Ending financial impasse

On New Year's Day, Reserve Bank of India put in place a mechanism for restructuring the stressed assets belonging to the medium and small scale sectors. Individual banks have been advised to take up stressed loans of these units and work out schemes which will enable them to continue securing funds for their operations.

In fact, something similar had been asked by the government of RBI while pointing out that the shortage of liquidity was clamming the economy. RBI had disagreed and maintained that there was enough liquidity. For all practical purposes, RBI has now acceded to the government's request for infusion of fresh funds under its new governor Shaktikanta Das. Without a hitch, and scarcely making any noise, one of the points of contention between RBI and the government has been resolved.

At this point, at the start of a new year, the natural question that comes up is: will it be as smooth always? The pitched battle fought out in the open between RBI and the Union finance ministry ceases to bother for the rest of the current year – looks like the tones will not be as shrill and differences may be sorted out in hushed tones internally. Before that, let us try to probe why fund shortage had become such a contentious issue between the government and RBI.

One must remember that all talks between the two sides in the first half have had the undertone of the forthcoming election. Whatever happens to the basics of sound economic management, elections would surely override those concerns.

A serious shortage of credit in the run-up to the election could make or unmake a government. Funds shortage would automatically leave its shadow on the employment situation. As such, the vaunted goal of providing millions of jobs every year has remained as far from reality as when it was promised. Jobs have not come and, on top of that, if there are some job losses because of funds shortage, this would be a double whammy for the ruling party.

The government had wanted RBI to turn the funds tap on so that these could grate the machine no matter how subprime such fresh accommodation to industry and business could be. The RBI's clamp down on banks having large portfolios of bad debts and its gag order on them prohibiting fresh lending could have created such a situation of widespread job losses. But then, why such abject dependence on funds from the banks for keeping the medium and small-scale sector humming? After all, the government had set up the so-called Mudra Bank, which was supposed to cater to the fund requirements of the tiny and smaller units that created the most number of jobs. It had stated a core fund of some Rs 90,000 crore at the Mudra Bank kitty for offering loans to small and any units. Did that fund reach the intended beneficiaries? Going by the noises raised, it does not appear so.

In fact, during some of the trips outside the confines of cities and towns, this correspondent found hardly any awareness about the Mudra Bank and its funding activities in the course of conversation with local small businesses. Whatever funds might still have flown from the Mudra Bank to beneficiaries might really have been the rechristened priority sector loans.

Thus, the Mudra Bank did not do what it was meant to – providing additional funds to the smaller units on a sufficiently wide scale to make a difference. In the absence of any such fresh financial intermediation, the small and tiny units had come under stress in the wake of sudden evaporation of funds after the IL&FS crisis. The unofficial sources of funds for the informal sectors had vanished all of a sudden. Now that RBI has set in motion a process of resuscitating small-scale funding through more active interventions from banks, many of these units could start stepping up their operations.

The other issue that still persists between the government and RBI, during the course of 2019, is handling of inflation threat and setting of interest rate. The year which is immediately behind had proven to be really stable as far as prices, in general, are concerned. Inflation rate had remained range-bound and mostly stayed below 5 per cent, if not lower most of the time. Even on the last count, prices have remained lower than the RBI threshold. The question, however, is about inflation perception.

The expectations about prices rising have turned out to be lively. With global oil prices jumping up and down, the sheer volatility had instilled a sense of fear about its impact on the general price line. Oil price has proven to be tremendously technical in nature, meaning that stock levels of crude oils with major suppliers and consumers, the views of the oil cartels and a couple of large producers and the reaction of US shale producers have become defining guides for setting oil price in global markets.

Leaving aside the influence of global oil prices and their impact on domestic Indian consumer prices, the critical factor in inflation watch is the trend line of food prices. There have been some surprises there as well. The prices have remained muted even in the high summer months when vegetable and food prices had customarily tended to rise. This gives scope for maintaining an easier monetary policy than otherwise.

Will these trends continue in the current year? If the prices front remains benign, there is little chance of a flare-up between the monetary policy guardians and the government. Peace might thus prevail without the North Block asking for an interest rate cut and incentives for the economy every now and then.

Third, with the government saying that they are not immediately interested in pawing upon RBI's so-called treasure trove of some $50 billion, a major fight has already been avoided. A high-level group has been constituted to work out principles for sharing the funds and that means putting the issue into limbo. There is no question that the aiding principles for this could be evolved before the next election so that the funds could become handy for popular programmes.

Lastly, the new governor can be expected to be much more reconciliatory rather than combative by his training as such. A lifelong bureaucrat is not a natural fighter. He is rather a problem solver in the sense that he will try to wriggle out some solution instead of sticking to some points of principle when it comes to a crisis.

2019 could thus see truce and peace between the government and RBI as the basic causes of differences have already been either resolved or put under the carpet. And then, when the next government takes office after the elections, enough would be on the plate to savour rather than bracing for small-time skirmishes.

(The views expressed are strictly personal)