Q| Finance Minister Nirmala Sitharaman presented a budget with a big ‘borrow and spend’ programme. Is it in the right direction?
A| The finance minister was widely criticised all of last year for her fiscal reticence—that for all the hype in the Aatmanirbhar package, the direct government spend was far too little given the huge loss to lives and livelihoods. Many attributed this caution to apprehension about a possible rating downgrade and all the attendant macroeconomic costs. In hindsight, it now seems like the government was cautious more because of the unusual uncertainty surrounding the pandemic and the urge to keep the powder dry. Now that the pandemic seems to be on the decline and there are spring shoots in the economy, the government felt emboldened to unveil a fiscally activist budget as you call it. The government’s calculation seems to be that spending now during the unlock phase will deliver more bang for the buck than it would have earlier when mobility and economic activity were restricted. The government also seems to be betting on higher growth as a pre-condition for debt sustainability.
Q| What do you think of the disinvestment programme?
A| The budget has replaced ‘disinvestment’ with ‘privatisation’, which I believe represents a welcome mindset change. The government has also said that the public sector will be pared down to the minimum. Let us hope they will take that decision to its logical conclusion, and do so soon enough. That said, the disinvestment outcomes over the last few years have been very disappointing. This time around, let us hope that they will achieve the budgeted number, if not overachieve it.
Q| What about the proposed privatisation of the two public sector banks?
A| Bank privatisation is a very welcome decision. We nationalised banks over 50 years ago in a different era, in a different context. In the event, PSBs delivered huge benefits such as penetration into the vast hinterland of the country and expanding rural credit. But now, I believe the financial sector is wide enough and deep enough to take care of financial intermediation without the government in the driving seat. Many commentators have said that the government is testing the waters with privatising two PSBs to start with, and based on this experience, it will privatise more PSBs. I hope that is the case.
Q| But it won’t be an easy task.
A| Probably not. There are already rumblings of agitation by some PSB unions. But that was expected. Every reform has winners and losers. It is the responsibility of a democratically elected government to consider the interests of all stakeholders and do what is best for the larger public good. The question that the government should ask itself is this: why are we still in banking? If the government wants PSBs to mimic private banks in terms of decision making and profitability, why keep them in the public sector at all.
Q| Was the amalgamation of PSBs a step in the right direction?
A| On the contrary, I believe it was a needless distraction. At a time when the top managements of PSBs should have been focusing on resolving the bad loans and scouting for fresh lending opportunities, they were forced to give time and attention to managing the nitty-gritty of mergers. Besides, it is not unambiguously clear that large banks are necessarily better.
Q| Would recapitalisation of PSBs help the sector move forward?
A| To the extent the government is the owner of PSBs, it has the responsibility of ensuring that they are capitalised as prescribed by the RBI’s regulations. Only then can the PSBs add any economic value to both savers and investors. The government is fiscally constrained and there are very many competing claims, such as health and education for example, for its limited resources. That is another compelling reason for the government to get out of areas which can be taken care of by the private sector and limit itself to doing things only governments can do.
Q| What about non-banking finance companies?
A| NBFCs have come centre stage over the last couple of years since defaults by a couple of large groups such as IL&FS and DHFL threatened overall financial stability. What we should not forget though is that NBFCs add value by lending in those areas and segments where banks do not go. Further, since the RBI does not allow NBFCs to raise deposits for consumer safety reasons, NBFCs are forced to access high-cost funds. This makes the NBFC model high-cost and high-risk. The constant attempt of the RBI is to calibrate the regulation of NBFCs to allow them the freedom to conduct their business, but in a way that does not jeopardise overall financial stability. The recent revision of NBFC regulation by the RBI is, I believe, a further step in that direction.
Q| How will the creation of a bad bank help?
A| The economy has been weighed down by the bad loan problem. The problem is going to get worse because of the pandemic as indeed reported by the RBI’s latest Financial Stability Report. The bankruptcy process has to be the absolutely last resort and we cannot afford to overload it. The need for a bad bank has to be seen in this context. I am sure the government will take into account international experience in structuring and managing the bad bank. For sure, the reality is that banks, especially PSBs, will have to take big haircuts. But it is better to do that and move on rather than allow the problem to fester and get even worse.
Q| How do you foresee things in the near future and how will the Indian economy shape up in the near term? Will India get to a $5 trillion economy?
A| We will of course get to a $5 trillion economy, but how we get there is as important as when we get there. A big lesson of development economics is that the quality of growth matters as much as the quantum of growth, which means the benefits of growth have to be widely shared. The trickle-down theory, we now know, just does not work. It needs activist government policies to ensure that our growth is job enhancing. Unemployment creates inequalities. Inequalities are corrosive everywhere, but can be much more corrosive in poor countries. The pandemic has accentuated inequalities. Millions of jobs have been lost, and big industries have taken market share away from the MSMEs. The informal sector is still in distress. As much as we focus on growth, we need to focus on creating jobs and enhancing productivity. Indeed, our path to a $5 trillion economy will take much longer if it does not lift all the boats.