Minsky’s Financial Instability Hypothesis: A Theoretical Engagement in the Indian Context

This chapter looks at a macro picture of the corporate investment and the role of finance from the lens of Hyman Minsky. India experienced its best ever growth performance during the 2000s but it also ended up with highly leveraged large corporate firms. These firms essentially financed their investment through the commercial banks. As a result, the high growth phase ended with a banking sector stressed by non-performing assets. On the face of it, this looks like what Minsky had said about the booms ending with a financially fragile system but can the Indian case fit that description? Serious macro-theoretical objections have been raised about Minsky’s financial instability hypothesis because it conflates the micro with the macro. While this criticism is valid, I argue that if investment is concentrated in the hands of a few business houses and the credit side of it in a few large banks, a leverage crisis at a micro level can have systemic issues, which is what seems to have happened in the case of India. It is in exploring the role of this concentration, both on the lenders and the borrowers’ side, that this chapter fits the overarching theme of this volume—to explore the role of concentration in business, corporate governance and their relationship with the political class in India.