New Delhi: Sanjeev Sanyal, principal economic adviser in the finance ministry, maintains a fine balance between his profession of an economist advising the government on the financial sector and his interest in reading and writing on history. In an interview, Sanyal talks about supervising more closely the larger systemically important non-banking financial companies (NBFCs) and the need for structurally lowering real interest rates in sync with lower inflation level. Edited excerpts:
The Indian economy slowed in the second quarter and the global economy is expected to decelerate in 2019. How do you assess India’s economic outlook for the next year?
India’s gross domestic product (GDP) growth rate slowed from 8.2% year-on-year in the first quarter of the financial year to 7.1% in the second quarter. Part of it was expected because of a base effect, which was anticipated. However, it slowed down more than expected because of a number of factors. From end-August, there were disruptions in NBFC lending and a spike in global energy prices. Interest rates were also tightening because of global factors. The bunching up of these factors seems to have affected the September number and probably into October as well.
The good news is that these factors have unwound since mid-November. Oil prices have come down very dramatically. The debt roll-over situation for NBFCs is much better now. The tightening path of the US Fed is likely to be less steep. You can see Indian bond yields have come off quite a bit. Meanwhile, bank lending has accelerated and is growing at about 14% year-on-year. While somewhat slower global growth may have some impact on exports, by and large, the macro environment for us has improved. The conditions are in place for re-acceleration of the economy.
What will be the overall GDP growth this fiscal and the next?
The government doesn’t forecast GDP growth rates. Most forecasters such as the Reserve Bank of India (RBI) and International Monetary Fund (IMF) have forecast 7.3-7.4% for 2018-19. For the first half, we have done 7.6%. So, the range seems doable. If energy prices remain at current levels and the external environment does not deteriorate, our growth should accelerate in 2019-20. However, we need to think about how we lower the cost of capital for our business sector.
The inflation trajectory has remained well below RBI’s comfort level. Do you expect the RBI to change its stance and cut policy rate?
Obviously, I cannot comment on what the monetary policy committee (MPC) should do. Nonetheless, I would say that Consumer Price Index (CPI) inflation is at the bottom of the RBI’s band and this drop in inflation needs to be seen in a wider context. We have had low inflation for quite a long period now and, therefore, it is fair to say that structural inflation has come down very significantly from the old 7-10% range. However, since nominal interest rates have not fallen as quickly, our real interest rates are very high. Real lending rates for MSMEs is above 800 basis points, which is clearly too high.
We need to structurally lower real interest rates. That is very clear for multiple reasons. One, if you keep real interest rates high for a long period of time, it causes unnecessary fiscal and financial stress to the economy. Second, it will generate higher supply-side inflation in the long run because industrial capacity and infrastructure remain under-invested. Economists very often forget that the second-round supply side impact of high interest rates eventually leads to higher inflation. Now that we have anchored inflation to a lower level, we need to bring down interest rates to be in sync with the new inflation rates. How we achieve this transition is, of course, the RBI’s and MPC’s prerogative.
This will be the last budget of this government...
Yes, it will be an interim budget as you know.
But will it have forward looking policy guidance for the next five years?
Perhaps there will be some policy guidance, but I am not in a position to comment on it.
Will there be an Economic Survey?
The Economic Survey will come out only with the full-fledged budget announcements in June-July.
Did the RBI governor’s resignation affect the central bank’s institutional integrity and send bad signals to foreign investors?
The RBI is a valued institution and its autonomy is also valued by this government. This autonomy, however, is within the context of the RBI Act. Greater autonomy always means greater accountability and, therefore, its accountability is to its board. Consequently, the board should be an important part of how the RBI functions in the future. It’s true not only for the RBI, we need to take boards more seriously for all regulators and for all public institutions.
Some critics point out that the government is trying to control RBI through its board and that RBI is becoming a board-driven institution.
It doesn’t have to be driven by the board, it needs to be accountable to the board. There is some confusion here. Board-driven would mean that it is being actively managed by the board. That is not the case. All that is happening is that the decisions of the management of an institution is being made accountable. One cannot have autonomy without accountability. Every institution is accountable to somebody. The government is accountable to Parliament, which in turn is accountable to the people of India. So, the question is to whom are regulators accountable? They are accountable to their boards.
But, so far, the RBI board used to play an advisory role.
As per the RBI Act, the management is accountable to the board. The RBI Act is very clear about this. It’s a board of directors not a board of advisers.
Is the government justified in demanding a portion of the capital reserves of the RBI?
There is nothing disreputable about the finance ministry wanting to discuss this. Every central bank in the world gains certain income from doing activities such as creating money, doing monetary operations, income from foreign exchange reserves and so on. After holding back some of this money for running the day-to-day activities and for capitalization, the rest of the money is transferred to the government. This is what is loosely called seigniorage. It has been an unremarkable, routine transfer in every country, including in India, and is also mentioned in the RBI Act. I don’t know why it is even a matter of debate.
The only question of debate is the formula for deciding how much capitalization the RBI needs to retain. For that a committee will be set up to decide on a rules-based system. It is entirely legitimate for the government to ask for a mutually agreed rules-based system to do this.
Former chief economic adviser Arvind Subramanian has called for asset quality review of NBFCs along the lines of the review done for banks.
I agree that since NBFCs are now systemically larger part of our financial system, we clearly need to pay more attention, particularly in regulating the larger institutions. But we also have to be careful that we don’t over-regulate them. So, a balanced approach is needed. But yes, the larger systemically important institutions certainly need to be supervised more closely.
How do you see the government’s announcement for providing additional ₹41,000 crore for recapitalization of public sector banks?
This is something that the government had committed to already. We are now going to carry out the commitment to recapitalize our public sector banks. We have spent quite some time cleaning up these banks—ensuring better NPA (non-performing assets) recognition, using the IBC (Insolvency and Bankruptcy Code) process to liquefy the assets, improving creditor rights, introducing much stricter capitalization requirements and so on. Now we have come to a stage where many of the banks can think about growing again. As a part of that, we need to recapitalize them so that they are in a position to expand. So, that is the context in which recapitalization should be seen.
Do you think loan waivers announced by states is the right way to address farmers’ distress?
The state governments can make a decision about how to best utilize their resources. It is their prerogative. The central government will not tell the states what they should or should not do. At the central government level, as far as I know, we have no plans of doing a nation-wide farm loan waiver.