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.

ECB back at its futile game

My former student alerted me to the European Central Bank going back to monetary easing. Such was the power of its previous spell of sustained monetary easing and ‘whatever it takes’ efforts that, in less than a year, after ending its asset purchases, it had to go back to the tried-tested-and-failed policy. Here is the press release.

ECB’s deposit facility rate has been ‘cut’ further to -0.5%. Now, this announcement says ECB will buy even private sector bonds with yields below the deposit facility rate! Oh, yes, that means that bond purchases have resumed at EUR20.0bn rate per month until such time that interest rates begin to rise. QE Infinity!

Additional monetary easing measures can be found here and here. Banks will not have to pay the deposit facility rate to the European Central Bank for keeping excess reserves with it! How considerate of bank profitability!

In the meantime, the same former student forwarded these remarks by the Vice-President of the European Central Bank in a speech made in Rome in June 2019:

In this context (favourable macro conditions), it is important to recall that the overall effect of our monetary policy on bank profitability has so far been broadly neutral. Nevertheless, the overall effects of negative rates on the banking sector need to be carefully monitored, particularly because the balance of their effects will depend on how long rates remain in negative territory [Link]

Good luck to European banks!

Revenue should not be the goal

I thought that the issue of the Indian Income Tax authorities wanting to tax banks for the services they offer (they deprive the government of revenues by doing so!) had gone away. It has not. See this and this.

This is unreasonable. Holistic thinking missing. Tax claim on a revenue foregone by a commercial enterprise is wrong in principle. That is a business decision to offer a package. A larger deposit facilitates creation of bank assets, economic activity and hence, tax revenues.

Government revenue has to be a by-product of economic activity. If it becomes the main product, then economic activity will be a bygone product.

The ‘talking oneself into a recession’ nonsense

This is another nonsense peddled by those who have no knowledge of either economics or history: that talk of recession will bring about a recession. Those who do not want a recession are in a majority, likely. They are the camp followers of the central bankers who sold the trope, ‘Great Moderation for eternity’. Why cannot they talk the world economy into one endless expansion, facilitated by negative rates, MMT and nominal GDP targeting?

The Asian prescription

Vivek Dehejia and Rupa Subramanya wrote:

Caving in to industry pressure for sops, such as reduced GST rates, would be little better than applying a bandage to a deep wound. What is needed is Schumpeterian “creative destruction”, which is greatly magnified within a vigorously contested market.

And, this requires that the government hold fast against industry lobbying, and move toward reducing import tariffs, as well as completing the country’s unfinished economic reform agenda, especially the liberalization of labour markets. [Link]

My friend reminded me of the following passages from Joe Studwell’s ‘How Asia works?’

The capacity to export told politicians in Japan, South Korea and Taiwan what worked and what didn’t and they responded accordingly. Since exports have to pass through customs, they were relatively easy to check up on. In Japan, the amount of depreciation firms were allowed to charge to their accounts – effectively, a tax break – was determined by their exports. In Korea, firms had to report export performance to the government on a monthly basis, and the numbers determined their access to bank credit. In Taiwan, everything from cash subsidies to preferential exchange rates was used North-east Asian politicians then improved their industrial policy returns through a second intervention – culling those firms which did not measure up. Japan, Korea, Taiwan and China, the state did not so much pick winners as weed out losers.

The message is: sops and subsidies are not bad; but lack of accountability and quid pro quo for exports, for quality and for scale are. So, the government can support the auto industry now but for reciprocal export obligations.

Just so that we know

The most popular Mudra loans, given to micro and small units, have three segments — Shishu (up to Rs 50,000), Kishore (between Rs 50,001 and Rs 5 lakh) and Tarun (beyond Rs 5 lakh and up to Rs 10 lakh).

As on March 2019, 16.2 per cent of the Shishu loans have turned bad (for Bank of Maharashtra, it’s 48 per cent and for BoI and Punjab National Bank and a couple of others, at least 25 per cent); the bad loans in the Kishore scheme are 13.22 per cent (four banks, including SBI, have more than 20 per cent bad loans) and Tarun scheme, 9.61 per cent.

We are yet to know the state of affairs at the 59-minute loans (Rs 1 lakh to Rs 5 crore), as loans disbursed on the fast lane are not a year old as yet. [Link]

Millennials do want cars

More than 80% of all millennials (aged 22 to 37) in urban India yearn for a personal vehicle, shows data from the first round of the YouGov-Mint Millennial Survey, a survey of 5,000 online Indians across 180 cities conducted in July 2018. There was virtually no difference in the propensity to buy cars between older millennials (aged 29-37) and the Gen X (38-53) generation, the survey showed. The propensity to buy cars was slightly lower among younger millennials but that has perhaps more to do with their lower incomes and savings than a disenchantment with cars [Link]