governance, political economy, institutional development and economic regulation

Posts tagged ‘arvind Subramanian’

FM Jaitley’s press meet – more lobs than ground strokes

Jaitley lobs

What was Finance Minister, Arun Jaitley’s press conference on Tuesday all about anyway? If the intention was to gain eyeballs, it succeeded. But if it was to allay fears about the Indian economy, it failed. Here is why.

Misguided choice of communication medium

First, the optics were all wrong. The finance minister had just returned from the annual meetings of the International Monetary Fund and the World Bank in Washington. The timing required talking up the economy in a more artful way, drawing on international trends, in rethinking the role of the State in development. Instead, the assembled press corps got drab statistics. The naysayers remain unconvinced that the economy is doing fine. Presenting alternative indicators — other than those already in the public domain — could have helped. For example, the government has reduced risk by conferring residency tax benefits for local administrative offices of multinational companies. Similarly, GST revenue is marginally more than the targets for the first quarter.

Recycled “kosher” ideas for fudging data on the fiscal deficit

Second, the key “announcement” was a proposed outlay of `2.1 trillion for recapitalising public sector banks over two years. This was presented as a “bold” step. But how is it going to be achieved without relaxing the fiscal deficit target of 3.2 per cent of GDP this year and 3 percent next year? The budgeted outlay, for capital support to publicly-owned banks is just Rs 200 billion till FY 2019. Where will the “additional” resources come from? The how and when remains a mystery – though speculation, some of it inspired by the views of Chief Economic Adviser, Arvind Subramanian, abound.

FM Jaitley unhappy at being trapped

The finance ministry has a long, credible tradition of technical expertise. The Prime Minister can get away with making generic promises, as he has done in Gujarat, of a tax amnesty for small business, for past misdeeds. But finance ministers are required to be very precise. They can’t waffle. They must not seem to be led by advice, whispered into their ears, while a press conference is on. This, unfairly, makes the finance minister look feeble, or worse, being led by the nose.

arvind subramanian and jaitley

Mr Jaitley fell squarely into these traps. To his credit, he looked decidedly unhappy and uncomfortable while doing so. It is inconceivable that this media jamboree was his idea. Just back from Washington, where “best fit” fiscal practices are the main discourse, resorting to fuzzy announcements, which create high expectations and uncertainty, is not par for the course.

It’s the politics stupid

So what explains Mr Jaitley going down this route? After all, the Budget is just three months away. The sanctity of placing new budgetary proposals before Parliament, prior to revealing them to the public, is a sound convention. The only explanation is that the press meet was convened to boost the feel-good factor prior to the Himachal Pradesh and Gujarat elections, due over the next two months. Recapitalising banks sounds good. Building infrastructure sounds even better. If this was the intention, Mr Jaitley was right to look uncomfortable. Nothing stops the Union government from doing its job, even as state elections are being held. But a red line must be drawn at presenting significant new fiscal proposals, that are not already embedded in the existing fiscal roadmap.

Stick to your instincts Finance Minister

Mr Jaitley’s instincts remain sound. He will try hard not to breach the fiscal deficit target. He will resist reducing the capital outlay. He must also resist forcing cash-rich, listed publicly-owned companies to subscribe to the special recapitalisation bonds proposed to be floated by public sector banks. Listed, publicly-owned companies must be managed by their boards, and insulated from politics, at least with respect to their investments. Anything else is very unfair for the minority shareholders and the Securities and Exchange Board of India is duty-bound to resist such moves — however bizarre that may sound!

Deepen equity divestment in publicly owned banks & companies

Generating Rs 580 billion by selling-off government equity held in excess of 51 per cent in banks is a good idea for a start. A better idea is to dilute government equity even further to 26 per cent without relinquishing effective control. The government does not need more equity to ensure that the public interest continues to be served. We must resolve the legal obstacles which prevent such dilution of equity.Using disinvestment proceeds to inject public finance into private companies, which create growth and jobs, is a great idea. But doing so via the chosen long route of public sector bank recapitalisation is worrisome. Unless management systems are restructured, politicised loans and NPAs will persist. This cannot be achieved by 2019.

Use equity divestment proceeds to refinance private NBFCs for MSME business

What can be done is to use disinvestment resources to refinance private banks and non-banking finance companies, who in turn finance end-use borrowers, including small and medium enterprises (SME), to scale up operations. The unmet financing needs of SMEs are estimated at Rs 65 billion. But this could be an underestimate, not least because of their widespread use of cash or unbanked transactions. The share of manufacturing SMEs in GDP is seven per cent, or just under 50 per cent of total manufacturing GDP. Their most immediate financing need is to discount their invoices and thereby reduce the 60-to-90-day payment cycle which saps their cash reserves.

Scale up private, boutique, supply-chain finance providers

Private specialised companies offering boutique supply-chain financing already exist. The largest is reputed to be the New Delhi-based Priority Vendors Technologies Pvt Ltd. founded by Kunal Agarwal in 2015 (http://www.priorityvendor.com)But these early entrants tend to finance only the payables and receivables of large, star-rated corporates who buy from, or sell goods and services to, smaller ancillary firms. There are 5,000 large corporates. Compare this with 1.6 million registered SMEs.

We have barely scratched the surface of the potential for supply-chain financing. Saturation levels of financing can alleviate the cash crunch, at the firm level, caused by the GST regime of advance tax payments coupled with the delays, in “matching” tax credits, earned on purchases, before they can be used by firms, to pay taxes.

Jaitley ground strokes

India is replete with good ideas. The finance minister could have unleashed an array of nimble steps, which can lubricate the economy, reduce risk and create jobs. But, by not grounding Tuesday’s press meet around a friendly conversation about the nitty-gritty of unleashing private potential and mitigating the hardships arising out of GST, this opportunity was lost. There will surely be another time. But will we be prepared by then to grasp the tide at its flood?

Adapted from the authors article in The Asian Age, October 26, 2017 http://www.asianage.com/opinion/columnists/261017/wheres-the-big-idea-fm-got-optics-wrong.html

Retribution – the missing R for resolving bad loans

Courtesy Arvind Subramanian, India’s Chief Economic Advisor, the 4R (reform, recognize, recapitalize, resolve) approach to manage the corporate bad loans problem, has captured public imagination. But he soft peddles a fifth R, that of retribution. The big stick must be wielded for reform to be credible.

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Public sector banks – flabby, politicised ATMs providing easy money to elites

Banks are flush with money. But “liquidity” for borrowers, even those who have a “special relationship” with banks, is low. The shadow of stressed loans – missed loan repayments and interest payments- makes the usual, clubby way of doing business suspect. Banks operate on big margins – between interest paid on deposits and interest received on commercial loans – of up to 5 percent, in our cartelized banking architecture, dominated by publicly owned banks. But, despite high margins, public sector bank ratings suffer. The more loans they give, higher is the volume of bad loans.

Bad loans are an outcome of shoddy risk appraisal followed by poor loan account oversight. The ugly habit of kicking the can down the road by rolling over bad loans has been the norm.  On average, only around 26 percent of bad loans and accumulated interest are recovered. Using this metric, banks stand to lose around Rs 9 trillion (6 percent of our GDP) by recognizing and resolving bad loans of around Rs 12 trillion.

If corporate loans were recovered like consumption loans for cars, there would be no problem

Once a loan becomes stressed there is little a bank can do, except to recover as much as it can from the borrower; divert the proceeds to a better borrower and black list the delinquent borrower. But Indian banks rarely operate on this “sunk cost” principle. A long history of covert support to keep diseased loans and borrowers alive, under the guise of retaining jobs, has not helped. The spectacularly unsuccessful, Board of Industrial and Financial Reconstruction was still alive till January 2016. Unfortunately, so were hundreds of companies ripe for corporate euthanasia. We now have a new Insolvency and Bankruptcy Act, January 2016. But its effectiveness remains to be established.

RBI oversight of banks comes up short

Disappointingly, the Reserve Bank of India, instead of taking the bull by the horns and directing banks to start bankruptcy proceedings for bad loans, has taken the soft approach – giving banks time, till the end of 2017, to resolve the stressed loans themselves. Amusingly, to nudge bankers into doing unfamiliar, unpleasant things, extraordinary measures are being taken, to provide them administrative cover, from ex-post facto audit, vigilance and CBI investigations. Clearly, retribution against those bankers, who approved and over saw the dud loans, is not contemplated.

Loan waivers without retribution for the complicit create moral hazard

Economists, including RBI Governor caution against the problem of “moral hazard” that loan waivers create in the context of agricultural loans being written off by state governments. Apparently, forgiveness without retribution, is bad for rural borrowers, but ok for corporate borrowers. Sadly, retribution is sorely needed for commercial borrowers too, who account for 75 percent of the bad loans.

80% model borrowers, 20% delinquent addicts of “easy money”

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The reality is even more nuanced. The bulk of borrowers, across sectors, are gold standard risks. Despite gross mismanagement of large corporate loans, 83 percent of the bank loans, valued at Rs 63 trillion, are serviced on time by borrowers. Moral hazard affects borrowers selectively in India. This is because retribution is also selective. Access to bank finance for small borrowers is cut off if they become delinquent and recovery proceedings are harsh. For large borrowers and the influential, more favourable terms apply.

Are only babus to be held to account?

handcuffs

Last month, a retired Secretary of the Coal Ministry and two other senior colleagues, were convicted for criminal conspiracy, by a trial court. The charge and the punishment meted out was completely out of proportion to their misdemeanors – less than adequate diligence in discharging their duties. Why this double standard for holding public officials to account? Rs 12 trillion of accumulated stressed loans against annual loan approvals of between Rs 3 to 5 trillion, indicates a deep rooted “conspiracy of silence” within public sector and co-operative banks; their patrons in government and the borrowers themselves.

These stressed loans, whether in industry or in agriculture, must be taken off the books of banks. But the concerned loan sanctioning and account oversight chain, whether present or retired, must be held to account on a standardized, transparent metric to establish active connivance to cheat the bank or lack of adequate diligence. This is the only way to delink quick resolution of the stressed loans from the problem of “moral hazard”.

Blacklist actively negligent founders

Second, deals need to be urgently struck with borrowers to resolve loans without access to the lengthy judicial review process. These can only happen if the big stick of sanctions is available to the negotiators. Founders, actively negligent in servicing loans, should be made to exit management positions, as a precondition for future access to bank finance. Delinquent individuals, who have been given opportunities earlier, to reform, via “greening” or rolling over of loans, should be debarred from access to bank finance.

Hold banks to account for bad loans

The argument against sanctioning bankers is bogus. It is feared bankers will stop taking decisions if sanctioned, thereby freezing the lending cycle. Till two decades ago, bank trade unions, routinely used the threat of striking work, to stop computerization or extract better wages. It was the Supreme Court which defanged them in 2003 by ruling that the right to strike is not absolute, particularly in the case of public services. No need to turn the clock back.

Stringent action against the bureaucracy has not adversely affected the functioning of government. Enshrined bureaucratic safeguards are most often the refuge of the incompetent or the corrupt. Those working transparently, in the public interest, rarely need such support. There is no reason why banks should be different.

Needed an empowered financial sector, “clean up” champion, to wield a long broom

Jaitley grimace

“Moral hazard” in bad loan resolution becomes a problem, only if we do not deal equitably and transparently. Elitist cliques, spanning politics, business and agriculture, must be weaned-off, the vice of bank financed “easy money”. Swift, impartial, standardized resolution of bad loans, with judicious retribution, can drain this vicious whirlpool, which saps national wealth and reeks of inequity.

Adapted from the authors article in TOI Blogs, June 23, 2017 http://blogs.timesofindia.indiatimes.com/opinion-india/retribution-the-missing-r-in-resolving-bad-loans/

 

Indian Economic Survey 2016: Bewinderingly optimistic

Arvind S

Arvind Subramanian Chief Economic Advisor- GOI: Rising star and Rajan clone?

The Indian Economic Survey is an annual document that is wrongly titled. The data it reveals is overpowered by large dollops of economic wisdom, literature and policy analysis. Arvind Subramanian, India’s Chief Economic Advisor and the key author of this year’s Survey, has clearly burnt the midnight oil liberally in making the Survey a reader’s delight, even for one who has only a nodding acquaintance with economics, gleaned primarily by pursuing the pink papers.

Running hard to stand still

The key guidance the general public has been looking forward to, is the credibility of the near miraculous GDP growth rate of 7.6 % recorded this year and in that context, prospects for the next year. Unfortunately, clarity still eludes the average reader. Whilst generally optimistic about the government’s ability to improve on the performance this year, the survey is curiously negative on growth prospects for next year (7 to 7.75%), which it says would be strongly dependent on world growth reviving rather than domestic reform being implemented. Running hard to stand still is not a very good incentive for public sector reform. Consequently, India should brace for lower growth next year.

Better fiscal administration but significant legacy problems

The Survey makes the point that over the last year India has done more than most of its peer countries- those with an investment grade of BBB, including China, to retain macroeconomic stability per the index of macro-economic vulnerability developed in the Survey last year. But it simultaneously notes that the quality of assets in government-owned banks has been deteriorating since 2010. This is complemented by the overleveraged position of large business houses who are finding it difficult to service these loans because market conditions are adverse and both the top-line and their bottom-line have taken a hit. Exports have reduced by 18% last year and the competitiveness of domestic suppliers even to meet domestic demand is dodgy. The domestic steel industry being the most recent example.

The popular explanation for the logjam in corporate funds has been that the financial stress of big corporates has less to do with inefficiency or injudicious resource allocations by them. The blame is pinned on government projects not progressing smoothly over the last few years of the previous government resulting in corporate funds getting blocked unproductively.

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Minister Nitin Gadkari doing the impossible- shaking the dust off moribund highway projects

But over the current year Minister Nitin Gadkari has revitalized the implementation of a large number of projects in the highways sector. Railways Minister Suresh Prabhu has similarly awarded more than double the level of contracts in railways than was the trend earlier.

prabhu Minister

Minister Suresh Prabhu -improving the plumbing of  Indian Rail – a colonial legacy and democracy’s neglected child 

State governments have also enhanced public investment per the Survey which states that the combined public investment increased by 0.8% of GDP over the first three quarters of the current year versus the previous year with state government contributing 46% of the investment.

Why then does corporate loan servicing remain a problem? Is it just a time lag issue before public expenditure decisions kick in and funds flow resumes to corporates? If this is the case  the salutary effects should be visible next year. Or is it that the loan defaults have less to do with poor implementation of government contracts than with the “smart” arbitrage strategy of big corporates to borrow domestically in an unreasonably strong rupee, post 2013 and salt investments away safely overseas? Is it not necessary then to keep the rupee at aggressively competitive levels to avoid the incentive for “carry trade”, boost export competitiveness and price the fiscal impact of imports- particularly oil, realistically?

Does a high risk fiscal strategy make sense?

If the economy could chalk up a relatively high growth rate of 7.6% this year, despite the adverse conditions, why then is there a clamour for more liquidity and lower interest rates to kick start private investment and to fund higher levels of public investment in the coming year?

Would it not be sensible to stick to fiscal rectitude and keep the fiscal deficit target at 3.5% of GDP and hope for the same growth rates next year particularly if domestic actions will count less than world growth and demand?

Does it not make sense to guard against the risk of inflation- particularly drought induced food inflation? Our poorly integrated agricultural markets and inadequately prepared public management structures for managing food inflation by using market mechanisms are unlikely to be effective to deal with the risk of such inflation should the next year also be dry.

Oil prices remain volatile even though the survey is sanguine on the potential for an oil price increase. Whilst there is still no agreement amongst the top oil producers for limiting production, India is badly placed, being heavily (85%) import dependent, to bank on low oil prices continuing. Adequate fiscal space must be reserved for dealing with an oil price shock. These could be occasions when drawing down capital from a highly capitalized Reserve Bank of India (the survey labels it second only to Norway in being highly capitalized) can help without increasing the debt burden.

At least Mint Street is like Norway – we like that

Drawing down RBI reserves to fund dodgy capital investments in the public sector is a bad idea. It would be ok in Norway but not if accountability levels are low.Oddly, to an average India, the fact that we are close to being like Norway, as least with respect to the RBI is comforting and gives hopes. Indians are notoriously miserly and magnificent savers.

rajan RBI

RBI Governor Raghram Rajan – firm as a Norwegian rock: photo credit: businessindia.com

Tax revenue complacency

The survey skirts around the advisability of increasing the ratio of tax to GDP above the 10% achieved last year. It appears  complacent that tax buoyancy in the first three quarters of current year exceeds the average of the last three years- particularly for indirect taxes. The full year’s data would only be available with a lag but the budget documents would show if this happy trend has persisted in the last quarter also and whether the revenue deficit is indeed on track as a consequence.

Ignoring the impact of committed and contingent revenue expenditure

The significant burden (Rs 100,000 crore) imposed by the 7th Pay Commission has been dealt with lightly. Enhanced government salary and pension can increase expenditure by 0.6% of GDP for the Union government alone and threaten the revenue deficit target. The jury is still out on its possible beneficial impact on stimulating demand.

More importantly, the survey deals unduly summarily with the issue of enhancing rural income support and social protection as necessary adjuncts of macro- economic stability. Marco-economic stability can be the first victim if India’s political stability is compromised by concentrated high growth, which is not reflected in shared prosperity. The survey notes that 42% of Indian households are dependent on the rural economy. What it does not mention is the low ability of 60% of households to adapt to income shocks emanating from loss of insecure jobs, medical emergencies or other social obligations. Food for this segment accounts for approximately 40% of their expenditure. Rural wages are down 2.5% this year. Around 40,000 jobs have been lost per the Labour Bureau’s September 2015 report. Even the IT industry has reduced jobs and IT majors like INFOSYS -under a new leadership- are automating processes and putting employees out to pasture. These ground signals fit the survey’s assessment of India being in a hard place. But the survey is short on the best options for dealing with this economic shock.

The historical inadequacy in dealing with out-of-control and poorly targeted power, fertilizer, food, water, public transport subsidies hinges around the inability of elected governments to be seen to be heavy handed with income strapped households. These resultant fiscal pressures amounting to around 5% of GDP (all of government) can only escalate in the highly charged political environment during the next two years on account of state level elections.

A soft Railway Budget- harbinger of the main budget?

The Rail Budget 2016-17 could be a harbinger of such populism. Despite a large number of facilities and passenger amenities being announced there was no increase in the passenger fares which recover on average only around one half of the cost of services. Air India continues to be heavily subsidized. Loss making PSUs continue to sap public resources. How credible the fiscal consolidation plan can be in the face of these risks remains unclear.

Hopefully the Finance Minister will show the way on Monday in the Union Budget 2016-17. We await with bated breath.

Adapted from the authors article in The Wire February 26, 2015 http://thewire.in/2016/02/26/the-bewildering-optimism-of-the-economic-survey-22864/

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