Opinion | Four lessons for the RBI board meeting in November
It is possible to find common ground if the individuals concerned get off their high horses and resist the temptation to engage in one-upmanship
In the ongoing drama of the Government of India vs. the Reserve Bank of India (RBI), the scene shifts to Mumbai and 19 November when the next meeting of the RBI’s board of directors will take place. Perhaps the battle should be defined in terms of personalities rather than in terms of institutions. Alternatively, it could be defined as the case for alleviating short-term economic distress versus the case for long-term structural reform. In reality, it is a bit of all of the above, as always. As per Business Standard on Monday, the government wants the RBI to reduce the capital adequacy ratio from 9% to 8% and there is a case for exempting non-internationally exposed Indian banks from the capital adequacy norms set by the Bank for International Settlements (BIS).
With the former, it is important to understand that the magnitude of the difference in terms of rupee amounts to between 8% risk-weighted capital calculated according to exact BIS norms for risk weights and 9% capital ratio calculated by the RBI using the boundaries of discretion allowed by the BIS. The difference may not be much, if at all. Second, the logic of exempting non-internationally exposed banks from the Basel norms is somewhat too simplistic and even naïve. Investors will not make that distinction. They will see these banks as having been granted regulatory forbearance and their risk premium will be higher. Their stock value will be marked down and hence the burden of capitalizing such banks may be higher rather than lower, at the end of such an exercise. Countries that want to move away from the risk-weighted capital adequacy norms may consider a simple capital adequacy ratio. However, that should be a lot higher than BIS norms.
Second, there is really no case for removing the ceiling on foreign creditors’ exposure to Indian corporate debt. Companies will be tempted to gorge on foreign currency debt when interest rates are lower in hard currencies only to create foreign exchange funding and consequent currency weakness risks for the entire economy when interest rates rise. India has made haste slowly with respect to liberalizing capital inflows, especially debt flows, and that has served it well. Indeed, liberalizing foreign debt flows is a case of creeping financialization and that contributes to inequality.
The Annual Wealth Report of Credit Suisse released in August 2018 shows that the share of wealth commanded by the top 1% and top 10% in India rose last year, reversing the trend of the previous three years. That is because the Indian stock market had a stellar year in 2017. However, the median wealth also rose in India, whereas during the United Progressive Alliance-II’s years (2009-14), the share of wealth of the top 1% and the top 10% kept rising while median wealth kept declining.
Third, the government is right to be concerned about and keen on increasing the flow of credit to micro, small and medium enterprises (MSME). To its credit, it has remained focused on the problem. In January 2017, the TReDS (Trade Receivables e-Discounting System) (please follow the link if you wish to know what TReDS is) platform of the Receivables Exchange of India went live. In October 2017, when the Union finance minister announced an economic stimulus package, including recapitalization for Indian banks, he said that public sector enterprises would register mandatorily in the TreDS platform in 90 days. That was sensible stimulus.
More recently, in the 12-point package announced by the prime minister for MSMEs, point 3 caught my attention. The government had made it mandatory for companies with a turnover of more than ₹500 crore to join TReDS so that MSMEs did not face trouble in cash flow. More than anything else in those 12 points, this has the greatest potential to make a big difference to the MSME sector. In due course, it may alleviate the problem of inadequate credit for MSMEs more than mandated bank lending to the sector. That has never paid off in the past even as it has had undesirable consequences for repayment ethics. The government would enhance the quality of the discussion on credit flow to MSME if it published a white paper on the successes of the initiatives it had taken since 2014 to increase this flow.
Fourth, the government should draw a lesson from the success of the demonetization exercise undertaken in November 2016. Critics panned it as the worst policy decision since Independence (that is some claim, of course) and continue to do so, focusing exclusively on the short-term economic costs and ignoring the potential for long-term and diffused benefits. The latest statistics on direct taxes for 2017-18 released by the income tax department force the critics to re-estimate the net present value of the demonetization exercise. I do not have to repeat the details that can be found at https://goo.gl/gbrozo and https://goo.gl/aXnkAi. Then, the government was willing to make the case for long-term benefits over short-term costs. Now, the shoe is on the other foot. It is making the case for short-term benefits disregarding the long-term benefits of RBI’s insistence on prompt recognition of non-performing assets and on keeping a few government-owned banks under prompt corrective action.
It is possible to find common ground if the individuals concerned get off their high horses and resist the temptation to engage in one-upmanship on social media and elsewhere. That would ensure a happy ending to this unpleasant drama.
V. Anantha Nageswaran is the dean of the IFMR Business School. These are his personal views. Read Anantha’s Mint columns at www.livemint.com/baretalk.
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