'2019 may be challenging year if govt halts reforms'

Ex-CEA Arvind Subramanian supports RBI's tight leash on banks

An ardent supporter of economic reforms, former CEA Arvind Subramanian wholeheartedly supports RBI's tight leash on banks laden with NPAs but says it should be more willing to discuss complex issues with the government and not shut its doors to stakeholders. In an interview with DH's Annapurna Singh, Subramanian talks about Air India privatisation, RBI capital reserves, farm distress, overall challenges facing the economy and much more. Excerpts:

Global growth is slowing down, back home farm loan waivers have resurfaced, RBI is being nudged to empty out part of its reserves into the government's kitty well before it goes into elections. Against this backdrop, what is your economic outlook for 2019?

Economic growth outlook is for 2019 is challenging. Growth has already started decelerating. And ahead next year's polls, the dynamics will be very different. There will be usual compulsions. You have already seen that in farm loan waivers, maybe the spigots will be open for more liquidity, government's demand to ease prompt corrective action and so on. These uncertainties and compulsions might have some impact on growth, not necessarily positive. But then a lot will depend upon who comes into power, what is the reform agenda and the kind of ability to execute the reform agenda. Three major growth challenges are – financial system reforms, on which we have not made any progress; agriculture is marred by lower prices and farm distress and third, our manufacturing and export growth has not been as desired.

How should the govt address farm distress?

Farm distress is certainly leading to retrograde policies by the government. Loan waivers have not helped historically. They are fiscally problematic. Poor farmers, who borrow from the informal sector, do not benefit. Those who borrow and repay, also do not benefit. So the person who borrows and does not repay, benefits. At state level, the waivers can still be curbed but when it moves to the Centre, there are no limits to it. We need much better way to help farmers and deal with the crisis such as direct transfers, Universal Basic Income (UBI).

On banking, you said asset quality review of 2015 helped?

It did help but it should have happened much before. Then it would have had made a big difference. Now, I am suggesting that there should be AQRs for NBFCs. It will take 5-6 months to complete and the results can come after the elections. On the contrary, if we relax PCA norms and open spigots to NBFCs, then I would say the problem is only going to be worse down the road.

Whatever norms are there for PCA, they should be followed strictly. In fact, some banks outside PCA should be brought under PCA. One big bank that all of us know, which is outside PCA should be brought under PCA (He chooses not to name the bank).

But ahead of polls, the government wants to open all taps of liquidity, it wants easy money, a consumption boom?

I don't think that should ever happen. If that happens, the result will be bad All reforms of the past will lose their meaning.

What about RBI capital reserves?

There are excess reserves with RBI, no doubt but it should be used judiciously. it should not be used for financing the deficit or for spending. It should only be used for recapitalising banks and only if the banks are reformed. Three, it should be done cooperatively. And I think setting up of the committee is the right thing. The fault of the RBI in the three-four years is that they are not even willing to have a discussion.

But that may dent the credibility of RBI and what about their rating?

The whole notion of rating of RBI is... No central bank is rated. Central banks acquire credibility and reputation based on how independent they are and how good the job they do. If you have excess reserves and keep it with you and you conduct bad monetary policy, you miss out on IL&FS and you understate the problem, are those excess reserves going to preserve your reputation?

But RBI should have an unimpeachable balance sheet, shouldn't it?

You have to have some technical basis for what is enough. RBI's capital is the fourth highest in the world. What are they talking about?

They can do with a little less?

Much less.

But then you are giving that well-preserved capital to a government that is spendthrift?

That is why it should only be used for three or four purposes that I mentioned. But no RBI can shut the door for a discussion with the government on reserves. That is why the committee. They should discuss. And if they are right, they will be proved right.

Now we have opened the doors under Shaktikanta Das. Is RBI changing directionally?

We will have to judge them by what actions they take. If they relax the PCA norms, open the spigot with NBFC, then God alone knows...

But tell me is India still in that “sweet spot” which you referred to in your first economic survey or we have lost on that count?

We are still doing 6.5%-7% which is not bad given the global slowdown but could have done much better. The financial sector reforms. And then, we find it difficult to give a bigger role to the private sector. For example, Air India privatisation has been delayed. Of course, we have done some good things. GST was an amazing reform. IBC that the government brought in has at least created a framework for the banking problems to be solved.

But the number of cases that we have on the financial side, do you think that the IBC alone could deal with all those?

I think we need to get into that discussion now. Will the IBC be able to handle all that. Because it is getting overloaded. There are delays and also with the power sector, we are still not sure if the IBC is a proper framework for the power sector. So I think that is the discussion we should have going forward.

In that case, Do you support out of court settlement for certain cases that can expedite some cases?

Yes, of course, we do need more and more out of court settlements along with IBC.

Does the present state of economy give you a sense of disappointment, especially what has been going on after you left?

I do not want to give any judgement but certainly, India needs to do more on export, manufacturing and agriculture.

Exports, we are still where we were in 2014. $26 billion. What about labour-intensive exports. Almost all have moved into negative territory?

Certainly, after demonetisation and GST, there has been some impact on exports but I think now that (demonetisation and GST) is behind us.

Not behind us. Small businesses have been complaining that they have not got over demonetisation and GST.

Yes. They did affect small business. Now, has enough been done to overcome that? I do not know. Certainly, in the case of GST, many of the procedures were simplified and maybe more needs to be done. Maybe we need to find ways to giving them access to credit but without it being the old state banks pushing credit to SMEs. We have to find better ways to give them credit.

What about petrol and diesel in GST. You have not said anything in your book

Petrol and diesel need to come under GST. But that will leave a big impact on the Centre and the state revenues. I hope when the next government comes, the oil prices remain where they are today and the revenue position is better, they should bring it under GST.

You were in the government when oil prices went up and there was a demand that the two fuels be brought under GST to reduce their impact on the common man. Did you tell Finance Minister Arun Jaitley to bring them in?

I think this thought process was there but you have to see the revenue implications.