Excerpts from an interview with Gunjan Pradhan Sinha and P Vaidyanathan Iyer:
•How serious is the impact of the global financial crisis on India?
It is significant but obviously not as pervasive as in the US. The reason is that our banks have a good regulatory mechanism, which did not allow creation of credit without adequate equity. In the US, there was a proliferation of credit and debt obligations which were not backed by reserves. The debt-equity ratio in these markets became disproportionately high.
Of course, we are also affected by a credit squeeze. External capital flows, including ECBs, have shrunk and domestic equity markets have been affected. This is the issue that needs to be tackled first.
Credit, according to the latest monetary policy review, continues to grow at 29 per cent. And the RBI seems to be concerned? Do you think, it’s a matter of concern given that inflation fears are receding?
I don’t comment on RBI policy. But I would say that for the time being, because of the fungibility of different sources of funds, we should not worry about a specific target. We are in the midst of a problem. After we resolve this, we can look at a normative target for growth of bank credit.
•Despite such growth in credit, companies complain about credit unavailability. What is going wrong?
Corporates would know better. The schematic problem essentially is that requirement of bank credit is huge in the absence of other non-bank sources of credit. It is not widely known that non-bank sources of credit for the corporate sector in last two years were twice as high.
•Have the RBI’s measures till now been adequate?
I do not know if they are adequate. But, steps taken so far are necessary and desirable. Personally, I will not be in favour of too many small steps, but a few big steps that are understandable by all players and take care of the demand and supply side. With a CRR cut and more liquidity in the system, banks need to lend more, but most importantly, subject to the credit worthiness of the borrower.
•Do you think there is need to step up public expenditure to prop up growth and not worry too much about fiscal deficit?
These are long-term issues. We need to concentrate and get over the present problem. After we have stabilised, we can talk about fiscal deficit.
•Does intervention by the RBI in the exchange market help?
Following the east Asian crisis, more than 10 years ago, India adopted a policy of flexible but managed exchange rate. Though contrary to prevailing orthodoxy and IMF views, this policy has held the country in good stead. We were able to successfully handle the Asian crisis and also eliminate the persistent balance of payment problems that haunted us for nearly 30 years prior to that. However, intervention depends on circumstances and objectives of government and RBI from time to time.
•Our strong foreign exchange reserves should give us comfort, is it not?
Today, we are in a very fortunate position vis-à-vis 1991 and even 1998. As of today, reserves are adequate for intervention in markets and for meeting other requirements. We have to keep a very close watch on reserves. But there is no reason to panic or need to take recourse to other methods just now.
•What should India seek in the Group of 20 countries meeting in Washington next week? Should it be mindful of a new regime, if discussed there?
Financial markets today are integrated. India gets impacted if there is an adversity in offshore funding or trading. The specifics of the stand at the G-20 have to be worked out in line with this. Just as Basel II norms and capital adequacy standards for direct loans by banks were established through international accord, a similar solution needs to be considered for the financial system as a whole. As the role of banks in financial markets has been smaller this time round, a new regulatory system needs to be worked out. While governments can act within their own political boundaries, some principles need to be established so that others do not get hit.
•Do you think the IMF will be able to take on this task?
IMF has been confined to financing developing countries in the past 40 years or so. This is a good time to raise the question whether it can now transform into a new role.
But if there is an agreement to create a funding facility of $200-300 billion by tapping surplus economies, we should take advantage of that. Of course, terms of any such facility should be acceptable to us.