The economist and the economy
It is unfair to blame the economic slowdown on former RBI Governor
NITI Aayog vice-chairman Rajiv Kumar caused a flutter earlier this month when he remarked that the former RBI Governor Raghuram Rajan's efforts, to clean up the mess in the country's banking system to prune the gargantuan non-performing assets (read loans), ubiquitously known by the acronym NPAs, were responsible for the slowdown of the economy. His remarks smack for scoring political brownie points and it clearly betrays two cardinal flaws. Firstly, the incumbent, who was earlier the Director-General of the business lobby group — the Federation of Indian Chambers of Commerce & Industry (FICCI), could only speak for the interest of the fraternity he had dined and supped with. Secondly, the apex policy-making body, as the NITI Aayog christened after it was built on the ashes of the erstwhile Planning Commission, which had its unique institutional clout as it was adorned by economists of eminence such as Dr Manmohan Singh, Montek Singh Ahluwalia, politically impeccable pragmatist like Madhu Dandavate, Rama Krishna Hegde and Mohan Dharia, does not have any such person at the top unfortunately; nor do they think it is unfair to cast stones at a man of outstanding and proven credentials globally such as Raghuram Rajan, who headed another vital institution such as the Central bank of the country as its Governor. Hence, the clumsy personal attack against a person who is not in the country to defend his record, though the nation owed it to him for having recognised at long last and tried to resolve the festering issue with uncommon zeal unlike anyone who could have the authority to do but remained unconcerned, is worthy of condemnation.
But in an unusual development, the Estimates Committee headed by veteran BJP leader Dr Murli Manohar Joshi made a note available on bank NPAs made at his behest by Dr Rajan. This has come as a fitting riposte to Kumar's unmerited jibe at the former Governor. Dr Rajan put up a spirited defence against the unjust accusation that the RBI created the NPA issue, stating that "the RBI is primarily a referee, not a player in the process of commercial lending". Just as he had forewarned the 2008 global financial crisis a couple of years ahead, Dr Rajan has also cautioned the current dispensation for storing up potential troubles for the next crisis in the country's banking system, flowing from loans extended to the unorganised micro and small businesses through MUDRA loans and credit channeled through the Kisan credit card.
It would only have helped Kumar if he had deigned to pore over at least the first chapter of the RBI Annual Report 2017-18 released on August 29, a week prior to his peremptory remarks on Dr Rajan's record. Lest policymakers and other bureaucrats charged with managing the economy should not have the time, thought, or energy to go through such a seriously and scholastically written annual report like the RBI's flagship publication; its very first chapter running to just nine pages providing a synoptic picture of the domestic economy by way of assessment and prospects. At the very first page of this chapter, the Central bank makes no bones about proclaiming that "the stage is set for the intensification of structural reforms that will unlock new growth energies and place the Indian economy on a sustainable trajectory of higher growth". That was precisely what the Prime Minister Narendra Modi and Finance Minister Arun Jaitley have been proclaiming from the rooftop, ever since the NDA came to power in 2014 and is all set to seek a renewal of mandate in the name of what the economy had achieved in the four and a half years.
Having said that the stage is set for the intensification of structural reforms to unlock new growth energies to put the domestic economy on a sustainable trajectory of higher growth, the RBI hastened to add that "resolute progress in repairing and resolving the acute stress in the banking system and in shoring up corporate debt will re-intermediate financial flows for productive purposes, which are essential for sustaining an acceleration in growth with macroeconomic and financial stability". That was precisely what Raghuram Rajan, as the Governor of the apex bank, set off when he ticked off asset quality review to clean up the massive mess of the debt-laden balance sheet of the banks. He did not take the punchbowl when the party was on, as it was described as the Federal action to raise rates when there was nascent recovery or economic activities being bolstered by credit from the financial institutions in the United States. In the post-2013 taper tantrum scenario, when the country's fundamentals were off the rails and the outgoing UPA government made a heroic bid to restore normalcy to the economy before it demitted office following its rout in the 2014 elections, the Modi government that assumed office in May 2014 had to contend two back-to-back droughts and tepid industrial growth. When things appeared to be turning for the better in 2016-17, it came out with complete shockers such as demonetisation and the incomplete rollout of GST in July 2017, entrenching the slowdown for another couple of years. While the four years just went by, in this wayward fashion by the act of men in authority, is it fair to shift the blame for the entrenched slowdown or the poor recovery of the patient to the doctor who diagnosed the malady and put in place a workable remedy for the long-term benefit of the Indian economy, making the banking system emerge leaner and fitter, and stay that way?
On the allegation that the banks had to take care of themselves by swallowing bitter medicines, even to the neglect of sustaining and looking after the real sectors of the economy for their credit needs to survive let alone thrive, the RBI annual report has the plausible response. It said that driven largely by private sector banks, credit growth revived from a historic low in 2016-17 and crossed double digits from December 2017, re-emerging as a significant source of financing for the commercial sector. The offtake of credit was noteworthy; even credit to industry picked up, and personal loans and credit to services surged above the overall growth of bank credit. The sting was in the tail of the paragraph when the RBI said sans mincing words that "credit flows from public sector banks (PSBs) were subdued, constrained by the capital requirements as also the elevated levels of loan delinquency".
The point to pause and ponder is not just the elevated levels of loan delinquency to corporate houses, the PSBs are fettered by various constraints such as statutory liquidity requirements (SLR) which compel them to park their otherwise lendable resources on low-yield G-secs, priority sector lending, education loans, loans to weak and vulnerable sections of society, and what not. Collectively, when all these constraints drag the PSBs, is it not unfair to blame one ex-governor who at least had the gumption to pin down a particular set of loan recipients (corporate houses) to get their loans repaid to the banks or, failing which, to take preemptive action against the banks for being lax in lending and recovery of the loans so imprudently and inordinately made through prompt corrective action?
(The author is a commentator on economic issues. Views expressed are strictly personal)