Bringing oil under GST won't solve problem of prices going up and down: Sanjeev Sanyal

The government is trying to get back on track the country's banking sector which is under tremendous stress due to a staggering level of bad loans. Sanjeev Sanyal, Principal Economic Advisor to the finance ministry, in conversation with Anjul Tomar, talks about how he expects the public sector banks to be on track in a quarter or two. Sanyal advises the government to clean the banks' balance-sheets and get them to start lending normally first, rather than jumping to consolidation. And once that happens, the economy will see more growth, he says. As many as 21 government-owned banks that hold two-thirds of banking assets in the country account for 90% of the bad loans.

How will the hike in repo rate impact the growth momentum?

Capital becomes more expensive when the central bank increases rates. The government only gave RBI (Reserve bank of India) certain target range and it is their judgement, depending on what future trends are. At no point in history have we held inflation at these levels for a very prolonged period of time. In fact, we now have complaints from farmers that their products are very cheap. It is quite an extraordinary achievement that we have lowered the inflation structurally by several basis points, while the economy has continued to be world's largest growing economy. Most countries had a major decline in inflation but they have entered the recession. RBI will respond to the emerging situation. If growth momentum slows down, inflation also slows down. So they will cut the rates.

Will the spike in oil prices and minimum support price (MSP) impact government's fiscal discipline? Will it be difficult to meet the fiscal deficit target? How does the government plan to tackle the situation?

There is a commitment that the Prime Minister has made and we have accounted to some extent for that. If more is needed, we will provide more resources to it. But farmers of this country do have serious problem and we will need to support them in whatever sensible way. MSP is not the only way. Over a long period of time if population growth slows and agriculture growth exceeds it, then clearly at some point of time there will be a downward pressure on the prices. So, this is one structural problem we have to solve for the government because in the end we can't keep increasing agricultural production when we can't eat so much. So we need to do various things. One, we have to think about increasing non-food agriculture. We have to think about storage chain and processing of food. We also have to think seriously about exports and changing the variety of crops. We have over-dependence on rice and wheat. They're all kinds of other crops, including food crops. We need to think about those. There is a wider discussion about the long-term trajectory of agriculture we need to have. But meanwhile our farmers need to be supported and some support has already been spoken about for by our PM. So, whatever has been promised will be delivered. So on the fiscal deficit front, we will make whatever adjustments are necessary.

What about farm loan waivers? Wouldn't it add to the states' fiscal deficit?

While the central government is giving support to the farmers with MSPs, the farm loan waiver is a state subject. But that aside, there are fiscal controls on the state. We continue to maintain those fiscal controls on the state unless there is some natural calamity. At the state level, there are certain resources and it is up to them to judge. They can decide to build a bridge with it or give a farm loan waiver. We in the centre will not tell states what to do. It is their judgement. And there is the central bank, which is their banker as well, to advise them.

High oil prices could inflate our current account deficit to $31 billion and impact other major macroeconomic variables. How do you see its impact?

We are an oil importing country. So, when the global oil prices go up, it feeds through various macros, whether it is inflation or current account. It is an arithmetic issue. It's not something we can manage but we have to bear with it as and when it happens. Bringing oil under the goods and services tax (GST) will bring uniformity but doesn't solve the problem of prices going up and down. In the end, we are importing. So, the long-term solution is ought to be ultimately to find ways to wean ourselves off reliance on foreign oil. So, what do we do? First comes non-conventional energy sources. We are investing in it and are part of the international solar mission. Secondly, we have to look for various kind of efficiencies- in public transport and other things. We also continue to have old options like nuclear energy and coal. Meanwhile, we are keenly watching the technology space as it is rapidly emerging. But for time being we continue to rely on imported oil and it comes with all the problems like instability of inflation, impact to current account and impact to every other thing.

What are the other key challenges before the economy?

There are a number of infrastructure projects. We need to finish fast many of these half-finished projects such as new airports, roads or highways and the whole bunch of new metro lines that we have opened. This is first. Then is GST. It went through a lot of pain and now after one year, it broadly works. It may not be perfect still, and therefore, we need to improve on it. We need to do small tinkering to make it more efficient. We will continue to do that till the end of the year to make sure it works as well as possible. The same is true for banking and IBC (Insolvency and Bankruptcy Code). We will make sure that most of the larger IBC cases get done by end of this year and that the banks are recapitalised to the extent possible and they start lending again; particularly make sure that resources reach micro small and medium enterprises (MSMEs). We are seeing the growth momentum coming back. After a fairly long time, we now are beginning to clearly see the investment coming back from the private sector. Meanwhile, we have to maintain fiscal discipline, inflation discipline and not get carried away in one direction and maintain overall macro stability. Then there are a few small reforms we may need to do along the way, for example, look into how we can create more reliable sovereign yield cover and increasing the spread in the Unified Payments Interface (UPI)-based payments.

When do you expect the banks to be back on track?

In a few months time, once the big IBC cases have come through, what will happen is that some money would have come back. You already have Bhushan Steel, Electrosteel, while a few more are in the pipeline. So, all of this is causing the monies to come back into the banking system. Remember, all this money has been written down. So, all the money which is coming back is pure profit. So you right it back, put it back into your capital, you begin to grow. So, in three to four months when this process happens, and of course, the government will also have to recap some of these, then hopefully some of these banks will come out of prompt corrective action (PCA) of the RBI. Large public sector banks like State Bank of India that are better anyway can ramp up their lending. So, suddenly new blood with glucose and oxygen will flow through system. So, when the oxygen passes through the economy, you see more growth. I think in a quarter or two everything would have been accounted for and banks would be on the other side of the cycle where they are writing back things.

A year-and-a-half-ago there was a solution to handle the NPAs. It was to create a bad bank. So you would take a large amount of these bank loans and put it in the bad bank. At that juncture, the call was taken that the bad bank would delay the resolution and that it was better to use IBC for the large stressed cases. It was thought that decision on the bad bank can be taken later. A committee is now there to look into it. 

 

Is the government considering consolidation and merger of weak banks?

The business of consolidation is a second-order solution. The first order solution is to clean up the balance-sheets and making sure that IBC process is carried through to its logical end. The next thing is to get them to lend again. For that, get some of them out of PCA. Get the better ones lending again. And once the machine is running, the banks can be merged for efficacy gain. So that's a commercial decision that will be made along the way but it is not a first-order solution. Straight away jumping into it doesn't solve any problem. Merging two banks gives you a larger bad bank. The issue is to get the banks to lend.

There are reports that foreign investors are pulling money out of India disappointed by lack of growth, with some experts blaming it on what they see as the worst earnings recession in the country's history.

I don't think it is the case. FDI (foreign direct investment) is flowing at record levels. Just a few months ago you had this problem when too much money was coming in, rupee was actually appreciating and everybody was complaining that it is going to become a bubble. You can't have a change in opinion every month. So, the point is that the foreign exchange reserves are held to smoothen these curves and RBI will judiciously use it. If the market wants to take rupee somewhere else, they will. In the end, it is a market-determined exchange rate. All we will do is to make sure that these movements are not sudden.

Last week, a second set of amendments to the IBC were implemented. How do you see the process getting strengthened further?

When you do these radical reforms such as IBC, GST, JAM trinity (Jan Dhan Yojna, Aadhaar and mobile number), Real Estate Regulation & Development Act (Rera), that too very very quickly, you have to be open to the fact that there will be unintended, unpredictable consequences. So, you have to keep your mind open and keep adjusting for those things. So, a new situation that you didn't expect will evolve. All these reforms will interact with each other. So in an evolving environment, good governance requires that you pay attention to how it is evolving and adjust along the way. We did it with GST, and are now doing with IBC process. We were concerned that there would be certain problems. If the auctioning process is captured by old promoters, it will lead to unintended consequences. So, we introduced certain kind of rules in November. We have now partially changed it. We now came to recognise that below a certain size it is not practical to expect a big auctioning process. In fact, in many cases, the original owners may indeed be the best people to buy it. So, it is fair that this process happens in a simpler fashion for them. IBC was built with an overall perspective. Now for specific sector you have to have a certain specific thing. The adjustments can again be made along the way. So you have to keep your mind open and keep adjusting for those.