Act fast for gains

If we are to welcome foreign investment, we must improve the ease of doing business. While there is talk, little has been achieved.
Last Updated 28 August 2015, 17:51 IST

Our political masters assure us that India is in a sweet spot despite the meltdown in China and consequently in global stock markets. Oil prices are at record low levels and there is now speculation that they might drop from $40 to 20 a barrel. For a country whose main import is oil and gas, this is obviously good news, though it might badly hurt many producing countries. 

Commodity prices have fallen sharply though gold has not (nor have onions!). This is to our advantage. We have already borne the brunt of decline in iron ore exports after the extra profits made illegally by exporters and consequent suspension of exports from some centres. Another of our important imports in recent years, coal, has also dropped in price and there is ample stock in the world. 

Consequent to the fall in crude prices, Indian retail prices of petrol, diesel, and cooking gas have fallen to levels not seen for years. At the same time, the government has wisely not passed on all the decline in crude to the  consumers but kept a good portion to augment its budgets.

Fiscal deficits are under control. Our power situation despite the apparent failure of the monsoon, would be good. Steel and aluminium prices have also dropped. Indian producers are cutting production. But our balance of payments has improved. Though the Rupee has fallen against the dollar due to the collapse of the Chinese currency, the fall is marginal in comparison with other currencies.

Thus, India is an attractive market for others and a safe investment destination. The currency is relatively stable, the economy is in good shape on most parameters, and returns on investment are good.

So are our masters correct that India is in a sweet spot? They would be if they use the opportunity. But this government has not shown the boldness to do so. Thus, this is a good time to reduce and eliminate expensive subsidies on kerosene, cooking gas, diesel, and fertilisers. As the then UPA government did when it reversed its policy on administered pricing for petro products, this is a good time to reverse on these subsidies.

Certainly these subsidies have been misused. For example, cheap kerosene has been used to adulterate diesel for trucks in a big way. The beneficiaries of the cooking gas subsidy are not the poor but the better-off.  Low prices of diesel have added to urban pollution and distorted the market for cars. Fertiliser subsidies with imbalance in prices between urea and others have led to excessive consumption of urea and the falling yields.

Domestic markets for agricultural produce have been distorted by the government interference in markets. Of course, this comes under the state governments. But the centre could use its influence to correct them. In the past, the UPA during failure worse off farmer loans (former PM Manmohan Singh regarded the write-off of Rs 76,000 crore of farmer loans as one of the achievements of his government).

There is another opportunity to reform the system to take advantage of our “sweet spot”. That is the governance and the process of giving loans by the nationalised banks. Many nationalised banks are on the verge of collapse. “Sticky loans”, also called Non Performing Assets (NPAs), are very high.

Some reported examples  from recent newspapers are: Union Bank of India provisioning is Rs 1,009 crore while net profit is Rs 444 crore; Bank of Baroda provisioning Rs 1,491 crore, net profit Rs 598 crore; Bank of India provisioning Rs 2,255 crore, net loss of Rs 56 crore; Punjab National Bank provisioning Rs 3,834 crore, net profit Rs.306 crore.
Most other state owned banks are no better. And these numbers are after ingenious accounting and sale of loans to asset reconstruction companies to avoid further provisioning. All banks together have over 5 per cent of all advances as sticky.

Significant recapitalisation

The present government has announced significant recapitalisation of the banks. This does not tackle the basic issues of crony lending, poor diligence and follow-up. Bank management is to be strengthened by outside recruitment and better remuneration. But there are other problems for resolution.

The global financial system is over stretched. High performance rewards to managers has propelled excessive lending without adequate confidence in lenders’ ability to repay. The situation, according to many, is close to the 2008 collapse when loans were packaged and mortgaged with little idea about the contents of the mortgages nor knowing enough about the viability of the loan components in the mortgages.

The Indian problem is similar. Nationalised banks are directed to lend to political cronies, debt to equity ratios are as much as 80-20 on infrastructure loans and public private partnership projects,  while the projects are delayed by interminable delays in government clearances over which the controlling Ministry has no authority.

Unlike the global private banks, the  Indian managers got no official rewards for showing high lending. This is now being corrected. But the government ownership and control remain the bugbears for the proper operation of banks. Autonomy of banks and strict regulation are vital. Politicians and bureaucrats must have no role in lending decisions.

If we are to welcome foreign investment, we must improve the ease of doing business. While there is talk, little has been achieved. Restrictions on foreign investment must go. At the same time, the hawala routes enabled by Mauritius and other countries with special agreements with India, and participatory notes, must go. We need more FDI; not FII. We must act soon to benefit from the global trends.

(Published 28 August 2015, 17:51 IST)

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