Focusing on public sector banks
We need to make better managerial decisions and incorporate the best international practices
The recent economic decisions are designed to serve multiple objectives.
There is a maxim that evil draws its power from indecision and excessive concerns about what other people think. This cannot be said of Prime Minister Modi who takes quick and bold reform initiatives that reflect vision and clarity. A leader is the one who knows the way, goes the way and shows the way. The integrated nature of these interconnected but holistic decisions suggests coordination and coherence. The consultative process will have involved the prime minister’s office, various wings of the finance ministry, the Reserve Bank of India and the key infrastructure ministries among others.
First, it seeks a synergy between enhanced public outlay and its overall multiplier effect. Subdued private investment more often than not piggybacks on growing public outlays. The issue of rising non- performing assets (NPAs) of banks which hamper their ability for to write off debts write offs must be tackled. Corporates have been hobbled by severely impaired assets and have little room or mindset for fresh investment decisions.
For starters, the GST Council – at its October 6 meeting – acknowledged the burden of implementation on the SME sector, and announced a host of relaxation measures to pave the way for compliance on SMEs and exporters. This process has intensified over the last few days. Major transformational reforms are disruptive and the response cannot be to abandon reform.
Second, a decisive plan to recapitalise public sector banks provides much-needed consistency to our deleveraging process. Public sector banks were unlikely to take the muchneeded, deep haircuts, for fear of impairing their capital ratios. It is against this backdrop that the government’s recent recapitalisation –committing to 0.9% of GDP in recapitalisation bonds in addition to the resource mobilisation under Indradhanush – assumes significance. The front-loading of capital should induce banks to effectively resolve stressed assets on their balance sheets .
Moreover, the combination of the bankruptcy law and the recapitalisation package provides a strategic soundness to dealing with the banking system. It is an unmistakable signal that the government means business on the asset resolution process in the form of jumpstarting credit and investment. Even as recapitalisation helps resolve the “stock” problem, we need to be cognisant of the “flow problem” so that we are not in the same boat a decade from now. The legacy of what is called “telephone banking” directed lending through government intervention must end. Domain expertise in public sector banks, improved quality of managerial decisions, project preparation and appraisal by following best international practice are integral to this process.
Third, the near-term, direct impact on the budget would be minimal to the extent of the interest on these bonds (expected to be less than 0.1% of GDP). Yes, debt levels will go up. But to the extent that lending, and therefore GDP growth, is likely to pick, the measure is likely to more than pay for itself in relation to the medium-term debt outlook. Recognising this, the initial assessment of some ratings agencies has been very positive.
Fourth, the continuing focus on public investment, and road infrastructure programme improves the quality of public expenditure and enhances the competitiveness of the economy. The golden quadrilateral conceived and built under the previous NDA government changed India’s landscape. It boosted productivity of manufacturing, situated in proximity to the quadrilateral. This government’s commitment to roads and infrastructure will accelerate this. The government’s target of constructing 83,677km of roads, involving a capex outlay of Rs 6.9 trillion over the next five years – most of it under the Bharat Mala programme – can dramatically alter the infrastructure landscape.
That said, the current programme envisages only 20% of resources from the private sector. Given India’s vast public investment needs, private sector participation will eventually have to grow. How will we avoid the pitfalls of the last PPP arrangements? How should risk-sharing be allocated so that the private sector can take on risks it can manage? What should the regulatory architecture governing this base? These are questions that will need careful deliberation and resource allocation.
Between the rolling out of the goods and service tax (GST), a statutory inflation targeting framework, subsidy rationalisation through biometric confirmation, and now a renewed focus on cleaning up public sector banks and public investment, the building blocks for strong and responsible growth in the medium-term are being decisively laid. Speed, agility and responsiveness hold the key to success.