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Saturday, 30 March 2019

The North Block-RBI effect on Lok Sabha polls (Sunday Guardian)

By M D Nalapat

North Block has continued Chidambaram-era policies with increased gusto. India needs low interest rates, low taxes and low regulations for double digit growth.


Raghuram Rajan continued the damage done to the Indian economy by his predecessor, former Reserve Bank of India Governor Yaga Reddy. Apparently responding to suggestions from merchant bankers in wealthy countries, Reddy raised bank interest rates mercilessly, a toxic brew continued by Rajan, a Chicago School economist whom Narendra Modi, Arvind Kejriwal and Rahul Gandhi have separately praised on multiple occasions. Perhaps such admiration was because of the dimming of memory of the havoc that was caused to the poor and the middle class in South America and elsewhere by Chicago School economic theories being put into practice. Both Reddy and Rajan have immense respect for western economics, yet this has not reduced their enthusiasm for carrying out central bank policies that are the opposite of those seen in wealthy economies. In each of these, as also in fast-developing China, interest rates are kept low so as to increase investment, lower the costs of business, and spur consumption in the economy rather than the hoarding of private cash in banks. In contrast, arbitrage sharks from wealthy countries seek a policy of high interest rates in India, so that they can borrow dollars, pounds or euros in banks located in their headquarter country and deposit them in India so as to get the advantage of high interest rates. In India, even companies that have an “A” rating pay 10% and more in bank interest. The plight of weaker companies can therefore be imagined. Small wonder that the toxic economic policies of the Chidambaram era (that have been continued by North Block even after 26 May 2014) has led to Indian businesses being reduced to morphing as underpriced pickings for foreign funds such as Canada’s Brookfield. This group has recently invested both in a stressed New York property belonging to the Kushner family as well as—soon afterwards—in Westinghouse, a nuclear power company in the US that has, after its takeover by the fund, received a raft of orders, including from India and very soon, Saudi Arabia. It would of course be churlish to claim any link between (a) the rescue of Kushner’s skyscraper in New York (b) the acquisition at a low price of Westinghouse, a company that had a very skimpy order book when it was taken over and (c) the fact that it is now bloated with orders for its nuclear power plants.
Good intentions are of little value if the policies generated by such thoughts get formulated solely by officials and their lawyers and accountants. Entrepreneurial input is needed for efficacious policy. In the Insolvency & Bankruptcy Code of India (IBC) for example, which came into force about two years ago, it was thought that recovering the dues of an ailing business would (through the Code) be made as simple in India as it is in countries such as the US or the UK. Although around 12,000 cases have been filed under the IBC, as on date, less than 20 have actually been resolved. Under the restrictively designed Section 29A of the Code, promoters whose companies have become unviable (even if because of causes beyond their control) have been placed in the same category as those who have been delinquent in their responsibilities. If an individual is in charge of a company that holds a non-performing asset beyond a year, he or she now gets summarily excluded from any future link with the company, even if the role of such an individual within a company has been to mitigate the negative effects of deterioration in overall business conditions, including interest rates pegged at Reddy-Rajan levels. Clearly, the IBC has been drafted by individuals who have themselves not begun or run a company, but by those whose entire career has been in the bureaucracy. Lately, the one year period has been shortened to 180 days, after which the company is told to await its fate in the bankruptcy court. This when even three years is often too short a period in India for a business turnaround, given the pace at which government departments as well as the justice mechanism function. Let us not even talk about the Kafkaesque complexity that made it torture for companies big and small to carry out GST reporting and payments obligations. Even North Block has had to dilute some of its absurdly complex provisions because of widespread distress among those paying GST. A growing economy depends on a brisk circulation of money, and this was reduced substantially by the November 8, 2016 demonetisation. Another damper on availability of bank finance (apart from “phone banking” NPAs for which only the bank officers and not the politicians making the calls get caught) has been the wave of arrests of bank officials in a rising number of cases. It remains a mystery—among many—why Rs 12,000 crore worth of Vijay Mallya’s assets have been frozen by the Enforcement Directorate rather than used to repay his debts, as the frozen cash is much more than the money owed to banks that lent money to Kingfisher Airline. Fortunately for air passengers, the bureaucracy has not killed off Jet Airways in the manner it did Mallya’s pride turned folly.
Given the “Jail Them Now” signals coming out of the offices of the Central Vigilance Commissioner (CVC) and no doubt soon from the Lokpal, there is no guarantee that a bank manager sanctioning a loan or resolving the financial troubles of a faltering company will not lead to a visit and worse by the CBI even after a decade. Only a very courageous banker now dares to sanction loans in these days of cash famine when even profitable companies take nearly a year to pay suppliers of goods and services what is owed out of normal business.
There was a time not long ago when the telecom sector, for example, employed more than ten million people and counting. Around half of those jobs have been lost over the past decade, which saw the Supreme Court cancel nearly 200 telecom licences in a single decision. Whether it be Systema, Telenor, Aircel,RCom or Tata, they have all lost horrendous amounts of money in India because of a dizzying and ever changing maze of regulations. And telecom is not the only sector to have seen its employment totals shrink. The UPA-era destruction by P Chidambaram and his official accomplices of an Indian commodity exchange that had expanded into Dubai and Singapore caused a further loss of close to a million jobs. Despite Narendra Modi replacing Manmohan Singh, North Block has continued most Chidambaram-era policies with increased gusto. India needs low interest rates, low taxes and low regulations for double digit growth. If such RBI-North Block policies do not materialise and soon, there will be over a hundred million very upset youths roaming the streets of India within the term of the next government. Should Prime Minister Narendra Modi and the party he leads fall substantially short of a majority in the next Lok Sabha, he has only to stroll across the road from South Block to North Block to find out why.

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