India has grand ambition. But does it have the appetite for risk necessary to convert ambition into achievement? Usually, it is the government in general, and the bureaucracy in particular, that are criticised for risk aversion. However, we must also ask ourselves whether we are, in fact, status quoists, who would rather take small, incremental steps to reach our destination than sprint off the beaten track? Are we able to visualise the future 10 years on or are we in a state of chronic myopia? Will we ever give our democratic governance system the licence to operate at the highest common denominator rather than the lowest common multiple, our bane for so long?
Popular reaction to two recent government policy proposals is revealing. The first relates to the three farm bills legislated by the government recently, which are in the early stages of implementation. The second, still in the realm of ideas, is a proposal by RBI to let corporates/industry own banks.
The new farm laws have brought the farmers of Punjab (and perhaps a scattering from some other parts of north India) to the streets of Delhi and a large section of the commentariat — all important and representative stakeholders — to their defence. Whatever the final outcome, the volume of protest tells us something: That some of us are afraid of change and unable to see what may be good for all of us a decade from now.
What do the laws propose to do? First, they end the monopoly of APMC mandis where farmers had to compulsorily sell their produce. Second, they end limits on stock-keeping (often mistaken for hoarding) and allow contract farming by the private sector. What is the fear? That farmers will no longer get a remunerative price for their produce as a result of these changes. What is the reality of Indian farming? Farmers don’t get a remunerative price for their products, with the exception of a minority whose produce, mostly wheat and rice, is covered by the Minimum Support Price policy. Most farmers toil on tiny, suboptimal acreage and have no bargaining power vis-vis the APMC middlemen. Choice in buyers gives them some leeway to bargain for a better price.
Indeed, even those who get MSP are suffering — from a fast depletion of the water table (because water-intensive rice is being cultivated in water-scarce regions), excessive use of pesticides/fertilisers (analyse the high prevalence of cancer in rural parts of Punjab) and a higher cost of other foods like vegetables and fruits (which are in short supply since everyone who can is planting MSP crops). Indeed, every year, a lot of wheat and rice rots in the Food Corporation of India’s limited warehouses. Surely, this is not a scenario which is worth preserving, even for the farmers of Punjab.
In any case, the future will be very different. Even at moderate growth rates, India is going to become increasingly prosperous or, at least, less poor and the growth in demand for non-cereal foods, like vegetables, fruits and proteins will outstrip demand for cereals. The government will have to balance the interests of farmers and consumers: A remunerative price for farmers cannot be at the expense of rampant food inflation for the consumer. With the present system, these contradictions and demand-supply imbalances, already evident, will only grow until they become unsustainable. Policy must think at least two decades ahead of time. The farm reforms are already 10 years late. No change is without risk but there are only two choices: Journey on with an unfit system (status quo) or be ambitious (reform). For once, a government has chosen the latter, but a vociferous section wants the former.
On the second policy issue of large industrial houses/corporates getting banking licences, an internal committee of RBI has floated what seems like a trial balloon. What is being proposed? To permit private sector businesses in the real economy to apply for banking licences and run banks subject to a more robust regulatory regime and some limits on the quantum of ownership. The majority reaction, of economists and former central bankers — no doubt key stakeholders — has been indignant. They argue that if an industry house owns banks, it will channel lending from that bank to its own business at the expense of better, more efficient fund allocation. What is the reality of Indian banking? It is racked by NPAs because banks which are not owned, controlled or managed by industry houses gave out large loans to corporates/industry which, in several cases, used them inefficiently or with malfeasance. The current banking system is hardly worth preserving as is.
The future, whether we envisage a $5 trillion economy or $10 trillion economy, cannot be built on the contours of the current banking system. Even when fully repaired, and rid of current NPAs, it is simply too small to finance an economy of that size. The banking system needs to be five to 10 times larger. Industry houses are the most obvious source of domestic capital to build such banks. And, perhaps, when they own banks directly, it will be much easier for regulators to track any lending to connected entities than it is for them to track the unofficial connectedness, which has led to the NPA problem. The point is that too many people have rushed to say no without giving the idea a chance.
As a collective, we may yet prefer the cautious, slow trudge to prosperity, but then let us begin to share the blame with the government machinery for an explicit preference for being risk-averse.
This article first appeared in the print edition on December 14, 2020 under the title ‘We, the naysayers’. The author is chief economist, Vedanta Ltd