Baretalk policy prescriptions for the Indian economy

In today’s column in Mint, I had argued that the government had to step in and stem the creation of bad debts by its own policies (mostly State governments) on power and coal pricing, coal linkages, etc. [Parenthetically, in this regard, Harish Salve’s comments on Supreme Court’s role in the economic slowdown is an important and pertinent one.] It is not enough for the government to provide just bank capital. It has to figure out the root cause of reluctance to lend.

My friend in Singapore who read this piece shared an anecdote with me on a retired public sector bank executive just to make the point that honest lending would not just be possible under such circumstances. Depressing.

In the previous four weeks, I had commented on different measures and approaches that the government and the Reserve Bank of India to encourage better flow of credit. By no means, the ideas are original. I am only channelling and contemporising the wisdom of my elders and the knowledgeable.

Last week (September 10), I wrote on why the government should level the regulatory playing field between public sector banks and private sector banks. I was channelling Dr. Y.V. Reddy’s wisdom there.

The week before that (September 3), I had defended the transfer of RBI excess capital to the Government and the payment of an outsized dividend, under the circumstances. In that note, I had left a wisdom in the end:

One of the important lessons of the current slowdown for the government is that it is always easier for a government to hurt and even halt economic activity than to revive it.

On August 19th, I offered a few more ideas on combating the structural-cyclical slowdown in India such as calling all BJP Chief Ministers for a conclave to agree on a minimum programme and to lease government land for long-term (99 years), etc.

On August 12th, I wrote about macroprudential measures, again taking the ideas that Dr. Y.V. Reddy had proposed in his comment on a paper by Alan Taylor at a conference in Switzerland in 2010. In that column, I made the following point which, I think, is important:

it is important to bear in mind that the Union government is the dominant owner of the banking system. Government policies (input prices, raw material linkages and power tariffs, for example) cripple the financial viability of bank borrowers. When the government breaches its contractual obligations, the money it saves is eventually not saved as it goes towards recapitalizing banks to close the capital shortage created by bad debts. Thus, the burden that had to be borne by certain specific consumers becomes the general burden of taxpayers. This is both inequitable and inefficient. [Link]

On August 5th, I had written about the applicability of Basel capital adequacy norms only for internationally active banks. The two concluding paragraphs are important:

The problem is that the discourse has become so puritanical that such a move would be seen as a dilution of prudence and credit discipline and interpreted as another sign of the central bank caving into pressure from North Block or South Block or both. Therefore, the government and the central bank must approach this in a calibrated manner and communicate clearly so that it is not painted as another attack on institutions by the government.

To begin the process, the government and the central bank could consider appointing a committee to re-examine the relevance of capital adequacy norms prescribed for internationally active banks in the Indian context. The terms of reference for such a committee should be formulated in a manner that strikes a balance between India’s economic growth and employment imperatives and maintaining a sound banking system. India should not prioritize one at the cost of the other. [Link]

On July 29th, I concluded that small minds cannot create a large economy. I had written that Indians were not that easily capable of seeing the big picture and sweat the small stuff too much. In other words, we can be easily persuaded to stay petty and put petty considerations ahead of big and more important things.

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