Modi pumps money into system in bid to boost economy
October 31 2017 11:42 PM
Delhi Diary
Delhi Diary

As the economy continued to stutter and stumble for the fifth consecutive quarter, Finance Minister Arun Jaitley said last month that the government would soon announce steps to bolster it. Last week he did it in emphatic terms.
A massive Rs9tn infrastructural and bank recapitalisation programme would be the fulcrum on which Prime Minister Narendra Modi’s government hopes to turn the economy back on to the growth path in the next five years. The government also announced an increase in the price at which it procures wheat, pulses and oilseeds from farmers. 
The finance package has been divided into two main categories - Rs6.93tn for investments in roads, bridges and such other related infrastructure in the coming five years and Rs2.11tn in the next two years for recapitalisation of government-owned banks that have been saddled with huge non-performing assets (NPAs) leaving them in no condition to extend loans.
The projections are mind-boggling. Some 83,677km of roads are to be constructed in what has been named ‘Bharatmala’, crudely translated as ‘India garland’. Though a state-wise/sector-wise breakup was not immediately available, the road works are expected to create 142mn mandays of employment.
Finance Secretary Ashok Lavasa said in the first phase of ‘Bharatmala’, around 34,800 km of roads will be constructed for which Rs5.3tn will be invested. Besides, a 9,000km economic corridor will also be built, along with inter-corridor and feeder route (6,000km), national corridors efficiency improvement, border toads and international connectivity (2,000km), coastal roads and port connectivity(2,000 km), greenfield expressways (800km) and balance national highway works (10,000 km). If everything goes as planned, India will boast of one of the largest road networks in the world.
This is good news for everyone but it is the other reform - bank recapitalisation - that has generated much controversy.
India’s 18 public sector banks (PSBs) have together lent some Rs8.5tn to entities that are non-performing or under-performing and, therefore, these loans have to be either written off or will take an enormous amount of time before they are closed. To describe these banks as “incompetent and inefficient”, as some analysts have done, may not be quite right because these loans have been disbursed on certain conditions that were beyond the control of these individual institutions. More of that in a bit. Nevertheless, on the face of it, the banks are at fault for lending money without sufficient guarantee that they will be returned as per conditions stipulated.
But leaving these banks to fend for themselves would not have been feasible for more than one reason. Their capacity to lend had to be revived in order for the economy to retain its zest. One way to get the banks back on track would be to sell them to the highest bidder. These banks, which held as much as 85% of deposits in the country in 1969, were originally private but were taken over by the Indira Gandhi government that year in what is known as ‘bank nationalisation’. Modi may be a ‘fan’ of private enterprise but he knows privatising these banks at this juncture could do more harm than good. The next best thing to do was to put money into their coffers so that their liquidity is restored to health.
None other than Urjit Patel, governor of Reserve Bank of India (RBI), has described the recapitalisation as a “monumental step’. The day after Jaitley’s announcement, Patel said in Mumbai: “For the first time in last decade, we now have a real chance that all the policy pieces of the jigsaw puzzle will be in place for a comprehensive and coherent, rather than piecemeal, strategy to address a virtuous cycle of investment and job creation.”
The government would be happy to hear Patel’s praise. But more than that the government would be happy if Patel, too, contributes to that effort of solving the “jigsaw puzzle” by reducing lending rates when the central bank’s Monetary Policy Committee meets next. 
Patel is known to be a very conservative, cautious economist whose prime concern is to keep inflation in check. While the government, especially the finance minister’s Chief Economic Adviser Arvind Subramanian, and noted economists like Surjit Bhalla have been calling for a substantial reduction in lending rates to boost the economy, Patel had been steadfast in his stand that to keep inflation in check the lending rates have to be relatively high. So, if the government has done its part, it is only reasonable to expect the central bank to do its at the earliest opportunity.
Patel can also help in making sure that banks don’t fall into the loans trap again. After all, the Reserve Bank of India is the regulator and final arbiter in everything concerning banks and if there had been a lapse in the banking sector- a serious one at that - the RBI must be the first one to be held responsible. Obviously the checks and balances had not been strict enough. When public sector banks were running up such huge NPAs the RBI was either caught napping or had looked the other way. 
How did these banks fall into such a bottomless pit when, on the other hand, most private banks in the country are reporting healthy bottom lines? The story goes back to the Manmohan Singh era when, in its eagerness to record higher gross national product (GDP) figures, the government indulged in indiscriminate lending. It is ironic that this had to happen when the country was being led by a prime minister whose credentials in economics are the envy of most financial wizards internationally.
But then again, the prime minister was not his own man as most of the crucial government decisions were controlled and dictated from outside the government. So, fly-by-night industrialists and entrepreneurs helped themselves to copious loans under one pretext or the other without let or hindrance. Naturally, there were many palms to be greased but these unscrupulous operators were only too happy to oblige. The scams that followed are part of India’s unsavoury history. 
The stressed assets issue was, therefore, one of the biggest challenges for the Modi government when it took over in 2014. Obviously it was a matter of great urgency to recapitalise these banks as otherwise they will not be in a position to lend to the small and medium enterprises which are the backbone of industrial workforce in the country. At the same time it could not be done in a hurry because the greater evil of ‘black’ money or unaccounted wealth was eating away the vitals of the economy.
The demonetisation may or may not have been a good thing depending on which side of the fence you are sitting, but what cannot be denied is that shell companies are finding it tough to survive in the new environment. As many as half a million shell companies had been established during the ten years of the Manmohan Singh government. A large percentage of them was involved in only one enterprise, money laundering. Now they are getting their comeuppance. 
Of course simply recapitalising public sector banks would not boost economic activity. Nor can it be even called a ‘reform’ because it is simply spending tax payer’s money for purposes other than originally intended for. There is much to be done by way of regulating loans disbursals so that only the deserving candidates get them. No more shell companies. Top quality due diligence is the need of the hour. These banks should also be asked to revamp their top management staff so that only the most competent persons occupy senior posts. Better salary packages could attract talent from private banks. All indications are real banking reforms are in the pipeline. And that’s the way to go.

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