable influence over the nation’s foreign policy. Along with his father, and predecessor as king, he has consistently stressed his commitment to the bilateral relationship. However, India must note that while the DNT has made “narrowing the gap” its motto, the DPT, which lost elections in 2013 after India suddenly pulled fuel subsidies for Bhutan, has campaigned on the slogan of “sovereignty and self-sufficiency”. The ‘China factor’ will be closely watched for its impact, a year after the India-China standoff on the Bhutanese Doklam plateau. This year marks the 50th anniversary of formal relations between India and Bhutan, built on cultural ties, mutual strategic interests, and India’s role in building roads and assisting in hydropower projects that became the mainstay of the Bhutanese economy. It is expected that Prime Minister Narendra Modi will lose no time in visiting Bhutan to consolidate the relationship once the new Prime Minister is in the saddle.
Not just liquidity
Policymakers must address the structural problems behind the NBFCs crisis
The default of Infrastructure Leasing & Financial Services (IL&FS) on several of its debt obligations over the last couple of months has raised serious questions about how regulators missed the growing debt pile of a systemically important financial institution. But apart from the obvious failure of regulators to do their jobs, the IL&FS saga has also exposed the underlying weaknesses in the non-banking financial company (NBFC) sector as a whole which has depended heavily on low-cost, short-term debt financing to sustain its shaky business model. As both international and domestic interest rates continue to rise, the stocks of NBFCs have been punished as investors expect the profit margins of these companies to come under pressure as their borrowing costs rise. Then there is the further, and more serious, risk of NBFCs being unable to roll over their short-term debt in case of a severe credit crunch in the aftermath of the IL&FS saga. Both these factors have combined to put an end to the dream run of NBFCs, which have enjoyed high valuations amidst rapidly growing profits over the last few years. The precipitous crash of shares of Dewan Housing Finance Ltd. has been the defining moment of the present crisis. It is worth noting that the rise of NBFCs was fuelled primarily by the demise of traditional banks which have been unable to lend as they were bogged down by non-performing loans. Meanwhile, NBFCs with strong pricing power, which can somehow successfully achieve the transfer of higher borrowing rates to their own borrowers, may still survive rising interest rates.
The response of policymakers to the ongoing crisis, which seems warranted if its purpose is to prevent a wider systemic crisis, is fraught with other risks. The Reserve Bank of India, the National Housing Bank and the State Bank of India last week decided to increase the supply of liquidity in the market to keep interest rates under control. The RBI has also urged NBFCs to make use of equity rather than debt to finance their operations. This is apart from the government’s decision to replace IL&FS’s management and commitment to providing the company with sufficient liquidity. While offering easy money may be a welcome measure in the midst of the ongoing liquidity crisis, the prolonged supply of low-cost funds to the NBFC sector also creates the risk of building an unsustainable bubble in various sectors of the economy. Defaults associated with any such bubbles will eventually only affect the loan books of lenders. State bailouts could also fuel the problem of moral hazard as other financial institutions may expect a similar lifeline in the future. Policymakers should thus try to focus on taking steps to address structural problems that contributed to the crisis. This includes steps necessary to widen the borrower base of NBFCs which have been banned from accepting deposits. This would allow NBFCs to tap into more reliable sources of funding and avoid similar liquidity crises in the future.