Increasing investments, productivity, employment a big challenge, says YV Reddy

Published On: 11, Dec 2017 | Source: moneycontrol.com

CNBC TV18 @moneycontrolcom

In an interview to CNBC-TV18's Latha Venkatesh on the topic of evolution of financial inclusion in India, YV Reddy, Former RBI Governor spoke about the state of the economy after disruption caused by GST and demonetisation.

He said disruption is not one-day affair and for the maximum effect to cool down would take about two years, and one year is already behind us, so will start looking up now. "As we move on, the gains will overtake the pain," he said.

From a policy point of view how to increase the investments in the country and improve productivity and make sure there is employment, is a big challenge.

According to him reforms are done in two ways, incrementally and fundamentally, currently we are doing incremental reforms.

Below is the verbatim transcript of the interview.

Q: I wanted to ask you on the state of the economy itself. We saw one gross domestic product (GDP) print coming better than the 5.7. We got a 6.3 print. From your anecdotal experience, do you think we are past the disruption of goods and services tax (GST) and demonetisation, things are stabilising and we are almost normal now?

A: There are two differences. One is disruption is not one day avatar. It continues. Then disruption gets reduced and the medium-term benefits start coming in. So that we should recognise. And the way I looked at it, in fact somebody asked me also, roughly the GST, given the nature of complications involved in GST, banking resolution also has to be done and then we have this demonetisation, it will take two years. That is my rough, for the maximum effect to cool down. One year is almost behind us. So it starts looking up now. So as we move on, I presume that gains will overtake the pain. But that distance shift should happen two years from the events and maybe one year from now.

Q: It is six months actually.

A: It is not months and it is not an event. There are so many things happen.

Q: So 2019 you think we should be?

A: Yes, and by then we should also look at basically how to increase the potential output. The real task for us is how to ensure, while this we have started out, this is an implementation issue, let me put it this way. Implementation issue where you minimise the imperfections, maximise the opportunity. From the policy point of view, how to increase the investment in the country and how to increase the productivity in the country and make sure that it is consistent with the employment and that is the bigger challenge.

Q: Over there obviously, one of the more important issues will be the public sector bank reform. Now, both the Governor of the RBI as well as the Finance Minister have said that recapitalisation will come with reform. How do you understand reform? What should be the most core of reforms?

A: There are two ways of looking at reform. When you reform, you can do it incrementally or fundamentally. We have been following incrementally. Basically what it means is public sector banks are not doing well, so I will encourage private sector banks, do not stop them. But I will not disturb them. Airlines, I will allow the private airlines to come, but I will not disturb Air India. But Air India also, money is being incurred. You are putting in more money. Then you are putting in more money in public sector banks and their share is coming down. This is one of the strangeness of this that where you are reducing the market share, you are incurring losses you are putting money and the tax payers' money. So then if you ask this fundamental question the answer is very clear.

Q: That you have to privatise.

A: It is very clear unless you are able to prove that there are other benefits. What are the other benefits? Now the other benefit is social first. Even assuming that you are thinking of social objectives like local financing, easier access, those are local area stuff, there is agriculture credit. Agriculture is a state subject. Agriculture credit can become a state subject. So therefore I was saying in the current context, is an answer to that question. And then what are we trying to do, what is the reform that we are talking of? Let us accept assuming that there is a Government of India and India is determined to reform fundamentally. What do you want to do? You consolidate. So you consolidate so that it operates like HDFC, like ICICI, then we are putting the people's money. So if at all, you want to serve social purpose, then it should be smaller banks, local area banks. If you pursue this logic, then there is merit in, if the government of India is thinking of consolidating and replicating private sector banks, my point is that does not make sense. Then as well, government of India makes it, if the concentration is on local, socialised requirements, you can as well ask state banks, each state government use modern technology, modern methods and start new institutions. Let me explain two things. I was not only with Rangarajan, as recently as six months back when this issues was raised, I said over my dead body.

Q: What, privatisation?

A: No, over my dead body the giving of bank licences to state governments. Fundamentally that has been my position, but now that there seems to be a strong political economy consensus for presence of the public sector banking in the country. And also, people are not reacting, it is putting back money also. So I feel there is a social and governmental consensus to have some sort of public sector banking. If that is the formulation, I would prefer it to be bank sponsored state governments for two reasons. Ultimately state governments are under the leadership of the central governments. The new banks will have to be created under the company law therefore dual control issue will not come up. Third and most important is there is no centralised risk. Therefore, some states may do well as some states are doing. So then you will have Gujarat banking model, Nagaland banking model, Kerala banking model because when you see Kerala, you have got a lot of deposits and local is limited. So I thought that in many countries have got such localised banks so at least we can try a new dynamic than persist with an old dynamic.

Q: But that will have to be an altogether new bank. The current public sector banks which are run by the central government, do you expect the best solution is privatising?

A: As I said, but the way I look at it is and I sympathise with the argument that some amount of public sector presence in banking is important. So whether they will privatise all or have some, but some presence even for government of India, maybe some presence is required. But my point is, if the purpose is social banking, such social banking can be done better at the state level in a new context. But if you are having, the point is whatever you are doing, definitely the best solution is not to have large public sector banks at national level doing exactly like HDFC and ICICI. It is not the best solution.

Q: Let me come to another issue and I will link it to public sector banks. The ordinance to the bankruptcy code does not allow promoters to buy back the companies, unless they clear every penny of the loan or most of the loan. You think that is fair?

A: I think it is a way of when there is some circumvention of law or something like that. It is in some ways an essence of benami. You have got one entity. You have marked it up. You create another entity, the same person comes in. So it in some way prevents the misuse of the identity.

Q: But you are in sympathy with that?

A: I do not know the details and that is not my area.

Q: I am asking you because there was one question which was raised by a financial expert who said that if India had only private sector banks, then if there was an NPA issue and the haircut issue, it would be between a private lender and a private borrower. Only because there is public money, tax payer money that is used as capital, we have made this ordinance that the old promoter who is discredited shall not buy.

A: I do not know the details but I can understand the difference. The difference is in the case of a private sector bank, the bank directors sit down and say the fellow who was owner is trying to buy the new one, so we won't accept the bid. They will go to a different bid. That would be arbitrary but based on their own judgement. That will not be permitted in public sector banks. In a public sector bank, they are accountable, they will go to court. So then they will give reasons. When you try to give reasons, the problem is if the company is different and the account is of brother in law, then you get into problem of the, so you have got information but not proof, so therefore, the public sector banks processes are more difficult.

Q: Require this ordinance.

A: I am not saying required, but they may be a possible reason why other countries do not have, if we have this may be the reason. But I am only speculating. I am as ignorant as you are.

Q: The other issue I wanted ask you, this is a law which only the text is available on the PRS website of financial resolution corporation that is going to be created. Now this Financial Resolution and Deposit Insurance (FRDI) bill is making everyone anxious because it says when a bank fails, the deposits of the bank can also be bailed in to bail out the bank, as it were, convert some of the deposits into share capital or maybe extend the tenure of the deposit. It is creating panic. Should people panic at all? After all government of India and RBI did not allow Global Trust Bank depositors to lose. It did not allow Bank of Rajasthan depositors to lose. Should we panic about this bill?

A: If that is there then why is there a bill. The counter can be, if the existing situation is not creating a problem then why are you having this law?

Q: They are trying to create a resolution corporation.

A: The question that is being asked – I do not know the details, but normally, there is a problem then there is a solution. What you say is if there is no problem so what is your problem? I am saying if there is no problem, what solution are you trying to give? So why are you trying to give me a solution if there is no problem?

Q: So basically you think people are justified?

A: I do not know, but definitely people are panicking, that I can tell you. Any number of messages I got and I am again pleading ignorance because I do not know much about that.

Q: We have the public sector bank reform on the agenda. Banks owned by state governments is not on the agenda at all. At the same time, Mr Jaitley made it very clear that political opinion as yet does not support privatisation of public sector banks.

A: What I am trying to say is let me explain. It is not privatisation of banking system in India. Privatisation of the national public sector banks and let me give you one simple example just to conclude. For computerisation in India, there is a National Informatics Corporation which was started. That service is provided to all state governments for free. The Andhra Pradesh government created its own corporation called Andhra Pradesh Technology Services and they said we will install our own computerisation because we want to move faster than government of India and as you know, it became a model for use. Therefore, you have to look at it that way. With social objectives, with local, is there merit in doing that. It is an experimentation, but as I said earlier, what is not on agenda does not mean you should not even think.