Econ­omy In Mess?

Af­ter mess­ing-up with na­tional econ­omy, Modi gov­ern­ment wants RBI to bail it out

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When Viral Acharya, RBI’s out­spo­ken Deputy Gover­nor, bat­ted for RBI’s in­de­pen­dence, he made one PR mis­take that only a tech­no­crat would: he warned that gov­ern­ments that do not re­spect cen­tral bank in­de­pen­dence “in­cur the wrath of fi­nan­cial mar­kets”. This made the RBI’s crit­ics ask the ques­tion - is our cen­tral bank work­ing for the peo­ple of In­dia - es­pe­cially the 6.7 crore small busi­nesses which em­ploy over 11 crore peo­ple — or just the af­flu­ent 2 per­cent who in­vest in the mar­kets? Why is the RBI, which is loath to ac­cept gov­ern­ment con­trol, so un­ques­tion­ing when it comes to ac­cept­ing the dik­tats of in­ter­na­tional fi­nance?

Such ques­tions have great po­lit­i­cal res­o­nance, es­pe­cially at a time when In­dia’s mi­cro, small & medium en­ter­prises (MSMEs) are find­ing it very tough to get loans. No won­der, RBI’s biggest critic, S Gu­ru­murthy — the po­lit­i­cal ap­pointee on its board — has pub­licly blamed the reg­u­la­tor’s tough pru­den­tial norms for the slow­down in MSME credit.

RBI’s own data shows that bank lend­ing to MSME sec­tor has dropped from 4.2 per­cent of GDP in 2013-14 to just 2.8 per­cent of GDP in 2017-18. Small busi­nesses have had to turn to Non-Bank­ing Fi­nan­cial Com­pa­nies (NBFCs) for funds. Since the IL&FS cri­sis, even that has dried out, be­cause NBFCs them­selves aren’t be­ing able to raise funds.

In an elec­tion year, this can be dis­as­trous for the BJP, which has been stead­fastly sup­ported by small en­trepreneurs. In many cases, they form the back­bone of the party’s lo­cal units. The Modi gov­ern­ment

needs to quickly ad­dress their prob­lems.

Af­ter yes­ter­day’s marathon 9-hour board meet, the RBI has ca­pit­u­lated on that key po­lit­i­cal is­sue — re­cast­ing loans to small busi­nesses. Loans given to MSMEs up to 25 crores can now be re­struc­tured which means MSMEs will find it eas­ier to get loans again. But why does small busi­ness need their loans to be re­struc­tured? GDP data tells us that In­dia is the fastest­grow­ing econ­omy in the world. Shouldn’t such high-growth have made it easy for en­trepreneurs to earn high prof­its and pay back their loans on time? Clearly, what­ever our head­line growth num­bers might be say­ing, things aren’t good on the ground.

What caused this? Most ob­servers agree it was be­cause of the twin blows of de­mon­e­ti­za­tion and GST. The Modi regime’s claim that mil­lions of small busi­nesses have got sub­stan­tial Mudra loans has also been ques­tioned by pun­dits and crit­ics. The gov­ern­ment, of course, has de­nied this. But its de-facto chief econ­o­mist, S Gu­ru­murthy — an ar­dent de­fender of de­mon­e­ti­za­tion — ad­mit­ted in a re­cent speech, “It is the MSME sec­tor which was hit by both de­mon­e­ti­za­tion as well as GST. It is this sec­tor which has been robbed of credit.”

Hav­ing en­gen­dered the cri­sis, the gov­ern­ment now wants the RBI to solve it. Its great re­solve to clean In­dia’s NPA rid­den bank­ing sys­tem has been put on the back­burner now that elec­tions are just a few months away. Ad­mit­tedly, MSMEs ac­count for less than 8 per­cent of the 10.3 lakh crores of NPAs, but as of June 2018, over 15 per­cent of loans given to MSMEs by pub­lic sec­tor banks had gone bad. Eas­ing norms could lead to a new MSME driven NPA cri­sis.

The Modi gov­ern­ment knows giv­ing relief to small busi­nesses will not be enough — it has to boost pub­lic spend­ing to im­prove farm in­comes, write off farmer loans and gen­er­ate ru­ral jobs. That will be tough, given its fis­cal deficit tar­get. And that is why the gov­ern­ment is eye­ing RBI’s re­serves. In­dia’s cen­tral bank has about 9.6 lakh crores in re­serves. Raghu­ram Rajan, for­mer RBI chief, had claimed this level is nec­es­sary for the cen­tral bank to man­age money sup­ply, bal­ance In­dia’s for­eign cur­rency needs and ring-fence it­self in case of an eco­nomic cri­sis.

Arvind Subra­ma­nian, the for­mer Chief Eco­nomic Ad­vi­sor, how­ever, re­peat­edly ar­gued that RBI’s re­serves are far higher than that of other coun­tries. If the RBI were to bring down its re­serves as a per­cent­age of its bal­ance sheet to a num­ber closer to the global mean, it would be able to give back 3.5-4 lakh crores to its sole share­holder — the gov­ern­ment of In­dia. That would be a one-time wind­fall, equal to about 15 per­cent of the to­tal ex­pen­di­ture es­ti­mated in the budget for 2018-19. It is 55-65 per­cent of the fis­cal deficit. It can fund this year’s MGNREGA 7-8 time over. It can fund 11-12 Na­tional Health Mis­sions and 20 Swachh Bharat Mis­sions. It can gen­er­ously re­cap­i­tal­ize In­dia’s banks, with­out them hav­ing to raise funds from the mar­kets.

But the trou­ble is that most of RBI’s re­serves are ac­tu­ally ac­count­ing en­tries caused by the reval­u­a­tion of its for­eign cur­rency as­sets and gold re­serves. As the ru­pee value of for­eign cur­rency as­sets and gold has gone up, the RBI has had to add to its for­eign cur­rency re­serves to deal with another 2008-type global fi­nan­cial cri­sis. The RBI’s ac­tual us­able re­serves — its contin­gency re­serves — are just 2.3 lakh crore, an amount that has grown just 5 per­cent in the past five years. There­fore, the RBI has very lit­tle to give to the gov­ern­ment with­out cre­at­ing a po­ten­tially un­sta­ble sit­u­a­tion for it­self.

In­dia’s cen­tral bank has of­ten been made the scape­goat when the econ­omy has slowed down. Suc­ces­sive gov­ern­ments have wanted the RBI to stim­u­late the econ­omy through easy money poli­cies. We all know what easy credit flows dur­ing the UPA years did to In­dia’s gov­ern­ment banks. Now, it seems, the Modi gov­ern­ment also wants to take this easy route.

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