Thursday, December 12, 2019

Raghuram Rajan on Indian Economy

Recently, Raghuram Rajan, former RBI governor, in the India Today cover story explained the issues that ails India right now. He also discussed few of his ideas that current establishment can ponder upon to get out of the mess it is in.

For the benefit of my readers, I will jot down the key highlights of his article.

What ails India?

  • Growth is slowing
  • Govt has less room to spend more as fiscal space is constrained
  • Household and domestic debt is rising
  • Financial sector is in stress
  • Industry is not spending
  • Unemployment is rising

What brought us here?

  • Govt inherited a lot of issues when it won power back in 2014
  • Land acquisition challenges, scams, coal and gas issues, bureaucratic hurdles stalled many infrastructure projects
  • Power producers face challenges as debt ridden power discos delayed payments
  • Bad loans on bank's balance sheet rose, as a result
  • Govt misguided intervention in agriculture for decades created its own problems
  • Rather than focusing on value creation for farmers, all governments took easy paths of subsidies, incentives, loan waivers.

Govt attempts to tame the beast

  • Initially focussed on taming the fiscal spending and inflation
  • Brought landmark resolutions like Insolvency and bankruptcy Code (IBC) to clean up the bad debt mess
  • GST reforms to unify the Indian market and improve tax compliance
  • RERA to clean up real estate sector 

Second Order Issues

  • Although all steps in right directions, govt miscalculated the second order effects.
  • Promoters stopped placing bets using bank loans as they worry they may lose their firm in bankruptcy
  • Banks stopped lending as they become more risk averse and ever greening of loans was heavily discouraged
  • Industry confidence nose dived as govt seemed aggressive on penalizing the egregious promoters
  • Unemployment rose as investment faltered across the country and businesses suffered from lack of demand/confidence

The way forward

  • Govt/ businesses need to find new avenues of risk capital by going more aggressive on reforms and attract foreign capital to invest
  • Encourage domestic institutions: Insurance companies and pension funds to take more risk
  • De-risk the projects by providing faster clearance for land acquisition and other processes.
  • Improve stability in the current policy regimes; constantly tweaking the rules and tariff structure creates uncertainty
  • Economic vision and priorities should not get sacrificed to social and political motivations of current establishment
  • RBI needs to assess NBFCs and brings regulatory certainty in the system; need to separate out the goods apples from the basket
  • Need to create funds for credible developers to finish their projects faster
  • Centre and state have to come together to resolve issues in power sector and maintain the sanctity of the contracts.
  • Labour act needs serious reform
  • India should not jump to reduce personal taxes to boost consumption - to stay fiscally prudent
  • Also, temptation needs to be avoided to raise deposit insurance to 5 lakhs, as some have suggested, before a serious audit of entire banking sector esp. cooperative banks is finished.