Cost of funds on top of chief economic advisor's mind

There is a need to focus on making the cost of capital cheaper for individuals as well as corporates, said Krishnamurthy V Subramanian, the newly-appointed chief economic advisor (CEA) to the government.

The higher cost of capital is one of the focus areas for the new CEA, who takes over at a time when the NDA government would face general elections in some weeks from now.

"In India, the home mortgage rate is in excess of 10%. If you compare that with any of the developed economies like China, it will be much lower at about 4%, in the US about 2.5-3%. So, the cost of capital for individuals and corporates is much higher in India and that is something which is related to the financial sector. That is something which we have to focus on as first thing," the CEA told DNA Money in an interview.

Speaking about how to take it forward, the CEA said that there were a bunch of recommendations made by P J Nayak committee on bringing in reforms in the financial sector. "Some of those recommendations are worth considering, which we will simply try and think more about." said Krishnamurthy, who was a member of the PJ Nayak committee of the Reserve Bank of India (RBI) on governance of banks.

He is also in favour of securitisation. "The world over and in the US, for instance, securitisation is used a lot with the lessons that have been learnt from the financial crisis. They are continuing to use securitisation because it enables the financial sector to do a lot more intermediation and these are thoughts we are actually mulling over as well to take forward," he said.

Securitisation refers to the conversion of loans such as auto, house and credit cards of banks and lenders into debt instruments. In other words, it deals with the conversion of assets which are not marketable into marketable ones.

He also sees the Bankruptcy Code as one of the policy decisions that will be really instrumental in bringing down the cost of funds. "The deterrent will reduce the probability of the default. And thereby start showing on the credit spread. So this is another part which will bring down the cost," he said, adding the banks could not anticipate very high recoveries before Insolvency & Bankruptcy Code (IBC).

Among other areas the CEA would like the government to focus on is skilling youth and agriculture.

"We need to be focusing on the marketing side of the food production and on bringing markets to farmers using technology," he said.

Elaborating on the reasons for a continued focus on agriculture, he said "You have a population which is growing at less than 1%, while the food production is growing at more than 3%. So, you have food surpluses which means that lower food prices."

Referring to the debate on jobs data as a 'misplaced' one, he said, "About 50 basis points or 1 percentage point change in the employment rate is really not the key issue especially when you have the majority of jobs being in the unorganised sector. The key issue is of the meaningful employment. Skilling is the process that takes time."

He said if those ten years from 18 to 28 years of age (starting from when you finish) were spent on developing skills that would be useful for either self employment or working for the private sector. "The ten years lost in memorising facts would not be lost as much. And the people will be a lot more skilled to be able to take the jobs," he said.

He said that a lot of the youth till 27 or 28 years of age try and compete for the lottery of government jobs. "The skilling they are doing for that is primarily memorising some facts like general knowledge. So all those people who don't end up with the government job will then have to re-skill themselves to be able to work in the private sector or possibly start some firm of their own," he said.

In his new role, Krishnamurthy said he would broadly try to push the economy on a path that the high growth is sustained.

The rate of Gross Domestic Product (GDP) growth in the last five years at 7.3% has been the highest for any government since liberalisation, he said.

"The real rate of interest has changed from -2% to +3%, which is a 5% increase in the real rate of interest. So over five-year period that puts about 27% increase in the purchasing power of savers, especially senior citizens. The Goods & Services Tax (GST) has brought in the savings of about Rs 320 for a household that has an expenditure of Rs 8,500 per month. So, the middle class has got a lot of benefits from the policies."

He said this is the start of a process of ensuring that the spoils from the growth are shared equitably and his emphasis would be on taking this process forward.

"The foundation for the building has been built by creating these structural changes. The monetary policy framework actually has reduced inflation, while the Bankruptcy Code is another aspect of ensuring that that the powerful and connected don't end up exploiting the financial system, and then there is GST," he said.

Asked if he will be able to implant his vision in a short span of the outgoing government, Krishnamurthy said, "I think the opportunity to implant vision does not depend as much on time as it does on the quality of inputs."

CEA SPEAK

Krishnamurthy V Subramanian, chief economic advisor

• The cost of capital for individuals and corporates is much higher in India and that is something which is related to the financial sector. That is something which we have to focus on as first thing
   
• About 50 basis points or 1 percentage point change in the employment rate is really not the key issue... The key issue is of the meaningful employment
   
• The IBC deterrent will reduce the probability of the default. And thereby start showing on the credit spread. So this is another part which will bring down the cost
   
• We need to be focusing on the marketing side of the food production and on bringing markets to farmers using technology