Is India Hedged Against Systemic Risk? An Attempt at an Answer

India has large twin deficits, high prices of some real assets, and (less familiar) fragile financial interdependence between banks and the government. So there is a systemic risk. However, India has a reasonably good record so far with regard to avoiding financial crises. This is due to five mitigating factors: (a) financial repression in banks; (b) unanticipated jumps in inflation rate; (c) somewhat regular bailouts; (d) misplaced confidence; and (e) good growth. The first three factors have ‘persistent’ costs. There are reasons to believe that these costs are high. The fourth factor is not a reliable ‘hedge’ against systemic risk. Finally, growth is a camouflage rather than a solution. The bottom line is that there is a serious problem at hand even if there has been no ‘financial crisis’ for long. We make long-term policy suggestions in this extensive but simple analytical article on the economic aspects of macro-financial stability.