Arguments between Finance Ministry and RBI are a good sign for the economy: Sanjeev Sanyal

Here are the edited excerpts of exclusive interview with Principal Economic Adviser Sanjeev Sanyal.

Sanjeev Sanyal, Principal Economic Adviser, Ministry of Finance, in an exclusive talk with Anil Singhvi, Managing Editor, Zee Business, said the economic growth of recent past is here to stay and continue well into the future. This growth is backed by certain policy decisions like GST and Insolvency and Bankruptcy Code (IBC), he said.

He added that the existing problem of Non-performing assets (NPAs) in banks is not a  new one and has been in the system for a long time. So for the first time, 15-16 months ago the government thought to do something to end the problem of NPAs once and for all. As a result, 50 biggest NPAs were identified and IBC process against them were initiated. Here are the edited excerpts:

Q: Government's two biggest decisions, demonetisation and GST, were questioned by people. They asked what will happen to the growth of the country. But the recent growth rate says that we are rapidly moving towards 8 percent growth. My first question is whether this speed of growth will be sustained or will it increase from here?

A: The speed will continue. This increase is backed by the few changes that were brought in over the past two years in the economic structure of the country. These changes have changed the fundamentals of the economy and its benefits will be visible in years and decades as well as to the generations that will come. I can explain what we have done in 1-2 minutes.

First, the implementation of GST, which has changed the taxation structure of the country with one tax replacing the existing multiple cascading taxes levied by the central and state governments.

Insolvency and Bankruptcy Code (IBC) is the second thing that has helped us to put a check on the increasing Non-performing assets (NPAs) in banks. It seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The law is a one-stop solution for resolving insolvencies and to auction the companies that are not able to pay the loans due to any reason within a decided time frame. In fact, it offers an economically viable arrangement. A strong insolvency framework where the cost and the time incurred is minimised in attaining liquidation has been long overdue in India.

The third thing is the new structure to control inflation and reduce the rate in a structured way. This is a tough task but we have succeeded in bringing it to a level of 4 percent, which it is at present. It was achieved by constituting a Monetary Policy Committee. Interestingly, I have never seen such low retail inflation rates in my life.

Q: The bold steps of the government is an indication of its commitment towards growth. But at such a time, I would like to know about Reserve Bank's regulations on the Public Sector Banks (PSBs), which have been engaged in lending 65-70 percent credit in India. Extra policing by the Reserve Bank has sent 11 PSBs of total 21 PSBs under the central bank’s Prompt Corrective Action (PCA) framework with an aim to check NPAs. Next 5-6 are on the waitlist to enter the framework. Now, how will the government be able to keep growth on the right tracks by having just 4 banks with it, namely SBI, BoB, Vijaya Bank and Indian Bank. How will you remove this mismatch?

A: Undoubtedly, the system has been allowed to function in a free way. Secondly, this problem of NPAs in banks are decades old, which made people think about doing something to rectify the problem and some clean-up action has been taken. But the problem was never given a permanent solution or it was not removed from its roots. This is the first time that we have planned to hit the problem at its roots and so for the first time, 15-16 months ago we thought to do something and bring the problem to a complete end. In February 2017, we identified 50 biggest NPAs and initiated the IBC process against them. Auction of Bhushan Steel is an example of the solution. Its auction helped us to fetch Rs 35,000 crore in cash and 12 percent of its equity, which stands near Rs 5,000 to 6,000 crore. More such cases are in line for being auctioned like Electrosteel and Binani Cements.

In addition to this, we also looked into the accounts of the banks and saw scams in it like the Nirav Modi scam. The money that will be received by writing-off these NPAs will be used in recapitalising the banks and they will help the banks to expand itself.

Instead of debating on it by terming it as over policing, you can have a debate on the level of regulation of RBI. Interestingly, such a debate always exists between the RBI and the government.

This is the first time in five to six decades that someone has visited the accounts of the banks and had a close look on it. In fact, the problem has continued since 1955, the year when Mudra scam came into light.

Q: It means, the problems of banks is about the end?

A: Yes, it is the beginning and its pain is visible in the whole economy.

Q: I feel, the RBI is not able to sense the pain of the government. It has increased the key policy rate as well as the interest rates at least when the government is trying its best to bring the growth rate back on track. The rate hikes have been made at a time when inflation is at its lowest. It means the central bank in its effort to kill inflation has placed a nuclear bomb that may also kill growth.

A: We can have a long debate on it but the RBI is declining to go for it and we have empowered the monetary policy committee to take its own decisions in the interest of the country and its economy. The independence given to the central bank has helped us to contain the inflation to the 4 percent level.
When it comes to policy decisions there is always an argument between the finance ministry and the Reserve Bank of India. In fact, this argument between the finance ministry and the central bank happens in all economies. Such debates and arguments between the central bank and the finance ministry is a good sign for the economy as such debates help in maintaining the economic balance and pace of growth of the country's economy.

Q: RBI in its trail to kill the terrorist named inflation has increased the key policy rates as well as the interest rates, which would hit hard to government's efforts to bring the growth rate back on track.

A: No, I feel the independence granted to the central bank in its functioning has helped us in containing the inflation rate at around 4 percent, which is the lowest in many decades. In fact, the argument between RBI and the finance ministry is a good sign from the economy and such arguments can be seen across all economies. The tension between the two helps in maintaining a balance between the economy and growth.

Q: Do you think that the government will be able to meet the fiscal deficit target of 3.3 percent at an ease? At least in the changed conditions, where crude oil prices are high, RBI has increased the key policy rates and the government wants to increase the minimum support price for crops to 1.5 times of production costs among others.

A: This is not something new and every Finance Minister have to face such challenges. In fact, we think about such situations while preparing the annual budget.
See, its true that the interest rates have been increased this is happening across the world and the crude prices have skyrocketed to about $75 per barrel, which is more than what we had put in our estimates. These factors will put a pressure on us. However, the growth rate of 7.7 percent, which is above our expectation is something that is balancing the problem.

But there are certain challenges where we will have to think about the trade-off and we were thinking that we will not be able to spend this much on this and that. Such adjustments will be done on every front to make sure that we are successful in meeting the projected fiscal deficit of 3.3 percent.

Q: Interest rates on the government securities that are issued in every 10 years is around 8 percent. Similarly, the development loans taken by the states is charged between 8.35-8.50 percent and same will happen if I take a home loan today, where the interest rate will be between 8-8.5 percent. What is a reason behind this mismatch? Why are Sovereign borrowings kept at such high rates? Can the rates are being reduced and what are you doing on it?

A: Structural reforms are needed on this.

There are many reasons for this mismatch like the absence of a stable sovereign yield curve and changes are needed to manage the same. These changes are going to be a long-term reform and we are working on it. For the purpose, we will have to make a risk free and there are many ways to do it, .i.e. we will have to give issuance at one point.  

At present, we issue them at an interval of 10 years but it is not a regular practice. At times, they are issued on a gap of 5 to 13 years, which means the investors are not aware of the time when they will be released. The process has been in practice for quite a long time. However, the market has been asking us to regulate it and we are working on it.

Apart from this, there are certain bonds in form of that are lying ideal and no one is interested in buying them.  

Secondly, when it comes to buyback and switch, .i.e. there are certain bonds that are lying idle and no one is interested in buying them. If reserve bank or the government plans to buy back such bonds and reissue them in form of liquid bonds. This a complete technical relationship with the market and should be managed. It is not so that we have changed the rules to end the problem. It is a continuous process and I am aware of it and I have worked for continuous 25 years of my life on it. It is not a big thing and we will be able to manage it in the same way as it is being managed across the world.

Q: Undoubtedly, you have initiated the process to bid a goodbye to the problem of bad debts, which was available at the banks. But this process has given birth to a new problem in which the books of banks are being cleaned, .i.e., the book value of the banks is going down and banks don't have enough money to do business. When are you going to start the process of allocating money to the government's banks and what will be the process of allocation?

A: It is a pertinent issue. First thing is, they will get some money once the auctions are completed. Secondly, we have announced the plan of recapitalisation of the banks but all banks are not in the condition that they should be recapitalised, so we are working on a plan to bring a change in their HR and management of these banks, yes the process will be done in a slow way.

But first of all, they should be brought under some control through regulations and it is being down under prompt corrective action (PCA) framework. They are being cleaned. Their management will be improved and brought under the control of the regulations after the cleansing process of these banks are completed.
There are some banks like State Bank of India (SBI) who are capable of doing the business at present. But, when it comes to small banks than there can be mergers and consolidations in some cases. This is not a scientific process but it is an art.

Q: There is a problem related to the crude oil prices and it has an impact on the cost of petrol and diesel in the domestic market. The prices of the fuel go up when crude prices are hiked in the international market and vice versa happens when the crude prices go down. This makes to fight on two fronts and they are to manage the entire balance sheet amid weakening value of rupees so that it doesn't have any adverse impact on the economy of the country and the harsh impact of the same on the people. How are you maintaining the balance between the two?

A: Even I am a customer and I can understand their pain. The price is increasing due to taxes being imposed by the states and the rate hike in the international market. Interestingly, when it comes to taxes than the maximum taxes are enforced by the states in form of VATs and other taxes, while the central tax remains a fixed one.
Slashes in the central taxes may lead to a reduction in of defence purchases or not provide the announced prices to the farmers. This is a reason that we haven't been able to reduce or bring a big change in the prices of the fuel. In fact, it is not a technical decision it is a political decision.

Q: My next question is related to disinvestment. When and how the process of disinvestment will be started? And do you feel that you will be able to meet the projected target of disinvestment by March 2019? At least, when the there is a trade war at international level and it is going to be an election year at domestic level and the government has failed to get a bid for Air India.

A: See, we have the faith that we will be able to do something along the lines of disinvestment.

When it comes to disinvestment, we have a faith that we will be able to do something on these lines. I know, that our plan of disinvestment of Air India has not worked but will work on the proposal and come back with certain amendments. In addition, we are committed and are working to meet the disinvestment target.

(Transcribed by Jitesh Kumar Jha)