Critics, which include analysts, economists, journalists, who have no skin in the game, have often used the ‘people’s’ argument to nudge RBI to be more flexible in its views. It is said that while the government is answerable to the people, RBI is not and hence needs to be more sensitive to wider issues of growth, employment, etc., which get hampered when liquidity is not eased or interest rates are cut or PCA banks are regularised or IBC is diluted. The view that RBI should think of ‘people’ when it comes to easing norms on PCA or IBC, etc., is disingenuous to say the least and, if not countered, can evolve to groupthink which is pernicious.
Governments are answerable to the people for sure and hence always go for populist measures. They always bat for farm loan waivers which are scorned at by critics. If IBC or PCA can be compromised, so should loan waivers and loan melas. We do not really use the ‘answerable to people’ excuse when petrol or diesel prices increase and use the FRBM as a shield. When tax rates are increased it is justified on fiscal grounds though people end up paying higher prices on goods and services. Here, ‘people’ never come into play and it is always ‘economics’. In that case, why should the ‘public’ argument be used to let weak banks lend or IBC norms be diluted?
The irony is that if people were asked to vote for expenditure, they would all support higher subsidies and salaries and not really care for capex of government as the person in the village does not really benefit from a fancy highway that takes one from Delhi to Agra in an hour’s time or a bullet train. NREGA and free power and water matter. People do not want privatisation and bank reforms but higher interest rates on deposits and small savings. Therefore, the argument that the government will be on the back foot at the electorate when RBI takes a firm stance on IBC or PCA is very weak.
The reason for having strong institutions is to ensure that governments are kept in check. There is really nothing sacrosanct about FRBM as such and the 3% fiscal deficit number, or 4%, may actually not make much difference. But it was felt in the general wisdom that budgets need to be prudent and that there should not be monetisation of deficits. The idea of a loan waiver has been debated because of the moral hazard created besides the weakening of credit standards. This is relevant when one evaluates how RBI or any regulator has actually protected the foundations of the financial system.
Corporate defaults were long looked upon as an eyesore and became a basis for justifying the waiving of farm loans. In India there is always a firm belief in the dictum that two wrongs make a right. The IBC provided a solution but for it to work one has to have a will. This was shown by RBI which, today, is considered to be draconian as it affects the viability of certain industries. The irony is that as long as RBI did nothing and allowed NPAs to become restructured assets, everyone was happy with the status quo. At some stage there was umbrage that our insolvency laws were weak, which led to the government ushering in the IBC.
It is true that there will be pain when such reforms take place and expecting it to be a painless operation smells of naiveté. The nation withstood demonetisation, which affected every human being, with few tangible results. Yet, it was justified as having being worth it for cleaning the moral fabric and the ‘people’ argument never came in. GST had swept aside a large number of SMEs which witnessed a double whammy. Yet, this was considered to be necessary for cleaning up the system and ensuring a more efficient structure in the future and the large number of people employed by the sector was not an overriding factor. However, today, when certain sections of India Inc. get affected by the IBC, we should accept it as part of the cleansing system which will lead to a better operating space in the future. There cannot be two sets of rules when it comes to sanitising the system.
The same holds for PCA banks. We can think of an analogy of a student getting less than 40 marks and failing the class. Do we promote the student or lower the standard? Further, can we say that the student has failed but allow the student to go to the next class in history and not science as he has passed in this subject? This is what is being asked for when it comes to PCA banks and SME lending. This is a tough call because, as the system is being vaccinated, one has to ensure that the bank meets the minimum standards and asking them to lend to certain sections in this set-up could be erroneous.
Interestingly, a question being asked, at times, is what the central bank was doing when credit boomed. It was forced lending to infrastructure which had created the NPA pack and which could, now, be replaced by another sector if this ideology is pursued. The decibel level increased when the NPA issue came to the fore. Now, when a correction mechanism has been established, we should not try and dilute standards which, in a way, have become a habit. Thomas Piketty would have argued that these double standards are not surprising in capitalism where there is considerable influence and interconnectedness with whichever government is in power anywhere in the world.
It is necessary to preserve our institutions, especially in the financial space because this is one sector which facilitates all transactions in the economy without directly resulting in production. When there is a debate on what should or should not be done, linking it to the electorate would be improper because once we enter that lane of thought, everything that can be economically and commercially imprudent is justifiable.
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