Pressure on RBI to part with funds

BRP Bhaskar

Gulf Today

The Reserve Bank of India, which is banker to the Central and State governments and regulator and supervisor of the country’s monetary system, is under pressure from the Modi administration to pass on to it a big chunk of its reserves.

According to media reports, the Finance Ministry wants the RBI to transfer to the Centre Rs 3,600 billion out of its reserves of Rs 9,590 billion, and it says no.

More ominously, the Ministry wants joint management of the reserves by the Centre and the RBI. This will not only destroy the RBI’s autonomy and inhibit its ability to perform its functions well but also allow the government easy access to the central bank’s reserves which play a critical role in ensuring the nation’s financial security.

Initially, the government did not deny reports about its differences with the RBI. On the contrary, it virtually confirmed them and offered palpable justifications for threatening the RBI’s autonomy.

It argued that the RBI had overestimated its requirements of reserves, and could do with much less than what it holds now.

It also claimed the RBI’s existing economic capital framework was determined by its board of directors at a meeting at which two government nominees were not present.

As the Opposition parties and financial experts criticised the government for attempting to erode the RBI’s autonomy and reports circulated that RBI Governor Urjit Patel was preparing to quit, the government began a damage control exercise.

Subhash Chandra Garg, a Secretary in the Finance Ministry, in a tweet, described the reports as “misinformed speculation” and said there was no proposal to ask the RBI to transfer Rs 3,600 billion or even Rs 1,000 billion.

However, Prime Minister Narendra Modi and Finance Minister Arun Jaitley said nothing that could reassure critics.

One of the two directors nominated to the RBI board by the government recently is S. Gurumurthy, a chartered accountant better known as an ideologue of the Rashtriya Swayamseval Sangh, the ruling Bharatiya Janata Party’s mentor.

Reacting to the media reports, the RSS said the Governor should cooperate with the government or quit.

Set up by the colonial administration in 1935, the Reserve Bank of India’s functions include formulation, implementation and monitoring of monetary policy and laying down the broad parameters within which commercial banks must operate.

Successive Central governments have respected its autonomy, recognising the need for it to be free from political control to discharge its onerous responsibilities.

The RBI has an equity capital of only Rs 50 million but pays the Centre a handsome dividend each year. The dividend for the current fiscal is Rs 500 billion.

The RBI is one of the few central banks of the world which regularly updates its history. It has so far published four volumes which cover its working from 1935 to 1997.

Chicago University professor Raghuram Rajan, who, while serving as Chief Economist at the International Monetary Fund in 2005, had forecast the 2008 crisis in the US financial system, was the RBI’s Governor when Modi became the Prime Minister in 2014. His monetary policy helped check inflation and raise foreign exchange reserves.

When Modi consulted the RBI on his demonetisation plan of 2016, Rajan advised against it and warned of potential negative effects. Although he was ready to serve another term, Modi decided to look for someone amenable. Rajan returned to his Chicago University job.

Last week, on the second anniversary of demonetisation, Rajan said the world economy had picked up last year but India could not do as well as it should have done because of the disruption caused by the note ban and the hastily introduced Goods and Services Tax.

While the government’s publicly advanced argument for seeking RBI funds is that the central bank has more reserves than it needs, the real reason maybe something else. Either it is experiencing a cash crunch, which it is unwilling to acknowledge publicly, or it is looking for funds to launch populist schemes ahead of next year’s parliamentary elections.

Another indication of its urgent need to raise money is the reported decision to sell company shares which were declared “enemy property” after the shareholders left for Pakistan or China following the wars with these countries. Their current worth is estimated at more than $400 million.

Whether the government will press ahead with the plan to squeeze money out of the RBI or pull back will be known when the bank’s board of directors meets next Monday. --Gulf Today, Sharjah, November 13, 2018

Worrisome economic portents

BRP Bhaskar
Gulf Today

Prime Minister Narendra Modi has lifted the Indian economy up, making it more competitive than it has ever been, the World Economic Forum said in a report last week. Ironically, the testimonial came as he was coping with the adverse effects of demonetisation of high-value currency notes and introduction of goods and service tax (GST).

Cheer leaders at home, aided by the quiescent media, were working overtime to create the impression that all was hunky-dory. A senior leader of Modi’s Bharatiya Janata Party, Yashwant Sinha, pricked the bubble. “The economy is on the downward spiral, is poised for a hard landing,” he said. “Many in the BJP know it but do not say it out of fear.”

In a long, clumsy sentence, Sinha gave a worrisome picture of the economy: “Private investment has shrunk as never before in two decades, industrial production has all but collapsed, agriculture is in distress, construction, a big employer of the work force, is in the doldrums, the rest of the service is also in the slow lane, exports have dwindled, sector after sector is in distress, demonetisation has proved to be an unmitigated disaster, a badly conceived and poorly implemented GST has played havoc with businesses and sunk many of them and countless millions have lost their jobs with hardly any new opportunities coming the way of the new entrants to the labour market.”

Sinha, who had resigned from the Indian Administrative Service and entered politics in 1984, was Finance Minister in Janata Dal leader Chandra Shekhar’s government. Later he joined the BJP and served in AB Vajpayee’s government first as Finance Minister and then as External Affairs Minister.

Modi did not respond to Sinha’s criticism. He assigned the task to Sinha’s son and Minister of State for Civil Aviation, Jayant Sinha, who claimed the government had created a robust new economy which would power long-term growth and job creation.

Sensing that the son’s defence was weak, three senior members of the government, Finance Minister Arun Jaitley, Home Minister Rajnath Singh and Railway Minister Piyush Goyal joined the fray. Jaitley insinuated that Yashwant Sinha, who is 80, was wangling for his job.

Before Sinha, two other BJP leaders, Subramanian Swamy and Arun Shourie, had criticised the government’s handling of the economy but few took them seriously as they are disgruntled elements.

More often than not, an economic decline is the result of factors beyond the government’s control like a bad monsoon which ruins agriculture or external developments which push up oil prices. There has been no such development in the recent past.

What has brought about the present situation is Modi’s attempt to replicate the reforms with which he had supposedly transformed Gujarat’s economy as its chief minister. Within three months of assumption of office he wound up the Planning Commission and brought into being a think tank named National Institution for Transforming India (NITI) Ayog, modelled after China’s National Development and Reforms Commission. He also abolished the Prime Minister’s Economic Advisory Council, a body of experts which had helped his predecessors by providing independent advice.

Under the new dispensation, sectors like education and health suffered. Much of the money allocated for these sectors went into institution building, resulting in a shortfall in the funds available for improving the lot of the people, especially the poor.

In an insightful analysis, Professor Maitresh Ghatak of the London School of Economics said Modi did not have on Gujarat’s economy the transformative effect he was touted to have. His centralised style of governance might have worked in Gujarat but was unsuited for running the economy of a country as large and diverse as India.

Ghatak welcomed the revival of the Prime Minister’s Economic Advisory Council. “We do need experts,” he said, adding: “We also need a government that listens to them.”

Making a pointed reference to the exit of Raghuram Rajan, who was Governor of the Reserve Bank of India, and Arvind Panagariya, who was Vice-Chairman of NITI Ayog, he wished the new group of experts would have a long tenure and freedom to pursue policies that would lead to course correction.

The immediate challenge before Modi, who has to face the electorate in 2019, is to create jobs to absorb the one million people entering the workforce each month. According to government figures, currently job creation stands at just over 10,000 a month. -Gulf Today, October 3, 2017

Doubts over GDP growth claim

BRP Bhaskar

Gulf Today

Economists and opposition politicians have voiced deep scepticism over the government’s claim that India’s gross domestic product registered seven per cent growth during the third quarter of the current financial year, as against 7.3 per cent during the previous quarter.

The figure suggests that the demonetisation of high-value currency notes, announced on November 8, did not hit the economy as badly as was anticipated. As much as 86 per cent of the currency in circulation had ceased to be legal tender on that date. This resulted in disruption of economic activity in many sectors for several weeks.

The Central Statistics Office put the GDP for the quarter ending on December 31, 2016 at Rs 30,280 billion, as against Rs 28,310 billion for the corresponding period of FY 2015-16. On the basis of these figures, it estimated that the GDP growth for the year ending on March 31, 2017 will be 7.1 per cent as against 7.9 per cent for the previous year.

The Reserve Bank of India and the International Monetary Fund had reckoned that demonetisation would reduce the current year’s GDP growth rate by one per cent.

Prime Minister Narendra Modi, addressing an election meeting in Uttar Pradesh, said the CSO data proved that the people of India did not allow demonetisation to hamper the country’s development.

The opposition Congress party’s spokesman debunked the claim, citing figures of decline in bank credit to industry and contraction in industrial production.

Former Jawaharlal Nehru University Professor of Economics Arun Kumar said CSO’s GDP calculation was invalid as it did not take into account data relating to the informal sector which bore the brunt of demonetisation. This sector, he pointed out, accounted for 45 to 50 per cent of the output of the Indian economy.

Some economists expressed doubts over CSO’s finding that private consumption had increased by 10 per cent during the quarter. They said the cash crunch in the wake of demonetisation had actually brought consumption down.

Surveys done by the State Bank of India and trade bodies had indicated that demonetisation had hit the growth of the unorganised sector to the extent of 30 to 40 per cent.

Chief Statistician TCA Anant, while releasing the CSO data, had admitted that in the absence of sufficient data it was difficult to assess the impact of demonetisation. “Policies such as demonetisation are difficult to assess without a lot of data, which is still to come in,” he said.

India calculates GDP primarily on the basis of activity in the formal sector which accounts for only about 15 per cent of the economy. The CSO surveys the grey areas of the economy periodically. Often it interpolates data from old surveys into the GDP calculation.

India has attracted the charge of fudging GDP figures from time to time. In 2015, the government modified the way GDP is counted. As a result that year the GDP growth shot up to 7.3 per cent from 5.5 per cent, and the government declared the economy had turned the corner.

The then RBI Governor, Raghuram Rajan, likened the new methodology to two mothers babysitting each other’s child and paying for the service. “There is a rise in economic activity as each pays the other, but the net effect on the economy is questionable,” he said.

The US State Department’s Bureau of Economic and Business Affairs said that while India’s economy was one of the fastest growing the depressed investor sentiment suggested that the approximately 7.5 per cent growth rate might be an overstatement.

Since the new methodology for calculating GDP was adopted India had appeared to be the world’s fastest growing big economy, outpacing China, “but scepticism about the data is growing even faster,” the Economist wrote. It added, “A cottage industry has sprung up to cater to the sceptics, bending various indicators of economic activity to produce new gauges of growth.”

Reliability of GDP data is a global issue. Two years ago, World Economics, a research firm in London, developed a data quality index to make people aware that GDP means different things in different countries. In its 2016 index, two Asian countries, Hong Kong and Singapore, figure among the 10 countries with the most reliable GDP figures. India is at the 53rd place and China at the 63rd.

Many observers are inclined to wait for the revised GDP estimates, which may come in about six months, to get a correct picture of the state of the economy. -- Gulf Today, Sharjah, March 7, 2017.

A miracle maker bows out

BRP Bhaskar
Gulf Today

With Raghuram Rajan, Governor of the Reserve Bank of India, who provided a calm environment for the economy through skilful management of monetary policy, quitting in September, the path is clear for the Narendra Modi administration to bring another autonomous institution under its heel.

The rupee was falling against the dollar and inflation was ruling high when the Manmohan Singh government picked Rajan to head the RBI in 2013. He steadied the rupee and brought down retail inflation.

The rupee’s movement against the dollar was held in the narrow range of 66.02 to 67.09. The inflation rate was brought down from 10.5% to about 5% in two years. In the past year it has moved up but still remains below 6%.

Rajan worked the miracle mainly by using the RBI’s right to fix interest rates. Initially he raised the repo rate (rate at which the central bank lends money to commercial banks) and reverse repo rate (rate at which the central bank borrows from commercial banks), against the wishes of the government. After stabilising the monetary system, he reduced the interest rates, but not to the extent the government desired.

In the favourable atmosphere he created the GDP grew from 5.6% in 2012-13 to 7.6% in 2015-16, foreign exchange reserves rose from $275 billion to 363 billion and the current account deficit fell from 4.8% in 2013 to 1.1% last year.

Rajan is credited with having forecast the ongoing global financial crisis three years in advance. Speaking at a function to honour outgoing US Federal Reserve Chairman Alan Greenspan he had said a disaster was ahead. Recalling his words, IMF chief Christine Lagarde said last year, “The world should have listened to him.”

Economists and financial analysts say the effect of Rajan’s departure will be felt in the years ahead. However, he disapproves of personalisation of the office and says the RBI will survive any governor.

A product of the Indian Institute of Technology, Delhi, the Indian Institute of Management, Ahmedabad, and the Massachusetts Institute of Technology, USA, Rajan served as Professor at MIT’s Sloan School of Management and Chief Economist at the International Monetary Fund before returning to India in 2007 to head a committee on financial sector reforms. He later became Chief Economic Advisor to the Government.

At the RBI, he was often at loggerheads with the government as it kept pressing him to lower interest rates to raise the growth rate. He resisted, pointing to the high fiscal deficit and possible price rise. After the change of government, the pressure on him increased as Modi was in a hurry to push up the growth rate and usher in the good days he had promised in his campaign speeches. Rajan started relenting but the quantum of rate cut always remained below the government’s expectations.

The government responded by attempting to tamper with the RBI’s autonomy. It proposed the creation of an independent debt management office. As Rajan objected, the move was dropped.

The government then planned to transfer part of the power to regulate the bond market from the RBI to the Securities and Exchange Board of India. The SEBI’s opposition forced the government to drop that too.

Thereafter the government sought to reduce the RBI to the level of certain other financial sector regulators. The RBI’s protests resulted in stalling of the proposed changes.

The Establishment’s unhappiness with Rajan came into the open when Bharatiya Janata Party leader Subramanian Swamy called for his removal a few months ago. He was believed to be acting at the instance of the Rashtriya Swayamsevak Sangh, the power behind the Modi government.

The RSS, which is quite innocent of monetary policy, was apparently incensed by his remarks on the growing intolerance after the lynching of a Muslim at Dadri in Uttar Pradesh for allegedly eating beef. “Tolerance and mutual respect are necessary to improve the environment for ideas, and physical harm or verbal contempt for any group should not be allowed,” he had said in a convocation address at IIT Delhi.

The government, which habitually hypes its record, was peeved with his comparison of the Indian economy to the fabled one-eyed king of the land of the blind.

When the government constituted a search committee to find a candidate to fill the vacancy that will arise when Rajan’s tenure ends it became a clear indication that he would not get an extension. In a note to RBI staff last week he announced his decision to return to academia when his current term ends.

“My ultimate home is in the realm of ideas,” Rajan said in that note. Such a man is, no doubt, a misfit in an administration which delights in surrounding itself with mediocrities.

As Rajan takes the bow some of the tasks he began remain unfinished. One of them is cleaning up of the balance sheets of public sector banks that are weighed down by bad debts, a process he had described as a deep surgery. Another is the formulation of a monetary policy framework. -- Gulf Today, Sharjah, June 21, 2016.

Troubled banking system

BRP Bhaskar
Gulf Today

How healthy is India’s banking system, especially its large public sector component? The question has assumed significance following reports that state-owned banks wrote off bad debts to the tune of Rs 2,110 billion between 2004 and 2015.

Based on material provided by the Reserve Bank of India, the country’s central bank, in response to a Right to Information query, the Indian Express said the banks had written off as much as Rs 1,141.82 billion in the last three years alone. Bad debts which stood at Rs 155.51 billion in March 2012 had shot up to 525.42 billion by last March, it added.

Public sector units dominate India’s banking sector. The British-owned Imperial Bank of India, which the government took over in 1955 and renamed State Bank of India, is the country’s largest commercial bank. It now has more than 16,000 branches, including 191 abroad. Its assets stood at Rs 20,480.80 billion a year ago. Banks set up by former princely states function as its associates.

Fourteen large private banks were nationalised in 1969 and six more in 1980.

The SBI topped the list with write-offs of Rs 400.84 billion in the last three years. The Punjab National Bank, the second largest bank, stood next with a write-off of Rs 95.31 billion.

Responding to media reports, the Finance Ministry, the RBI and the SBI said loan write-off was basically a technical exercise to cleanse the balance sheet and achieve taxation efficiency. It was done at the head office level and did not preclude the branches from continuing recovery efforts.

However, many financial analysts voiced concern over the rise in bad debts and the recent fall in bank share prices. RBI Governor Raghuram Rajan accused critics of making claims bordering on scare-mongering. He attributed the fall in share prices to the turmoil in the world markets but conceded that the performance of some banks, particularly public sector units, was not pretty.

There may be no need for panic, as Raghuram Rajan says, but there is certainly cause for worry. The RBI recently put the value of banks’ stressed assets (including restructured loans) at Rs 7,400 billion. This means 10.9 per cent of all loans is stressed. Standard and Poor’s has forecast an 11-to-12 per cent growth in stressed assets during the year.

The issue of bad debts was a well-kept secret until the All India Bank Employees Association released a list of top defaulters in 2014. It contained names of 406 account holders who owed the banks Rs 703 billion.

Liquor king Vijay Mallya’s Kingfisher Airlines headed the list with debts of Rs 26.73 billion. The Winsome Diamond and Jewellery Company was a close second with debts of Rs 26.60 billion.

Among the other big defaulters was a construction company owned by KS Rao, who was Textile Minister in the Manmohan Singh government at that time. Raghavendra Rao and Deepak Puri, two businessmen whom the government had honoured with Padma awards, also figured in the list.

The AIBEA said bad debts of public sector banks had risen from Rs 390 billion in 2008 to 2,360 billion in 2013.

It alleged that banks, including private and foreign ones, had written off loans totalling Rs 2,040 billion between 2001 and 2013 under political pressure. It asked the RBI to publish the names of defaulters and demanded enactment of legislation to improve the recovery process and to make wilful default a criminal offence.

Raghuram Rajan, professor of finance at the University of Chicago and a former chief economist at the International Monetary Fund, took several steps to help the banks deal firmly with defaulters immediately after he took over as RBI governor in 2013. Guidelines issued by the RBI allowed banks to convert debt into equity and take control of defaulting companies if debt restructuring failed. The banks could then find new promoters to run the companies.

The Modi government, which assumed office the following year, announced a seven-point programme to revive public sector banks. It has only been implemented partially.

The latest debt figures indicate that the steps taken by the RBI and the government have not yielded anticipated results. The government told Parliament last year that 30 top defaulters owed public sector banks Rs 951.22 billion. This was more than one-third of their non-performing assets.

The name-and-shame policy adopted by some banks also does not seem to have had any effect on the defaulters.

The RBI and the government must urgently come up with foolproof measures to ensure the good health of the banks with a view to safeguarding the interests of the depositors and honest borrowers. --Gulf Today, Sharjah, February 16, 2016.