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Mr Jaitley, hasten slowly
The financial sector is not a playground for hyperactive, revolutionary changes under the garb of decisiveness
From a point when nothing seemed to be moving, the nation now wants the finance minister to act as chief restoration architect and bulldozer combined. So, merge Andhra Bank with State Bank of India, eliminate subsidies, privatise public sector banks, increase pay of officers at state-owned banks five times over and so on. If there is some time left, increase foreign direct investment (FDI) in insurance to 100%. Apparently, he has the numbers in his favour, so this is the time to strike hard, right?
Wrong. Not because we should not dream big. More than 1991, the time for that is now. It is because we ignore the really punchy small ideas. Here are a few.
1. Dismantle the perverse five-yearly Indian Banks Association-driven wage settlement: What can be a bigger human resources disaster than a single agreement for nearly 40 banks, including 25 state-owned banks, regardless of performance and ability to pay? Since the specified period of five years is typically co-terminus with general elections, Arun Jaitley’s predecessors have been merrily fanning unrealistic demands of unions, who have had their way. It is time to put an end to this and let individual bank managements slug it out with their unions. If the finance minister cannot take on bank unions on this issue, his government can bid adieu to the idea of taking on teachers’ unions for education reform and factory unions for labour law reform.
2. Stop the practice of disinvestment being a fourth-quarter affair: Why does the sovereign have to ape the questionable practices of corporate India, like commissioning assets on 31 March, the last date for availing tax benefits for the year? By invariably back-ending disinvestments, the government not only gets a poor price, but adds to the usual liquidity stress in the fourth quarter of the year. Money is best raised when available rather than when bureaucrats and ministers feel convenient.
3. Convince regulators that forbearance is toxic: Problem implementing international Basel III banking rules? Postpone the deadline. Surge in non-performing assets (NPAs)? Give a special dispensation on restructuring. Drastic fall in bond prices? Allow the loss to be amortised over a long time. All this reminds me of an acquaintance who said that in his college days, an exam used to be postponed if there was a power failure at the hostel the day before, as if all studies had to be done only on the day before the exam. So students found ways to create power failures.
4. Build a consensus on persistence of relatively high inflation: This does not flow from any theoretical construct, nor is it palatable, but it is inevitable. Since the incremental capital-output ratio (ICOR) has moved from four to seven in the past five years, capital productivity has been decimated, and the output gap has disappeared. Otherwise one would not have seen stubbornly high inflation with falling growth. Several experts have provided the long to-do list to improve the situation, but they have not told us that if it took five years to destroy the ICOR, it will take possibly longer for the return journey. It is easy to gain weight, hard to lose it.
5. Continue to scare everybody: The finance minister has made a good beginning by sounding out that the budget will not be a bed of roses, but this thought needs to be re-emphasised regularly. If you think complacency is not setting in, think again. It is the elephant in the room. Corporations with wobbling balance sheets have been rethinking asset sales because of the supposed return of good times that may lead to better pricing. A few state bankers’ chests have swelled with pride on seeing the surge in stock prices—the capital markets demonised them, and now they are endorsing them, so the problem is over. If only rising stock prices could solve problems. He should also suppress all expectations of a rapid fall in interest rates. In brief, achhe din aane wale hain (good days are about to come) is not to be extrapolated to achhe din aa gaye hain (good days have arrived).
6. For heaven’s sake, pass at least the simpler economic laws: Jaitley has the laundry list and it is really long. Many of these laws were introduced three or four years ago and have travelled through standing committees and debates. Even if he attempts to pass them tomorrow, nobody can accuse him of hurry or no debate. He should not repeat the previous government’s feat of taking six years to legislate an incontrovertibly innocuous State Bank of India amendment.
If you are in doubt, look at your boss. After a thundering, boisterous campaign, all that he is concentrating on right now is the plumbing work—merging some ministries, eradicating groups of ministers, attacking the slovenliness of government offices, asking for notes in PDF format and 10-slide presentations in bullet points. Hundred smart cities and bullet trains can wait.
The author has been a senior research analyst on financial services as well as other sectors at various investment banks, and is currently an independent consultant focusing on banks and financial services.
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Business NewsOpinionMr Jaitley, hasten slowly
First Published:18 Jun 2014, 11:04 AM IST
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