‘Rapid growth sees excess bank loans. It’s common… As boom ends, there is stress… But must it last 6 yrs?’

Updated: March 8, 2020 11:35:19 am

Rapid growth sees excess bank loans

Montek Singh Ahluwalia, Planning Commission, Montek Singh Ahluwalia Idea Exchange, Idea Exchange, Idea Exchange Montek Singh Ahluwalia, India news, Indian ExpressFormer Deputy Chairman of Planning Commission Montek Singh Ahluwalia with Deputy Associate Editor Udit Misra in The Indian Express newsroom. (Express Photo by Abhinav Saha)

One of India’s most influential financial policymakers, Montek Singh Ahluwalia served within the 1980s in senior positions within the governments led by Rajiv Gandhi and later V P Singh. Then, within the 1990s, as India battled a macroeconomic disaster and embraced radical financial reforms, he performed a central position, first as Commerce Secretary and later as Finance Secretary. In 2001, he was chosen by the IMF as the primary director of its Independent Evaluation Office. He returned to India in 2004 as Deputy Chairman of the Planning Commission — a place he held until May 2014. He has simply written Backstage, an e-book narrating India’s growth story

Former Planning Commission Deputy Chairman Montek Singh Ahluwalia defends UPA in opposition to the cost of “welfarism”, says it did not undertake its achievements, calls resolution to not be a part of RCEP “unfortunate”, and offers examples of scope for RBI to be unbiased

UDIT MISRA: Did the Planning Commission overstay its welcome?

Many of my mates thought that it was a contradiction of kinds for somebody related to liberalization to turn out to be Deputy Chairman of the Planning Commission. I used to make the purpose that they had no thought of what the Planning Commission does… It by no means engaged in detailed direct management. It was at all times an advisory physique. But it did change fairly a bit over time. The major process we had, which was successfully govt, was to divide the full improvement expenditure for the Centre and states…This useful resource allocation position was a lot emphasized, however, I felt that the true job of the Planning Commission needs to be to push for brand new coverage initiatives….

UDIT MISRA: What is your opinion of the position performed by the NITI Aayog?

I don’t have good information about it, however, I imagine that they haven’t any position to play in monetary selections, and that is unlucky as a result of a part of the usefulness of the five-year planning course of is that it introduces self-discipline. Even huge companies have funds processes which can be multi-years. Currently, it is not being carried out by the NITI Aayog. You might argue that it is being carried out by the Finance Ministry. But I don’t assume it is a good suggestion as a result of the ministry has a core job, which is to maintain fiscal deficit underneath management….

UDIT MISRA: Isn’t it true that most of the points that the financial system is dealing with at current are due to the UPA authorities, not enterprise any important financial reforms?

In aggressive political surroundings, political events will put throughout details in no matter method fits them. Let’s look objectively at what accounted for prime growth within the UPA interval? There is little doubt that the large reforms initiated in 1991, which had been additionally continued by the United Front and Vajpayee governments, produced a picture of continuity and broad consensus which helped generate pro-investment local weather.

Montek Singh Ahluwalia, Planning Commission, Montek Singh Ahluwalia Idea Exchange, Idea Exchange, Idea Exchange Montek Singh Ahluwalia, India news, Indian Express“The strength of India is the perception that there is a broad consensus on good policy… not a competition between ideologies. Right up to Vajpayee and UPA government, that is the image… That continuity is not being really kept,” said Montek Singh Ahluwalia. (Express Photo by Abhinav Saha)

The Vajpayee authorities contributed to this. His openness to FDI was a continuation however it was a brand new sign from the BJP which had many segments against FDI.

Second, he signaled going past disinvestment to real privatization… The United Front was the primary to recognize that authorities’ fairness might go under 51 percent however they didn’t do it… The Vajpayee authorities were the primary to say that they had been prepared to cut back authorities’ fairness to 26 percent. Arun Shourie led the cost with some real privatization however it received embroiled in controversy.

Then got here the UPA authorities. They took many initiatives that ignited non-public funding. Manmohan Singh’s presence was the very best sign that may very well be despatched out to the non-public sector that the federal government supposed to stimulate non-public funding. The sharp discount within the fiscal deficit within the first 4 years clearly helped create room for personal funding to develop.

UDIT MISRA: Many argue that there was an excessive amount of stress on welfare, and whereas the federal government created fiscal area, it additionally gave it up around 2008.

The notion that we created an area after which gave it up for welfarism is simply not true. Otherwise, the fiscal deficit wouldn’t have fallen. Besides, I don’t imagine that the MGNREGA was as unfavorable as folks assume. The MGNREGA is a mechanism for constructing property in rural areas… One of the large issues that Mihir Shah (previously a member of the Commission) and I had been pushing for was that we should always use the MGNREGA for programs for water conservation. NGOs had been against it as a result of they felt that the initiatives need to be decided by panchayats. So we struck stability.

The different main steps that had been taken had been reform-oriented. One was increasing the scope of FDI, each in airways and telecom. Then there was FDI in insurance coverage, which required laws and the BJP opposed it. I’m glad that after they got here to energy, they promptly did it.

GST is one other instance. The thought was first introduced in Parliament in 2005 by P Chidambaram. But then it was stopped once more by the BJP, primarily by states resembling Gujarat and Madhya Pradesh….

UDIT MISRA: There had been additionally a variety of rights-based schemes resembling the Right to Education that had been launched. But what about bigger structural factors resembling company tax minimize, which has occurred solely now. Why wasn’t it completed when there was a fiscal area?

Can one object to the Right to Education? The actual downside is that we by no means recognized what institutional flexibility is wanted to ship Right to Education. And that is good criticism. But that is very troublesome and we’re not doing it now both. The solely space the place the federal government ought to have acted and didn’t is labor. And that is for a similar purpose why the Central authorities are not doing it now. Historically, there has been a massive illustration of organized labor in main events. The opposition of organized labor to labor reforms was huge.

SUNIL JAIN: Knowing in regards to the twin stability sheet downsideif you happen to had been to do it once more, would you push bank lending and increase infrastructure without finishing up reforms?

While we had been actually pushing growth, we weren’t straight pushing bank lending. When growth happens, there is an enthusiasm; folks borrow and banks lend… If you begin attempting to do all the pieces, nothing will occur. The logic of change is to go forward and push; be careful what the issue is and try to appropriate it… In 2014, when Raghuram Rajan was the RBI governor, he recognized the issue… He was criticized for unnecessarily creating difficulties. Frankly, this subject had emerged in 2014-15… The Economic Survey at the moment talked about what now we have to do — we should always recognize the issue, that was completed; we needed to recapitalize banks, that was completed however solely partially; and we needed to reform banks in order that they don’t behave in an identical manner. That reform by no means occurred and that was a pity.

Montek Singh Ahluwalia, Planning Commission, Montek Singh Ahluwalia Idea Exchange, Idea Exchange, Idea Exchange Montek Singh Ahluwalia, India news, Indian Express“The decision to not join RCEP was very unfortunate. The government said we must ‘Act East’. Refusing to join RCEP is not Acting East, it is sitting on the shore and saying, no, thank you very much,” says Montek Singh Ahluwalia. (Cartoon by E P Unny)

UDIT MISRA: Since liberalization, now we have seen governments of all hues, however, there appears to be continuity when it comes to the broad financial technique. Does India have just one financial ideology?

The power of India relies upon the notion that there is a broad consensus on what is good coverage. If the image portrayed is one among competitors between two opposed ideologies, with coverage reversals after each change of presidencyyou possibly can assume that we’ll simply be caught. Right as much as the Vajpayee authorities after which the UPA authorities, that is actually the picture. Now, some folks would possibly criticize the current authorities for persevering with the UPA programs whereas renaming them… Continuity, with renaming making it catchier is high quality. On the opposite hand, I don’t assume that continuity is being actually maintained as a result of there has been a rise in Customs obligation within the last two-three years… It is potential that we’re reacting to a notion that the outdated stuff about reducing duties is old school, and the brand new economics is that we should always have larger safety. I personally assume it is a mistake. I additionally assume the choice to not be a part of the RCEP (Regional Comprehensive Economic Partnership, a proposed free commerce settlement in Asia-Pacific) was very unlucky. The authorities initially stated that we must transcend ‘Look East’, and ‘Act East’. But refusing to hitch the RCEP is not Acting East, it is actually sitting on the shore and saying no thanks very a lot.

UDIT MISRA: Do you assume the Congress had the flexibility to push reforms?

The 1991 reform was carried out by coalition authorities led by the Congress — Narasimha Rao supplied the political management and Manmohan Singh was the financial architect. They undid an infinite quantity of conventional Congress insurance policies. If we might do it in 1991, why can’t we do it once more?… Admittedly, it is straightforward to take powerful steps within the face of a disaster if you happen to can say that it was brought on by anyone else. The expertise of 1991 means that eventsin this case, the Congress, may be persuaded to maneuver in new instructions. Not all people within the prime management of the social gathering in 1991 were prepared to go alongsidehowever, the modifications had been made… If there are issues that should be completedthey need to be completed.

PRABHA RAGHAVAN: With India having initiated an assessment of its current free commerce agreements (FTAs), what bearing do you assume it may have on ongoing talks with different nations?

Lots of this need to scrap FTAs is based mostly on many lobbies arguing that our FTAs haven’t benefited us. The newest Economic Survey does an evaluation of FTAs and says that’s not true. The very first thing one has to ask is whether or not the Economic Survey is proper or incorrect? I imagine that the Economic Survey is proper. If the Economic Survey is proper, then the entire argument in opposition to FTAs is false.

ISHAN BAKSHI: Is it time to assess the macroeconomic framework that has ruled India’s insurance policies for the last 20 years?

We ought to at all times assessment macroeconomics periodically. A key query is, are we on the right track in macroeconomic phrases? We will not be. We now not have growth targets however the authorities have set the purpose of turning into a $5 trillion financial system by 2024-25. This requires a growth charge of just about 9 percent. We are going to finish the monetary 12 months (2019-20) at 5 percent or rather less. And the subsequent 12 monthscould also be somewhat above 5 percent. At this charge, we’re not going to get a 9 percent common except the growth charge within the remaining 4 years is nicely above 10 percent or so, which is not going to occur.

There is additionally no probability of reaching the focused doubling of farm earnings over a five-year interval between 2015-16 and 2021-22. So we do have to revise our expectations and set lifelike targets.

Montek Singh Ahluwalia, Planning Commission, Montek Singh Ahluwalia Idea Exchange, Idea Exchange, Idea Exchange Montek Singh Ahluwalia, India news, Indian Express“Populism, in the sense of saying ‘Not a job, but I’m giving you benefits’, is unsustainable because it is unaffordable. It will see the government borrowing excessively… It’s just not viable to ignore economic policy, rely on populism,” says Montek Singh Ahluwalia. (Express Photo by Abhinav Saha)

SUNNY VERMA: How truthful is it for the present authorities accountable the UPA for the mess within the banking sector? Also, with the financial system struggling, what can be your recommendation to Finance Minister Nirmala Sitharaman?

It needs to be accepted that durations of speedy growth are accompanied by excess bank lending. This is a typical phenomenon. When growth happensnon-public capitalists turn out to be excessively optimistic. There is no hurt in banks supporting enthusiastic buyers if they convey sufficient of their very own fairnesshowever, this doesn’t occur. At the tip of a boom, there is a downturn and the financial system slows down. Lots of initiatives aren’t in a position to service their debt. So the banking sector will get harassed. But how lengthy ought to that stress last? Six years?… I really feel what has occurred is that whereas the issue was clearly recognized, corrective steps weren’t taken.

When it involves reform of the banking system, it has nonetheless not been undertaken. Reform is not one thing that is completed immediately. If you return to 1991, a variety of reforms had been carried out within the monetary system… and these took four-five years. The subsequent step was to open up the home capital market and the capital account in a cautious method. And then opening up insurance coverage. This was politically not straightforward however it was completed. We now have to concentrate on the reform of the banks. The P J Nayak Committee suggestions need to be applied. The GST additionally must be mounted.

UDIT MISRA: Is present Indian politics financial system proof?

I agree that the financial system is underneath appreciable stress… most felt within the lack of creation of job alternatives. Young graduates are on the lookout for significantly better jobs than their dad and mom had. And except the financial system performs in another way, they’ll get pissed off quickly. Populism, within the sense of claiming that ‘You are not getting a job, but I’m supplying you with advantages’, is completely unsustainable as a result of it is unaffordable. So it will mirror itself within the authorities borrowing excessively, straight or not directlywhich can solely squeeze out the non-public sector and make the roles disaster worse… The notion that you would be able to ignore the financial aspect and depend on populism is simply not viable.

UDIT MISRA: Did the general public response to demonetization shock you?

It was very disruptive, however it is true that it was politically nicely bought and folks didn’t appear to thoughts it. They minded the lack of jobs and so forthhowever by some means the political administration of demonetization was such that it was accepted.

RAVISH TIWARI: Where do you assume the UPA-II misplaced the plot?

There are two issues that the UPA-II didn’t do. First, they didn’t adequately clarify to those who the UPA-II had substantial achievements, significantly the discount in percentages in absolute numbers of poverty as of 2011-12. So it was not simply within the UPA-I. I’ve no reply to why they had been unable to undertake these achievements… The PM did point out them. Even Sonia Gandhi talked about them in a few of her speeches. Somehow, it was not a part of the dominant political discourse… One of the most important achievements of the UPA was within the space of well being. Polio received eradicated. The director-general of the WHO got here to India and made the announcement simply earlier than the (common) elections (of 2014)… Particularly as a result of the Congress was so involved about schooling and well beingthis could have been trumpeted from the rooftops…

The second was the general public notion that corruption had reached unattainable ranges. There had been many elements — the Anna Hazare motion, mobilization by NGOs. Corruption is an issue all over the place. It is not as if India is the one corrupt nation on this planet. But the way in which the entire thing was managed, the UPA by no means received round to creating its case that it is being tarred unfairly by a selected brush.

UDIT MISRA: Can you consider examples up to now when the Reserve Bank was in a position to show independence?

The RBI is not legally unbiased for the reason that legislation permits the federal government to intervene if it needs. However, it has been in a position to protect an excessive diploma of independence up to now. This is exemplified by the case of the Bank of Credit and Commerce International (BCCI) within the early 1980s. The BCCI was lobbying exhausting to get a banking license however the RBI had reservations. The Finance Ministry felt the presence of the BCCI would ship an optimistic sign to buyers and it sought to beat the RBI’s unwillingness by getting the Cabinet to approve a proposal that the ability to permit an overseas bank to function ought to lie with the Finance Ministry, though the RBI might proceed to oversee the functioning of the bank as soon as it began operation. This proposal was authorized by the Cabinet, however, Manmohan Singh, who was the Governor of the RBI on the time, took up the matter with Prime Minister Indira Gandhi. He defined that it would critically injury the credibility of the RBI as an establishment, and if the federal government insisted on implementing it, he must resign. After listening to him, the PM truly reversed the Cabinet resolution and the withdrawal of powers was by no means applied. This is an instance of preserving the efficient independence of the establishment. Singh has written about this in a little-known article.

The RBI’s reservations had been amply justified by subsequent revelations of money-laundering and unlawful actions unearthed by US authorities which led to the collapse of the bank. It exemplified the potential battle between a proactive developmental method and a regulator’s danger mitigation method.

Updated: March 8, 2020 11:35:19 am

Montek Singh Ahluwalia, Planning Commission, Montek Singh Ahluwalia Idea Exchange, Idea Exchange, Idea Exchange Montek Singh Ahluwalia, India news, Indian ExpressFormer Deputy Chairman of Planning Commission Montek Singh Ahluwalia with Deputy Associate Editor Udit Misra in The Indian Express newsroom. (Express Photo by Abhinav Saha)

One of India’s most influential economic policymakers, Montek Singh Ahluwalia served in the 1980s in senior positions in the governments led by Rajiv Gandhi and later V P Singh. Then, in the 1990s, as India battled a macroeconomic crisis and embraced radical economic reforms, he played a central role, first as Commerce Secretary and later as Finance Secretary. In 2001, he was selected by the IMF as the first director of its Independent Evaluation Office. He returned to India in 2004 as Deputy Chairman of the Planning Commission — a position he held till May 2014. He has just written Backstage, a book narrating India’s growth story

Former Planning Commission Deputy Chairman Montek Singh Ahluwalia defends UPA against charge of “welfarism”, says it failed to project its achievements, calls decision not to join RCEP “unfortunate”, and gives examples of scope for RBI to be independent

UDIT MISRA: Did the Planning Commission overstay its welcome?

Many of my friends thought that it was a contradiction of sorts for someone associated with liberalisation to become Deputy Chairman of the Planning Commission. I used to make the point that they had no idea of what the Planning Commission does… It never engaged in detailed direct control. It was always an advisory body. But it did change quite a bit over time. The main task we had, which was effectively executive, was to divide the total development expenditure for the Centre and states…This resource allocation role was much emphasised but I felt that the real job of the Planning Commission should be to push for new policy initiatives….

UDIT MISRA: What is your opinion of the role played by the NITI Aayog?

I don’t have good knowledge of it, but I believe that they have no role to play in financial decisions, and that is unfortunate because part of the usefulness of the five-year planning process is that it introduces discipline. Even big corporations have budget processes that are multi-years. Currently, it is not being performed by the NITI Aayog. You could argue that it is being performed by the Finance Ministry. But I don’t think it is a good idea because the ministry has a core job, which is to keep fiscal deficit under control….

UDIT MISRA: Isn’t it true that many of the issues that the economy is facing at present are because of the UPA government not undertaking any significant economic reforms?

In a competitive political environment, political parties will put across facts in whatever manner suits them. Let’s look objectively at what accounted for high growth in the UPA period? There is no doubt that the tremendous reforms initiated in 1991, which were also continued by the United Front and Vajpayee governments, produced an image of continuity and broad consensus which helped generate a pro-investment climate.

Montek Singh Ahluwalia, Planning Commission, Montek Singh Ahluwalia Idea Exchange, Idea Exchange, Idea Exchange Montek Singh Ahluwalia, India news, Indian Express“The strength of India is perception that there is a broad consensus on good policy… not a competition between ideologies. Right up to Vajpayee and UPA government, that is the image… That continuity is not being really kept,” say Montek Singh Ahluwalia. (Express Photo by Abhinav Saha)

The Vajpayee government contributed to this. His openness to FDI was a continuation but it was a new signal from the BJP which had many segments opposed to FDI.

Second, he signalled going beyond disinvestment to genuine privatisation… The United Front was the first to recognise that government equity could go below 51 per cent but they didn’t do it… The Vajpayee government was the first to say that they were willing to reduce government equity to 26 per cent. Arun Shourie led the charge with some genuine privatisation but it got embroiled in controversy.

Then came the UPA government. They took many initiatives that ignited private investment. Manmohan Singh’s presence was the best signal that could be sent out to the private sector that the government intended to stimulate private investment. The sharp reduction in the fiscal deficit in the first four years clearly helped create room for private investment to expand.

UDIT MISRA: Many argue that there was too much stress on welfare, and while the government created fiscal space, it also gave it up around 2008.

The notion that we created space and then gave it up for welfarism is just not true. Otherwise, the fiscal deficit would not have fallen. Besides I don’t believe that the MGNREGA was as negative as people think.The MGNREGA is a mechanism for building assets in rural areas… One of the big things that Mihir Shah (formerly a member of the Commission) and I were pushing for was that we should use the MGNREGA for programmes for water conservation. NGOs were opposed to it because they felt that the projects should be determined by panchayats. So we struck a balance.

The other major steps that were taken were reform-oriented. One was expanding the scope of FDI, both in airlines and telecom. Then there was FDI in insurance, which required legislation and the BJP opposed it. I am glad that when they came to power, they promptly did it.

The GST is another example. The idea was first announced in Parliament in 2005 by P Chidambaram. But then it was stopped again by the BJP, mainly by states such as Gujarat and Madhya Pradesh….

UDIT MISRA: There were also a lot of rights-based schemes such as Right to Education that were introduced. But what about larger structural points such as corporate tax cut, which has happened only now. Why wasn’t it done when there was fiscal space?

Can one object to Right to Education? The real problem is that we never recognised what institutional flexibility is needed to deliver Right to Education. And that is a fair criticism. But that is very difficult and we are not doing it now either. The only area where the government should have acted and didn’t is labour. And that is for the same reason why the Central government is not doing it now. Historically, there has been large representation of organised labour in major parties. The opposition of organised labour to labour reforms was enormous.

SUNIL JAIN: Knowing about the twin balance sheet problem, if you were to do it again, would you push bank lending and boost infrastructure without carrying out reforms?

While we were certainly pushing growth, we were not directly pushing bank lending. When growth occurs, there is an enthusiasm; people borrow and banks lend… If you start trying to do everything, nothing will happen. The logic of change is to go ahead and push; watch out what the problem is and try and correct it… In 2014, when Raghuram Rajan was the RBI governor, he recognised the problem… He was criticised for unnecessarily creating difficulties. Frankly, this issue had emerged in 2014-15… The Economic Survey at that time talked about what we have to do — we should recognise the problem, that was done; we had to recapitalise banks, that was done but only partially; and we had to reform banks so that they don’t behave in the same way. That reform never happened and that was a pity.

Montek Singh Ahluwalia, Planning Commission, Montek Singh Ahluwalia Idea Exchange, Idea Exchange, Idea Exchange Montek Singh Ahluwalia, India news, Indian Express“The decision to not join RCEP was very unfortunate. The government said we must ‘Act East’. Refusing to join RCEP is not Acting East, it is sitting on the shore and saying, no, thank you very much,” says Montek Singh Ahluwalia. (Cartoon by E P Unny)

UDIT MISRA: Since liberalisation, we have seen governments of all hues, but there seems to be continuity in terms of the broad economic strategy. Does India have only one economic ideology?

The strength of India depends upon a perception that there is a broad consensus on what is good policy. If the picture portrayed is one of competition between two opposed ideologies, with policy reversals after every change of government, you can assume that we will just be stuck. Right up to the Vajpayee government and then the UPA government, that is certainly the image. Now, some people might criticise the present government for continuing the UPA programmes while renaming them… Continuity, with renaming making it catchier is fine. On the other hand, I don’t think that continuity is being really maintained because there has been an increase in Customs duty in the last two-three years… It is possible that we are reacting to a perception that the old stuff about lowering duties is old-fashioned, and the new economics is that we should have higher protection. I personally think it is a mistake. I also think the decision not to join the RCEP (Regional Comprehensive Economic Partnership, a proposed free trade agreement in Asia-Pacific) was very unfortunate. The government initially said that we must go beyond ‘Look East’, and ‘Act East’. But refusing to join the RCEP is not Acting East, it is in fact sitting on the shore and saying no thank you very much.

UDIT MISRA: Do you think the Congress had the ability to push reforms?

The 1991 reform was carried out by a coalition government led by the Congress — Narasimha Rao provided the political leadership and Manmohan Singh was the economic architect. They undid an enormous amount of traditional Congress policies. If we could do it in 1991, why can’t we do it again?… Admittedly, it is easy to take tough steps in the face of a crisis if you can say that it was caused by somebody else. The experience of 1991 suggests that parties, in this case the Congress, can be persuaded to move in new directions. Not everybody in the top leadership of the party in 1991 was willing to go along, but the changes were made… If there are things that need to be done, they should be done.

PRABHA RAGHAVAN: With India having initiated a review of its existing free trade agreements (FTAs), what bearing do you think it will have on ongoing talks with other nations?

A lot of this desire to scrap FTAs is based on many lobbies arguing that our FTAs have not benefited us. The latest Economic Survey does an analysis of FTAs and says that’s not true. The first thing one has to ask is whether the Economic Survey is right or wrong? I believe that the Economic Survey is right. If the Economic Survey is right, then the whole argument against FTAs is false.

ISHAN BAKSHI: Is it time to review the macroeconomic framework that has governed India’s policies for the last two decades?

We should always review macroeconomics periodically. A key question is, are we on target in macroeconomic terms? We are not. We no longer have growth targets but the government has set the goal of becoming a $5 trillion economy by 2024-25. This requires a growth rate of almost 9 per cent. We are going to end the financial year (2019-20) at 5 per cent or a little less. And next year, may be a little above 5 per cent. At this rate we are not going to get a 9 per cent average unless the growth rate in the remaining four years is well above 10 per cent or so, which is not going to happen.

There is also no chance of achieving the targeted doubling of farm income over a five-year period between 2015-16 and 2021-22. So we do need to revise our expectations and set realistic targets.

Montek Singh Ahluwalia, Planning Commission, Montek Singh Ahluwalia Idea Exchange, Idea Exchange, Idea Exchange Montek Singh Ahluwalia, India news, Indian Express“Populism, in the sense of saying ‘Not a job, but I’m giving you benefits’, is unsustainable because it is unaffordable. It will see government borrowing excessively… It’s just not viable to ignore economic policy, rely on populism,” says Montek Singh Ahluwalia. (Express Photo by Abhinav Saha)

SUNNY VERMA: How fair is it for the current government to blame the UPA for the mess in the banking sector? Also, with the economy struggling, what would be your advice to Finance Minister Nirmala Sitharaman?

It should be accepted that periods of rapid growth are accompanied by excess bank lending. This is a common phenomenon. When growth occurs, private capitalists become excessively optimistic. There is no harm in banks supporting enthusiastic investors if they bring enough of their own equity, but this doesn’t happen. At the end of a boom, there is a downturn and the economy slows down. A lot of projects aren’t able to service their debt. So the banking sector gets stressed. But how long should that stress last? Six years?… I feel what has happened is that while the problem was clearly identified, corrective steps were not taken.

When it comes to reform of the banking system, it has still not been undertaken. Reform is not something which is done instantly. If you go back to 1991, a lot of reforms were carried out in the financial system… and these took four-five years. The next step was to open up the domestic capital market and the capital account in a cautious manner. And then opening up insurance. This was politically not easy but it was done. We now need to focus on reform of the banks. The P J Nayak Committee recommendations should be implemented. The GST also needs to be fixed.

UDIT MISRA: Is current Indian politics economy proof?

I agree that the economy is under considerable stress… most felt in the lack of creation of job opportunities. Young graduates are looking for much better jobs than their parents had. And unless the economy performs differently, they’ll get frustrated soon. Populism, in the sense of saying that ‘You are not getting a job, but I’m giving you benefits’, is totally unsustainable because it is unaffordable. So it will reflect itself in the government borrowing excessively, directly or indirectly, which will only squeeze out the private sector and make the jobs crisis worse… The notion that you can ignore the economic side and rely on populism is just not viable.

UDIT MISRA: Did the public reaction to demonetisation surprise you?

It was very disruptive, but it is true that it was politically well sold and people did not seem to mind it. They minded the loss of jobs etc, but somehow the political management of demonetisation was such that it was accepted.

RAVISH TIWARI: Where do you think the UPA-II lost the plot?

There are two things that the UPA-II did not do. First, they did not adequately explain to people that the UPA-II had substantial achievements, particularly the reduction in percentages in absolute numbers of poverty as of 2011-12. So it was not just in the UPA-I. I have no answer why they were unable to project these achievements… The PM did mention them. Even Sonia Gandhi mentioned them in some of her speeches. Somehow, it was not part of the dominant political discourse… One of the biggest achievements of the UPA was in the area of health. Polio got eliminated. The director-general of the WHO came to India and made the announcement just before the (general) elections (of 2014)… Particularly because the Congress was so concerned about education and health, this should have been trumpeted from the rooftops…

The second was the public perception that corruption had reached impossible levels. There were many factors — the Anna Hazare movement, mobilisation by NGOs. Corruption is a problem everywhere. It is not as if India is the only corrupt country in the world. But the way the whole thing was managed, the UPA never got around to making its case that it is being tarred unfairly by a particular brush.

UDIT MISRA: Can you think of examples in the past when the Reserve Bank was able to display independence?

The RBI is not legally independent since the law allows the government to intervene if it wishes. However, it has been able to preserve a high degree of independence in the past. This is exemplified by the case of the Bank of Credit and Commerce International (BCCI) in the early 1980s. The BCCI was lobbying hard to get a banking licence but the RBI had reservations. The Finance Ministry felt the presence of the BCCI would send a positive signal to investors and it sought to overcome the RBI’s unwillingness by getting the Cabinet to approve a proposal that the power to allow a foreign bank to operate should lie with the Finance Ministry, although the RBI could continue to supervise the functioning of the bank once it started operation.This proposal was approved by the Cabinet, but Manmohan Singh, who was the Governor of the RBI at the time, took up the matter with Prime Minister Indira Gandhi. He explained that it would seriously damage the credibility of the RBI as an institution, and if the government insisted on implementing it, he would have to resign. After hearing him, the PM actually reversed the Cabinet decision and the withdrawal of powers was never implemented. This is an example of preserving effective independence of the institution. Singh has written about this in a little-known article.

The RBI’s reservations were amply justified by subsequent revelations of money-laundering and illegal activities unearthed by US authorities which led to the collapse of the bank. It exemplified the potential conflict between a proactive developmental approach and a regulator’s risk mitigation approach.