Crosscountry comparison indicates that ICOR has been amongst the lowest in India. This is especially true of the period since the 1980s onwards (Table 8). Various reform measures aimed at increasing the competitiveness appear to be having the desired impact on the productivity of the Indian economy.
To counteract excessive investment in sovereign bonds, we need to change the capital rules for these bonds to make sure they are adequately risk-weighted; and we need limits for banks’ exposures to sovereigns, as is already the case for private creditors. Only then will banks be able to cope with the repercussions of sovereign default.