New Delhi: An economic revival is presaged on the government’s ability to press ahead with its reforms agenda, and the country is in the midst of the most important phase of structural reforms since the big-bang reforms undertaken 25 years ago, finance minister Arun Jaitley said in an interview on Monday.
The minister listed the reforms—the goods and services tax (GST) legislation, the bankruptcy code and amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act and prevention of corruption law—and added that these were the government’s priorities in the coming second half of the budget session of Parliament.
Jaitley’s comments come in the wake of the Reserve Bank of India’s (RBI’s) most aggressive move yet to infuse liquidity into the cash-strapped economy and a month after a well-received Union Budget.
And they come almost two years after the National Democratic Alliance government took charge. At the time, Jaitley had said it would take two years to repair the economy. That assessment didn’t factor in one positive development (the fall in oil prices) and three downsides, Jaitley said.
“The three downsides are: an intensive global slowdown, the adverse impact of sectoral stress on banks, impairing their ability to lend; and the extent of the stress on the private sector (to such an extent) that the government has to shoulder both policy and economic activity.”
Still, the government’s approach of focusing on creating infrastructure and making it easier to do business in India—one that has been criticized by many for being far too incremental, and not big-bang enough—found support from RBI governor Raghuram Rajan.
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“See we have reformed. We are spending more… in the right direction. And we are sticking to fiscal prudence. So we are doing a lot of things right in a global environment that is not friendly,” Jaitley said.
He added that the government has been working on ways to resolve the debt problems of banks. The NDA, while ensuring that wilful defaulters do not get away, will create a more enabling environment for bank officials to boldly settle bad debts, Jaitley said. Most bankers are reluctant to do this, fearing harassment by investigative agencies.
The recovery of the Indian economy has been impeded by what the Economic Survey describes as the twin-balance sheet problem—stressed finances of the corporate sector as well as the banks that loaned them funds.
Publicly traded banks in India added nearly Rs.1 trillion in bad loans in the quarter ended 31 December, amounting to a 29% increase in the stock of deteriorated debt from end-September, as lenders responded to a central bank call to accelerate recognition of stressed assets.
RBI’s Rajan has set banks a March 2017 deadline to clean up their balance sheets and nudged them to treat some troubled loan accounts as bad and make provisions for them by the end of this March.
While some of these bad debts can be set right once the economic recovery begins in earnest, some will require write-offs.
Bank officials fear intense scrutiny of such write-offs could expose them to judicial oversight.
“Banks must have flexibility to settle. And settlements can’t be looked at with suspicion,” the finance minister said.
On specific measures to create an enabling environment for bank settlements, Jaitley said: “I think amending the Prevention of Corruption Act and creating an Ombudsman mechanism together will help. When I say Ombudsman, I mean a body which will cushion bank officials on the settlements.”
Jaitley emphasized the need to be more open to such write-offs, while taking care that serial wilful defaulters do not get away.
“We have to create both a political and an economic environment for the banks to stage a healthy recovery. And that can’t take place in an environment of suspicion,” he said.
The finance minister also ruled out any immediate privatization of banks, saying, “I don’t think India’s political opinion is ready.”
Implicitly challenging critics, Jaitley struck a confident note and claimed that the country was witnessing “a very important phase of structural reforms”.
“Each one of these steps, whether it is direct tax, indirect tax, FDI (foreign direct investment) reforms, auctions (of coal and spectrum)—each one of them is a big-bang step,” he pointed out, adding, “And when the history of reforms is written, post-1991 (when India undertook big bang reforms), this will go down as one of the most important phases.”
The NDA under Prime Minister Narendra Modi took charge in May 2014 after a popular win in the elections on a development and anti-corruption platform. Its win raised expectations of big-bang economic reforms such as large-scale privatization of state-owned companies and banks.
However, in the last two years, as the NDA has coped with the headwinds of a rapidly slowing global economy and two back-to-back sub-par monsoons, it has preferred to focus on alleviating infrastructure bottlenecks, taking the less headline-friendly approach to reforms. Many critics have argued that this is not good enough and severely criticized the government and the finance minister.
As the recent RBI monetary policy statement on the economy showed, the changes undertaken by the government may eventually be coming together.
Last week, RBI governor Rajan said India was poised for a “leap in production” and that the government’s emphasis on infrastructure creation was bearing results.
“I think we are right for change. The emphasis of the government on infrastructure creation, improving logistics network, some of the private sector companies like Flipkart and Snapdeal are creating a huge change in warehousing, in logistics,” he said.
Rajan was speaking at the Singapore Symposium 2016 organised by the Confederation of Indian Industry in Mumbai.
“I suspect we are on the verge of a revolution here. I do believe that we should allow our enterprises to find their way,” he said, before adding, “We have almost everything for the leap in production; whether it is manufacturing or services, we can take the step forward.”
Jaitley echoed that sentiment.
“I think the economy is picking up,” he said, but added that the monsoon’s intensity will be critical. The rain gods “have not been kind to us” in the first two years of the NDA government, Jaitley added, referring to deficient monsoon rains in 2014 and 2015. “We can live” with a bad monsoon in 2016, he said, “but we will be better off with a good monsoon”.