Hiccups from the outset
From restructuring PSBs to rehabilitating NBFCs, tough tasks lie ahead of FM Nirmala Sitharaman as she tries to restore the economy’s lost pace
'What do the stars foretell?' Shakespeare was fond of his lead actors saying this in various forms.
What do the stars foretell about India's new finance minister? The stars, in this case, are the events of the last five years; Nirmala Sitharaman's handling of industry and commerce and defence ministries along with her past background in BJP.
Sitharaman has done nothing outstanding or innovative in any of her charges but she was effective in holding operations. Finance ministry needs someone conservative, who somewhat loathes radical changes, is of a cautious nature and not too adventurous.
When the question of opening up the retail trade sector to foreign investment was prized open by the first UPA government, Sitharaman, as BJP spokesperson on the subject, had stoutly run down the concept. She said she was in the UK and knows very well what opening retail trade could do in India.
In commerce ministry, Sitharaman had pursued a conservative policy line for India, which was famously practised by her predecessor in the UPA government of not conceding to the demands of the US and other developed countries. She is not famously known for liberalising India's trade policy.
In defence ministry she only stepped into the void left by the sudden departure of her predecessor, becoming the figurehead for the purchase of the French fighter aircraft. She had been a useful and reliable entity for carrying on the wishes of her boss, the prime minister.
In the present context, if anything, finance ministry and handling of union government's finances would call for such an approach where not much radical changes in policies are done that may have an uncertain impact on the economy. The policy is "do no harm", even at the cost of doing no good.
In fact, where is the scope for such actions either.
After the last five years of the deleterious impact of demonetisation and GST, the Indian economy had hardly come out of the worst shocks of recent years. If at all, the economy is just emerging out of them. It needs a little bit of nursing.
Prime minister Modi had wanted to be the Great Liberaliser by introducing the GST, notwithstanding the difficulty of carrying out the process and the uncertain impact. That alone explains the midnight session for the introduction of GST and all the drama around it. But it did undoubtedly disrupt the functioning of the economy, particularly the functioning of the small and medium sectors.
Now that the pursuit of that kind of glory is not on the radar of the prime minister, the economy also needs a kind of holding operation.
The economy has admittedly lost pace. But that should not be considered too much of a calamity for a large economy. Some slackening is normal; only the downward trend should not get a firmer hold. Besides, in the foreground of a major national election, which unavoidably could be associated with policy reversals and uncertainties, some dip in investment or spending behaviour is normal.
So what the new finance minister should attempt is to give a few sops and encouragement.
Firstly, a rising revenue collection curve may not be the best indicator of a government's success. In the current context, some tax concessions might be in order. A stable GST regime should ordinarily push up the government's take. Now is the time for the government to give a part of revenue back to people to egg on spending.
Secondly, everyone has referred to a fall in consumption and investment expenditure. A lower consumption expenditure resulting in lower capacity utilisation should discourage fresh investment. A larger push in public investment in infrastructure and social capital creation should restart the consumption-investment cycle. Of course, this could have implications for the fiscal deficit target. But that could sometimes be pushed a little back into the burner for a while.
Thirdly, talk about drastic restructuring of the public sector banks, affecting the interests of depositors, could undermine and altogether destroy the confidence of the general public in the financial system. In this context, the irresponsible statement of a former finance minister, P Chidambaram, that depositors money should be used for shoring up eroded balance sheets of PSU banks, could not have been more destructive of public confidence.
Hence, a more gradual approach to the restructuring of the public sector banking system should be pursued, the emphasis being on reining in the creation of any fresh bad debts. The best course would be an unequivocal statement of the government backing the PSU banks and their ordinary depositors.
The non-banking finance companies always played a critical role in smoothening the functioning of the economy. The liquidation of the largest of them, IL&FS, has created a vacuum. The new finance minister must pay attention to rehabilitation of the non-banking finance companies.
The last of these concerns, namely, restructuring the financial system and re-building confidence should call for closer cooperation between the government and the Reserve Bank of India. The relations between the government and the RBI have not been congenial. Nor is it expected for all times, either. But the current players, Sitharaman and Saktikanta Das, seem more accommodative than otherwise. We can look forward to better coordination.
(The views expressed are strictly personal)