Q. Rs 70,000 crore for PSU banks, a lifeline for NBFCs, new sops for auto… What else can the government do to shake the economy out of its current stupor?
A. N.R. BHANUMURTHY
This is one thing we have been arguing for quite some time—speedy implementation of bank recapitalisation—and I am glad that this is happening. This in itself should help the banks release substantial capital resources for credit purposes. The growth of credit to the commercial sector between April and August 2019 is at -0.8% compared to the same period last year and I hope recapitalisation will reverse this negative growth. The government should use the additional resources that it has received from the RBI to complete the infra projects.
The concept of a bad bank needs a relookt. Right now the challenge is not that there are not adequate funds but that there are no adequate borrowers, there is no demand for credit. Longer term structural reforms are more important. How we can get large projects going which will have large borrowing requirements.
None of these addresses the core structural problem and involves a mindset of a kitchen-sink approach of throwing every sop and temporary fix at the problem, reflecting both a sense of desperation and cluelessness.
For generating resources in the near term, the government should aggressively pursue privatisation and asset monetisation. These will help in generating revenues in the short run which can be deployed for infrastructure creation. The current slowdown provides an excellent opportunity to frontload these measures.
Most of these measures are from the supply side, whereas the principal economic problem now is the lack of aggregate demand. The best way to stimulate the economy is to step up public infrastructure investment such as rural roads, highways, railways, by public borrowing. Yes, such measures will breach the fiscal deficit target. But at a stage when inflation is low, there is an investment demand constraint, reviving output growth is far more important
“PRIVATISATION AND ASSET MONETISATION SHOULD BE USED TO GENERATE RESOURCES IN THE NEAR TERM, WHICH CAN BE SPENT ON BUILDING INFRASTRUCTURE” —D.K. JOSHI
than meeting the fiscal deficit target. Public borrowing in domestic currency for public investment is an eminently justifiable proposition, as many an economist would agree. Such investments could, in turn, bring in private investment to kickstart a virtuous cycle of growth. Let us recollect the Vajpayee government’s massive road reconstruction Golden Quadrilateral Programme connecting the four metro cities, and the PM Gram Sadak Yojana (PMGSY) aimed at connecting all villages by motorable roads, which helped revive the sagging economy in the early 2000s.
It is feasible to increase public sector investment by 3.5-4% points of GDP.
One percentage point of GDP each may come from additional capital expenditure undertaken by central and state governments and the balance by the public sector enterprises.
These are all supply-side interventions; the government should be thinking of demand-boosting strategies, especially if they think this is cyclical.
Finance is often defined as the lubricant that keeps the economy going. When finance fails, the real economy sees an impact.
While increasing liquidity, lowering interest rates and recapitalising public sector banks can ease immediate difficulties and increase credit growth, we will not get a dynamic and competitive financial sector without legislative and regulatory reform. As we have seen over and over again, short-term fixes leave fundamental weaknesses in the financial sector and the economy unaddressed. Banks that repeatedly make losses are repeatedly given taxpayer-funded bailouts. It is almost as though banking is [considered] a political service meant to fulfil government obligations and provide jobs rather than a critical instrument of resource allocation in the economy. India’s uncompetitive financial system, whose growth depends on repeated bailouts, needs to be replaced by a competitive system with various markets including private banks, bond markets and well-governed public sector banks. Many studies and expert-committee reports have shown the way forward. This government has the time, the numbers and the political confidence to undertake bold reform—increase competition to public sector banks and take serious steps to improve their governance. In addition to short term quick-fixes, the government needs to bring solutions like these back on the table.