Mumbai: India hasn’t exhausted its ammunition to fight the slowdown. The new government that will come to power in the next four weeks will have a headroom of about 1% of India’s Rs54.3 trillion gross domestic product (GDP) to offer as fiscal stimulus to prop the slowing economy. But it may not need to do so, as there are distinct signs of recovery in certain pockets, said Arun Ramanathan, India’s finance secretary.
The present government has so far announced three fiscal stimulus packages, accounting for about 3% of GDP.
Optimistic: Arun Ramanathan. Harikrishna Katragadda / Mint
Ramanathan, 60, who has been closely associated with the creation of the government’s fiscal stimulus packages and the central bank’s emergency monetary measures to combat the economic slowdown, said Indian firms are gradually being successful in their efforts to raise money overseas for relatively longer terms and the rates are coming down.
According to him, between October—when the problems started with the collapse of several US financial institutions—and March, public sector banks sanctioned fresh loans worth Rs6.18 trillion, 50% higher than what they had sanctioned in the corresponding period of the previous year. Public sector banks, which account for around 75% of banking assets, have pared their loan rates, but foreign and private banks are finding it difficult as some of them have overextended themselves in retail and realty loans and are trying to reorganize their balance sheets.
He retires on Thursday.
In a freewheeling exit interview, Ramanathan, who has a ringside view of the impact of the global credit crisis on the Indian economy, spoke on a range of subjects, including early signs of recovery, the government’s market borrowing programme to bridge the rising fiscal deficit, suspension of the Fiscal Responsibility and Budget Management (FRBM) Act, autonomy of public sector banks and the so-called tension between the finance ministry and the Reserve Bank of India (RBI).
He also asserted that India does not run the risk of being downgraded to junk status because the increase in government spending will not create large contingent liabilities as they will largely be limited to infrastructure and social spending. Even if “our growth rate is around 6% in 2009-10, it will still be one of the fastest growing economies in the world”, he said. Edited excerpts:
Are the government’s stimulus packages working?
There were two separate stimulus packages, and the third one was part of the interim budget. The stimulus packages have several components such as fiscal benefits, concessions to exporters, strengthening spending on infrastructure and so on. We also planned regular review of credit flow to various sectors.
The fiscal and export concessions have taken effect immediately. We have facilitated better flow of credit from public sector banks and spending in certain areas. In the infrastructure space, IIFCL (India Infrastructure Finance Co. Ltd) raised Rs10,000 crore tax-free bonds. The money will be used for refinancing bank credit to road and port projects. It will raise another Rs30,000 crore for refinancing infrastructure. These will roll out through this financial year and can spill over to the next year.
Are you seeing some pockets of recovery?
Yes, of course.
The outlook of the economy largely depends on the monsoon and by early indications, we may have a normal monsoon. That’s good news.
We are also, perhaps, seeing the early signs of dawn. Both cement and steel sectors have started looking up. The auto sector seems (to be) reviving.
If you look at exports for the first 11 months of the last fiscal—between April 2008 and February 2009—for which tentative figures are available, in dollar terms there has been around 7.3% growth compared with the corresponding period of the previous year. In rupee terms, the growth has been around 20.3%. Even though overall targets have not been achieved and certain sectors have been doing badly, there are signs of growth in others.
Let’s look at some of the items. Dollar value (exports) of ores and mineral exports have declined by around 14%, but their share in the overall exports is just over 4%. Decline in gems and jewellery exports, which have around an 11% share in overall exports, is about 5%. Textile exports, whose share is around 11% of exports, have been almost flat at just below 2%, but exports of engineering goods, which have a share of around 23%, have grown a little over 23%.
Also, the Baltic Dry Index, which came down sharply in October and November, is up by around 109% since January. International commodity trade seems to be looking up, albeit slowly.
What about the flow of overseas money?
We are finding that companies are slowly able to raise money for relatively longer terms than a few months ago, and rates are coming down. Indeed, they are not getting long-term money, but indications are that things have relatively started improving.
We are also keeping a close tab on what’s happening abroad. In the US, auto sales that dropped to an almost two-decade low seem to be showing signs of some recovery; existing home loan sales in February have reportedly shown a 5% increase against an expected decline of about 1%, and new home loan sales in February have reportedly gone up by at least 4%, against an expected decline of around 3%.
In China, the manufacturing data is looking up. These are all, in my view, positive developments.
So, you’re fairly certain that the worst is behind us.
One cannot be certain about anything these days, but my guarded guess is the first half of fiscal 2009-10 will more or less be along the lines of the second half of last year and from October onwards, things will, in all probability, look up.
RBI has projected that the economy will grow at 6% in 2010. This is one percentage point lower than what the economic advisory council to the prime minister has projected. How does the finance ministry look at the RBI projection?
The International Monetary Fund (IMF) has been revising its growth estimates quite regularly. In March, IMF said the global GDP will shrink by 0.5-1% against a 3.2% expansion that it had projected last year. As far as emerging market economies are concerned, the growth according to IMF will be between 1.5% and 2.5% in 2009, down from 6.1% in 2008.
By RBI estimates, the growth in 2008-09 will be 6.5-6.7% and for 2010, its projection is about 6%. For 2009-10, many investment banks have projected India’s GDP growth in the range of 4.5-5%; the IMF projection is 5.25%; and the Planning Commission feels that the growth could be around 6.3%.
We have, therefore, a scatter diagram of estimates. I would think it is safe to say that GDPgrowth in 2008-09 will be closer to 7% than 6%, and for 2009-10, it will be closer to 6% than 7%.
Is there any scope for yet another round of stimulus packages when the new government comes in?
Oil and fertilizer subsidies are expected to be far lower in 2009-10 than 2008-09, and there will probably be headroom of about 1% of the GDP in 2009-10 to accommodate some fall in revenues and higher stimulus spending if called for. But we must understand that the measures that have already been taken will play out through the year and the new government will undoubtedly take a close look at necessary steps.
The government plans to borrow some Rs3.6 trillion in 2010, a record high. How will RBI manage such a huge borrowing programme? The only option before the government, it seems, is printing money.
According to RBI, the gross market borrowing for the first half of the year will be Rs2.41 trillion. If you consider the repayments, the net borrowing will be about Rs2.07 trillion. RBI plans to conduct open market operations and unwind MSS (bonds floated under the market stabilization scheme) and ultimately, the net supply of fresh securities is expected to be Rs85,364 crore only, much less than the net supply of fresh securities in the first half of 2007-08—Rs1.35 trillion.
RBI will manage the borrowing programme in the least disruptive manner. If matters improve by October, then printing money may not need even discussion.
So, you won’t need to suspend the FRBM Act?
Indeed, we had decided that we would not be able to adhere to the targeted FRBM discipline last year. The choice was between hanging on to the FRBM discipline, cutting expenditure and letting the economy tank, or stimulating the economy by spending more and suspending the FRBM objective.
This may continue this fiscal also. Indeed, a higher fiscal deficit has been projected in the interim budget, but it has also been made clear that we will come back to the FRBM discipline as early as possible.
Are you worried that the rating agencies might downgrade India to junk status because of the rising fiscal deficits?
Standard and Poor’s has affirmed India’s long-term as well as short-term sovereign ratings, but revised the outlook on the long-term sovereign rating from stable to negative. The rating agency probably feels that India’s fiscal position is not sustainable in the medium term. But other global rating agencies have maintained their India ratings and outlook.
Interestingly, you must have also seen Standard and Poor’s affirming the high ratings of many sovereigns that are in serious financial trouble.
There is absolutely no fear of being downgraded to junk status. Firstly, the deficit that we have taken on ourselves is something planned and found necessary, and this is happening in many parts of the world. Secondly, even if our growth rate is around 6% in 2009-10, it will still be one of the fastest growing economies in the world. Thirdly, the increase in spending is not going to create large contingent liabilities since it will largely be limited to infrastructure and social spending.
Besides, most of the measures are reversible and India has a good track record of servicing domestic and external debt.
You have been pushing the banks to lend and cut rates continuously. They are citing high small savings rates for not being able to cut their deposit rates and hence lending rates, too.
Allow me to clarify. I have been monitoring the flow of credit to various sectors, but honestly, I have not been directing banks to lower their rates.
In September-October 2008, credit flow overseas dried and there was a lot of pressure on local institutions to substitute the fall in foreign funds flow and we found that public sector banks would have to do most of the lending because foreign and private banks seemed to have their own problems and were not coming forward (to lend).
We raised the credit targets of public sector banks and I started video conferencing with them once every two-three weeks to discuss all related issues. The public sector banks actually surpassed the revised targets and preliminary data indicates that their lending last year rose by at least 25%.
If one looks at the fresh sanctions of loans between October—when the problems started—and March, public sector banks sanctioned fresh loans worth Rs6.18 trillion. In the corresponding period of the previous year, fresh sanctions were around Rs3.99 trillion. In other words, the sanctions for fresh loans rose by over 50%.
RBI has been cutting policy rates and interest rates have started moderating. Indeed, there is ample liquidity in the system, but banks are not cash stores which should be pushed to clear their perceived surplus cash inventories at discounts. They need to be prudent, otherwise they will end up in deep trouble piling up stressed assets.
I have not pushed banks to cut rates as we are also aware that they need a minimum net interest margin to sustain. In this context, my guess is that the net profits of public sector banks last year may add up to around Rs27,000 crore. This is about 1.25% of the credit outstanding of these banks. So, if 1.5% of their credit goes sour, their entire profits will be wiped out.
So, no case for driving down the small savings rate?
I prefer talking about general deposit rates. We need to look at various factors such as demand for money and so on. When smooth and adequate low-cost overseas funds inflow and IPO (initial public offerings) buoyancy resumes, market-driven deposit rate adjustments could happen. We need to remember that we have a very large section of the population that depends on deposit interest earnings and should be mindful of this important factor.
Is there any scope for bringing lending rates down?
Right now, the lending rates of public sector banks are at levels seen around March 2007. The economy was doing reasonably well at that time. I am sure the lending rates will soften, but it may need some patience. Even this March-end, a number of public sector banks have cut their lending rates.
While public sector banks are responding to your overtures, private and foreign banks are not bringing down their loan rates.
Going by the RBI data, foreign banks’ loan growth up to 27 March has been around 4%, against around 28.5% in the previous year. For private banks, the comparative figures are 10.9% and 19.9%. I did have a meeting with leading private and foreign banks on this issue and most of them promised to look into lowering lending rates.
Bullish on growth: Finance secretary Arun Ramanathan says the economic and financial scenario will start looking up from October. Harikrishna Katragadda / Mint
There have been some reduction in rates, but not to the extent that public sector banks have brought down their lending rates. I think many of these banks have found themselves overextended in retail and realty loans and are trying to reorganize their balance sheets. They are going through this process. Once this process plays out and they see more and more of their business going to public sector banks, I am sure they will adjust their loan rates.
The finance ministry is seen as a micromanager and using public sector banks as government departments. Why do you do this? After all, they are listed entities.
We have given banks quite a bit of autonomy as far as their operations are concerned. We have our directors on their boards. To the best of my understanding, we do not interfere with their functioning. They do come to us for guidance or help on some issues and we do help them out. We do not direct them on what they should do.
You also seem to be interfering with RBI. You direct the central bank on the interest rate movement, which it resents.
In the 15 months that I have been with the finance ministry, I am not aware of any interference or tension between RBI and the ministry.
One problem today is that too many people have started talking economics. There are extreme opinions floating around, such as RBI should cut its reverse repo rate and CRR (cash reserve ratio, or the portion of deposits that commercial banks need to keep with RBI) to near zero in one big bang because some countries in the West are doing so. People without responsibility for the consequences are strongly airing their views of mixed merit on what RBI should do and this, in my view, is not wholesome.
RBI and the ministry of finance have been having close interactions, but issues do arise when there is no comparable precedent and you allow your gut feelings or impressionistic views or cross-country comparisons to be the main drivers of arguments for action. In these circumstances, persistence based on sound reasoning and regular exchange of views helps the move forward. In my view, this has been happening if you go by the slew of measures taken in tandem by RBI and the government.
I could also offer an example. Over the last few months, there has been a lot of pressure to expand the scope of priority sector lending, but RBI offered its views backed by sound reason, with which we agree. In mid-October 2008, RBI had some views on opening a special liquidity window for mutual funds. We did discuss this and RBI opened the window, offering great relief to the sector, which was on the verge of collapse.
The finance ministry and RBI see eye to eye, though in some issues, there could be a difference of opinion. You can’t say we are imposing ourselves on RBI.
Do you find it easy to interact with RBI now that a former finance secretary is at the helm of the Indian central bank?
Certainly. We know him and relate well to him. There is comfort for both of us.
As you step down, what are the pressure points in the economy in general and the banking industry in particular?
I wouldn’t call them pressure points, but there are areas which seem to merit focused attention.
First, there is a strong case for looking at the problems of micro and small industries in greater detail. They should be rated and we should look at the interest rate they pay for funds. There is also need to ensure large and medium units, which delay the bills of the small and micro industries, are strongly disincentivized from doing so.
Second, there is a case for reviewing the regulations that govern NBFCs (non-banking financial companies). These are a very important arm of the financial system in areas where the formal banking routines are confining. NBFCs should be enabled to raise low-cost funds and regulated to ensure asset-liability mismatches do not endanger the financial system or their ability to serve their customers.
Third, we need to perhaps see that financial inclusion moves faster. One can consider if, by a quick drive, the primary agricultural societies and post offices in unbanked areas can be linked to the banks in the form of business correspondents.
Fourth, HR (human resource) issues of public sector banks are critical. Banks are expanding, they need people at the right level with the right skills and need to pay them appropriately.
Fifth, technology is another emerging challenge. We need to avoid duplication and optimize cost. There is a need to see that too many banks do not rush at branchless banking to the same areas, each incurring expenditure on expensive technology with different platforms.
Sixth, we need to perhaps take a relook at the concept of development financial institutions such as Nabard (National Bank for Agriculture and Rural Development) and Sidbi (Small Industries Development Bank of India), and consider steps to lower their cost of funds to make lending cheaper.
Finally, financing the debt needs of the power sector is developing into a challenge. A very large quantity of money has to flow into the sector, and we need to diversify the sources and distribute the requirements among them on a cost and risk-efficient basis.
What’s the bull doing in the finance secretary’s room?
It has been there since before I took over. It’s a bull and thankfully not a bear. I have not removed it because Taurus happens to be my sign in the zodiac.