Taking cognizance of the bad liquidity situation in the financial sector and weak private investment in the economy, Rajiv Kumar, Vice Chairman, Niti Aayog said that since the government is faced with an “unprecedented issue”, it needs to take steps that are “out of the ordinary”.
“This is an unprecedented issue for the government of India. For the last 70 years, we have not faced this kind of a liquidity situation. (The) entire financial sector is up in a churn and nobody is trusting anybody else… You may have to take steps that are out of the ordinary… I think the government must do whatever it can to take away some of the apprehensions of the private sector,” Rajiv Kumar said during a discussion at the Hero Mindmine Summit.
Pointing to the lack of trust in the market, Kumar said it is not only about trust between the government and the private sector but “within the private sector, nobody wants to lend to anybody else… Everybody is sitting on cash but they will not move”.
While blaming a large part of the problem on the high credit growth between 2004 and 2011, when it grew 27 per cent and resulted in a build-up of NPAs, he said it takes a lot for the government which has inherited all the “systems and inertia”.
The steps taken by the government over the last four years, such as demonetisation, GST and IBC, have reduced the cash in the system, Kumar said. “In the earlier period, you had a 10-35 per cent of cash sloshing around, which used to help people. That has become much less,” he said, adding all the issues put together have led to a “fairly complex situation”. “There is no easy answer,” he said.
Stating that private investments will drive India out of the middle income trap, Kumar also said some steps have already been announced in the Union Budget to address stress in the financial sector and give a push to economic growth, which hit a 5-year low of 6.8 per cent in 2018-19.
Further, a delay in payments by the government and its departments to the private sector in lieu of goods and services availed from them could be one of the reasons for the slowdown. The authorities are making all efforts to expedite the process, he said. “I have no hesitation in saying that there is no business of the government to hold back payments, which are due to the private sector. At the moment, there is huge effort going on to try and get this sorted out,” he said.
Addressing the Summit, Chief Economic Advisor to the Finance Ministry Krishnamurthy Subramanian said government intervention to bail out the private sector every time it goes through a “sunset phase” creates a “moral hazard” and is “anathema” for the market economy.
While the RBI and India Inc called for greater transmission of repo rate cuts (110 basis points since February), many banks have desisted from passing it on citing elevated interest rates on small savings, fixed by the government which has forced them to pay more on deposit rates.
Earlier, the CEA had said that government support is required at the time of infancy, and not when one has grown up. “I would say that the private sector has been in India since 1991 (liberalisation) and is now a 30-year-old kid. A 30-year-old man now needs to start saying that I can stand on my own feet. I don’t need to go to papa,” he had said at an event in Mumbai Wednesday.