Cost of Funds Not Bind­ing Con­straint

Re­solv­ing the bad loan prob­lem is pri­or­ity

The Economic Times - - The Edit Page -

The mar­kets yawned and shed a few points on the day the Mon­e­tary Pol­icy Com­mit­tee (MPC) an­nounced a 25-ba­sis-point re­duc­tion in the cen­tral bank’s pol­icy rate to 6%. The mar­kets had al­ready priced in the de­vel­op­ment; fur­ther, State Bank of In­dia had low­ered its sav­ings bank in­ter­est rate by 50 ba­sis points the pre­vi­ous day. Too much money with the banks is chas­ing too lit­tle de­mand for credit and bank lend­ing rates would have been in free fall, had it not been for the bad loan prob­lem that hob­bles them. The pri­mary con­straint on the flow of credit is not the cost of bor­row­ing but the twin bal­ance-sheet prob­lem, the non-per­form­ing assets of the bank­ing sys­tem and their coun­ter­part, the un­ser­vice­able loans of large com­pa­nies. Pol­icy en­ergy must be spent on tack­ling the bad loan prob­lem, more than on any­thing else.

In its assess­ment of real ac­tiv­ity, the MPC noted that while the out­look for agriculture ap­pears ro­bust, un­der­ly­ing growth im­pulses in in­dus­try and ser­vices are weak­en­ing, given cor­po­rate delever­ag­ing and the re­trench­ment of in­vest­ment de­mand, says the RBI press re­lease. This is the real prob­lem, not the cost of money. The chal­lenge is to ad­dress it. In­vest­ment as a pro­por­tion of GDP at cur­rent prices is down to 27.9%,10 per­cent­age points be­low the peak achieved be­fore the fi­nan­cial cri­sis. Big projects in in­fras­truc­ture is the only way to boost in­vest­ment. The cen­tral gov­ern­ment is do­ing its best to step up pub­lic in­vest­ment. State gov­ern­ments, in con­trast, are cut­ting back on cap­i­tal for­ma­tion, pre­fer­ring, in­stead, to use their fis­cal ca­pac­ity to waive farm loans and take on the debt of state power util­i­ties that do not re­cover from con­sumers the cost of the power sup­plied. The MPC frets that en­hanced al­lowances rec­om­mended by the 7th Pay Com­mis­sion would fur­ther eat up fis­cal re­sources and cre­ate ex­cess de­mand, feed­ing in­fla­tion.

Res­o­lute action to re­solve the bad debt prob­lem of the banks and to re­cap­i­talise them is the first step to re­viv­ing growth. Pre­par­ing vi­able in­fras­truc­ture projects and find­ing agen­cies to im­ple­ment them is the next.

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