Ramnath Goenka Lecture series: Probe illegality, but don’t kill lending, cautions Raghuram Rajan

At First Ramnath Goenka Lecture, RBI Governor calms jitters, underlines macroeconomic stability, says infra upgrade not exchange rate key to exports.

By: ENS Economic Bureau | New Delhi | Updated: March 13, 2016 12:37 am
RBI governor Raghuram Rajan, Raghuram Rajan, Ramnath Goenka lecture series, Ramnath Goenka Raghuram rajan, india news Dr. Raghuram Rajan delivers the first Ramnath Goenka lecture in New Delhi. (Source: Express photo by Praveen Khanna)

Reserve Bank of India Governor Raghuram Rajan on Saturday backed the government’s fiscal management, monetary policy reforms and rural job creation efforts, but stressed the need for authorities to draw a line between dealing with genuine risk-taking and wrongdoing while going after loan defaulters.

WATCH: RBI Governor Raghuram Rajan delivers first RNG lecture

“In general, there are a variety of reasons why loans have gone bad. And if you say that every bad loan indicates malfeasance and requires a full-fledged investigation by criminal authorities, let me assure you that you are going to kill both lending and entrepreneurship in this country immediately. I don’t think we want to go there. And it is not right,” Rajan said after delivering The First Ramnath Goenka Lecture in New Delhi.

Also read | Large scale debt write-offs difficult, says Raghuram Rajan

Speaking on ‘India in the global economy’, Rajan emphasised that the banking regulator intends to have clean and fully provisioned bank balance sheets by March 2017: “The last leg of the stabilisation agenda is to clean up the stressed assets in the banking sector so that banks have the room to lend again. The problem in the past was that banks simply did not have enough powers to force promoters to pay, or to put stressed assets back on track… Our intent is to have clean and fully provisioned bank balance sheets by March 2017.”

He said that in the absence of a functioning bankruptcy system, his task was to first create an effective out-of-court resolution system and then work with banks to recognise and resolve stressed assets.

Even as there have been debates and concerns over India not going for high growth, Rajan sought to calm the nerves of both domestic and international investors and seemed to be on the same page as the government.

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Stating that several economies faltered as they headed out for high growth without looking into macroeconomic stability, Rajan said, “Let’s not emphasise growth at the cost of macroeconomic stability,” and underlined that India’s decision to stick to the path of macroeconomic stability is the right one. He said India’s relatively high growth rate in the current challenging economic environment is commendable and the country now needs to build on the base that it has set up.

“I believe we are in the process of proving the sirens wrong. Given the inhospitable world economy and two successive droughts in India, either of which would have thrown the economy into a tailspin in the past, our focus on macroeconomic stabilisation must be part of the explanation why we have over 7 per cent growth, low inflation, and a low current account deficit unlike some of our emerging market counterparts. Now, we have to build on this sound base,” he said.

He also endorsed the budget announcements of 2016-17 where Finance Minister Arun Jaitley treaded the path of fiscal prudence. “The recent central budget emphasised fiscal prudence and adhered to past commitments, even while allocating resources towards capital spending and focusing on structural reforms, especially in agriculture,” he said.

At a time when international investors are depressed and all countries are striving for extra growth, he said India should make sure that the domestic environment promotes strong, sustainable, and stable growth. And that, he said, requires a firm platform of macroeconomic stability.

Even as the constitution of the monetary policy committee, mooted in the Finance Bill, is set to take away the RBI Governor’s ability to set the monetary policy unilaterally, Rajan hailed the decision and said it will strengthen RBI’s inflation-focused monetary framework.

“I believe shifting the decision to a committee is in the economy’s interest. Not only will a committee aggregate multiple views better than an individual can, it will offer more continuity, and be less subject to undue pressure. I believe the monetary reforms of this government will stand out as one of its signal achievements,” he said.

He also sought to allay fears over weak trade and exports, saying India is not in isolation and Indian exports of goods and services broadly mirrors that of emerging markets. While questions have been asked as to what is the right exchange rate for India and there have been suggestions to depreciate the rupee to push exports, Rajan said, “The ideal exchange rate for us is neither strong nor weak, it’s just right.”

Stating that exchange rate is unlikely to be a helpful tool in India’s quest to increase what we make in India, he said in order to export more India can look to “improve productivity by building out infrastructure; improve human capital with better schools, colleges, vocational and on-the-job training; simplify business regulation and taxation; and, improve access to finance. Fortunately, all this is what the government is focused on.”

In recent times while there has been a lot of debate over the depreciation in rupee against the dollar, Rajan said that the Indian currency has been relatively stable in comparison to its peers and there should not be much concern around that.

He said while capital flows are stable, even foreign direct investment is set to hit an all time high this year. While it stood at $41.7 billion in 2008-09 (the highest in a year), it had already touched $38.7 billion for the ten-month period April 2015-January 2016.

He also reiterated that the central bank would not target an exchange rate for the rupee and would only intervene to curb volatility. The central bank, he said, would focus on steadily increasing foreign investment limits in government bonds.

At a time when the developed economies or the ones that are part of the G-7 dominate the agenda and dialogue for the world, Rajan suggested that while India has a seat at most international tables, as it gets more power, it needs to develop the capability of using it effectively by developing ideas and pushing agendas through coalitions.

“Today, it is an unfortunate reality that international meets are still dominated by the old powers. But it is less through brute power politics and more through the power of ideas, agenda setting, and organisation that they dominate. Agendas in the G-20 are still largely set by elements of the old G-7, and often we find that they have already agreed on their preferred approach. It is only when the big powers disagree that the rest of us have some hope of influencing outcomes,” he said.

He said that “unless we amongst the emerging world put forward our agenda, build the intellectual and analytical basis for pushing it, and create coalitions to support it, we will have no chance of moving forward”.

The Ramnath Goenka Lecture series has been launched by The Express Group to mark 25 years of the passing away of Ramnath Goenka, the founder of The Indian Express. The lectures will aim to deepen understanding of change and inspire debate on issues of vital contemporary interest.

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