Rajiv Kumar interview: ‘Weakness in exports a worry; lazy banking must be jettisoned’https://indianexpress.com/article/business/economy/niti-aayog-vice-chairman-rajiv-kumar-interview-weakness-in-exports-a-worry-lazy-banking-must-be-jettisoned-5202599/

Rajiv Kumar interview: ‘Weakness in exports a worry; lazy banking must be jettisoned’

Rajiv Kumar says a series of reforms in the last four years of the government has laid the “foundation of a solid growth story going forward.”

Rajiv Kumar interview: ‘Weakness in exports a worry; lazy banking must be jettisoned’
Niti Aayog Vice Chairman Rajiv Kumar

Another round of reforms is required in the banking sector and the government should now focus on reducing the number of public sector banks, Niti Aayog vice chairman Rajiv Kumar said. “I think time has come, for a smaller number of more manageable public sector banks. This is one reform that needs to be done,” he said. In an interview with Sunny Verma and Anil Sasi, Kumar said a series of reforms in the last four years of the government has laid the “foundation of a solid growth story going forward.” Edited excerpts:

There is a criticism that growth has been below potential in the last 3-4 years.

Our overall growth between 1950 and 2018 has been below potential. That’s very clear. Besides all our structural features, natural resources, endowments, better human talent than China at any point in time, they are at five times our size (in per capita income). There cannot be a better demonstration that we have not achieved our true potential. As for the last four years, people forget the kind of legacy we inherited in 2014. Has any government inherited that sort of a legacy? The fact is that the last two years of UPA, average growth rate was around 5.9 per cent, while inflation was around 9 per cent. NPAs had already gone way up there, we had done all the excesses that we could do in the excuse of responding to the 2008 crisis. Mr Chidambaram had busted the public finances in his 2008 Budget, in preparation of the 2009 elections. UPA ran a loose fiscal policy. There was also complete policy paralysis. And the critical point was that the private investment has completely turned turtle, because of the twin balance sheet implosion. So look at the legacy. But what this government did was to completely change the rules of the game. It didn’t matter whom you knew, if you had a good proposal, it would go through. That’s a big change. Demonetisation and GST are also big changes. Now the only reason to fault the government would be that why were you bold enough to do those things. But I think it was good that we were bold because all the foundational work is now done and the economy is beginning to take off. Economy can now reach higher level of growth of 9 per cent and sustain it there, rather than having this cycle of boom-bust-and-bailout. This is the cycle that we have maintained for the last six decades. This has now ended with the insolvency code, with the end of crony capitalism and extensive informality in the economy. Now we can expect cleaner, more inclusive, sustained higher growth. Never before has so much been done in a 48-month period to lay foundation of a solid growth story going forward.

Performance on export front has been dismal with zero growth in the last four years?


This is the real weakness and you really do need much smarter, more focussed, more nitty-gritty and granular policy making to get this going. We must get out of the habit of fiscal subsidies as the only means for promoting exports. There is more to it. In labour-intensive industries production, not just exports, has been declining. That cannot to be a result of declining demand. We need to look at this very carefully. I hope this gets done sooner than later. We in Niti Aayog are trying to look at four or five sectors in a very granular manner and will hopefully come up with very specific suggestions, because that’s what is needed today to push up exports.

On the banking sector, 11 banks are under PCA (Prompt Corrective Action) and for other 2 banks, fresh lending has been completely frozen. In the past four years there have been 3 concrete reforms — Indradhanush, Recapitalisation and then Insolvency and Bankruptcy Code — but still we have not seen them out of the woods. Former Prime Minister Manmohan Singh said that people are slowly losing trust in the banking system.

He should not have said that. It is complete nonsense. He has been my boss and having the highest regard for him, but I wish he hadn’t said that. This is just unnecessary scare mongering. After all, we have the domination of public sector banks, which have sovereign support and backing. Next, you will say that people are losing faith in government treasury and securities. This is just not right and I should better stop here.

He had said that “I say this very carefully and with responsibility”.

Well he cannot possibly say that he was making an irresponsible statement. Can he? In the past the government has also bailed out private commercial banks and not only public sector banks, which in any case have sovereign support. So are you questioning the capacity of the sovereign state of India to be able to pay its depositors? I think… it is purely over the top. This is like Chidambaram saying the Ayushman Bharat Scheme is totally under-funded, knowing fully well that it is not the case.

Having said that, clearly the three reforms have not been sufficient. You need more. I think the essential point here is that public sector banks and to the large extent the private sector banks as well have to brought into the habit of proper risk assessment, risk management. The whole culture of what Rakesh Mohan called ‘lazy banking’ has to be jettisoned. And that would require significant and concerted policy action. The PSBs especially the smaller ones, I think also suffer from a huge human resource problem. That’s really the issue. I wish it wouldn’t be true. But given this problem, the first step in this direction would be to reduce the number of these banks. So that you are not spread so thinly in terms of human talent and resources. I think time has come, for a smaller number of more manageable public sector banks. This is one reform that needs to be done.

For the last four years, low oil prices were a big tailwind for the economy. Now with that cushion disappearing, will India’s macroeconomic stability be affected?

The fact that the tailwind has disappeared must make a difference to the economy but more so for economic management. Now therefore the time has come for much smarter macroeconomic management, and I think that is where the government must rise to (the occasion) as it were, on how to handle the current situation so that growth doesn’t stall, fiscal balances do not worsen. We have to look for solutions within now more restricted parameters than what you had before. My own belief is it is certainly possible. After all we have grown at 8 per cent even at times when oil prices were around $120 per barrel, though at the same time inflation was rising which was not in order. But there is no reason to believe that growth cannot be maintained with oil prices where they are. The most important aspect here is that for the real economy, for the investor, for the producer, for the consumer, the oil prices did not decline. So all the impact that happened (of low prices) was at the government level, in the public economy, the private economy continued to live with the oil prices that were there prior to that. So, in some sense the supply side response that you are looking for or the consumption demand, should still be there. We must clearly distinguish this in our mind, the state of the public economy and state of the private economy. And the private economy is finally beginning to gather strength and the private demand and private investment are on an upturn. That will continue. The government has to make sure that it doesn’t do anything to weaken that upturn in an attempt to protect the public economy. And there I think the critical factor is whether we find enough fiscal space to absorb the higher oil price by doing things which we may not have done in the past, for example, much smarter disinvestment, SUUTI (stake sale), it gives you Rs 50,000 crore right there. This is where smarter, more responsive, less reactive, more forward looking macroeconomic management will help. All this can be managed and there is no reason to believe that there are trade-offs which are insurmountable.

Can we do much higher disinvestment, last year there were record collection of Rs 1 lakh crore from state sales?

Yes, but still we did zero strategic disinvestment. We can do better.

Why has the government not moved on SUUTI stake sale?

The government is not like a think-tank, there are lot’s of things, lot of stakeholders, everybody has views so it takes time. The analogy that the Prime Minister has given in the past is a good one, which is that the government is like an oil tanker and not a scooter, so the turning radius is huge. Decisions in government can take time.

Should the government cut taxes to bring down oil prices?


The states must cut their taxes because they have got ad valorem taxes. As the prices have gone up, there have been getting a windfall gain, which can hardly be continued. So they must reduce it below 27 per cent – 3-4 percentage point cut is doable. The central government must find the fiscal space and then cut the excise duties. On the one hand, we don’t want higher oil prices to result in entrenched higher inflationary expectations and on the other, it is also undesirable to let your fiscal balance deteriorate. And this is what I meant by smart macroeconomic management. A one rupee cut in excise duty on oil prices results in a central government revenue loss of Rs 13,000 crore a year, it’s a daunting number but at the same time we have to explore if there is sufficient revenue buoyancy and possibility of higher non-tax revenues.