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‘Govt and banks — a con game at some level’

N.S.Vageesh
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DR Y.V. REDDY
DR Y.V. REDDY

“… if India expands private sector, please do so, knowing, that if you do not have the proper regulatory framework, then it will be more expensive than having an inefficient public sector.” — DR Y.V. REDDY, FORMER RBI GOVERNOR

Dr Y.V. Reddy makes a public appearance whenever he is delivering a lecture or writing/releasing a book. When he was in Mumbai earlier this week, to release a compilation of I.G. Patel’s essays, it was a good opportunity to get his views on some current issues.

Retirement from the Reserve Bank of India has not dimmed his memory, his quick thinking or his gift of picking the right phrase to articulate his thoughts. He continues a busy career as a globe-trotting advisor even as he holds an emeritus professor’s chair at the University of Hyderabad.

Most recently he flagged a number of important issues in his landmark lecture a month ago (Per Jacobsson Foundation Lecture at Basel). He makes reference to some of those issues in this interview. Excerpts:

How did you come to be associated with this project (editing I.G. Patel’s essays)?

After retirement I was looking back. Most of us (policymakers and professional economists) are so much concerned with immediate issues and challenges that we tend to think incrementally. If there is a problem, our concern is how to respond to it. But we have rich experience of people who have faced similar problems in the past. I found I.G Patel’s public works themselves offer interesting insights — both when he was in policy and later in academia. Fortunately, his family made available his unpublished works.

When I ran through his unpublished works, it was fascinating. (He was not very forthcoming when you talked to him, being a reticent person.) I thought it would be useful for policymakers and academia as well as the media to look back and see how they did in their time.

After the global crisis, everybody in the West is looking back at the depression-era policies and the financial repression that followed and the link between finance and development. They are revisiting those issues.

But in India, we seem to think that what we should do is what we thought of yesterday. We should carry the reform forward. We should also look back.

What did you find interesting in his writings?

There is one section which has talks he gave on economic reforms and policies in 1991, 1998 and 2003. In 2003, he talked about “unease with economic reform”. That was quite an important issue that he raised. These three chapters in particular are relevant to the country. He wrote on gold and the issue of equity. His writings on the external sector may be outdated in some places. But we should understand what we went through. His analytical framework for gold was excellent.

Generally there has been criticism that academicians are technique-oriented whereas policymakers cautiously talk of policy of the day. I.G. Patel was active in academia for two decades after he left public policy. Rarely do you get someone who will talk and draw upon their experience, but not trying to impress anybody.

Are you following that model? You are also into academics now …

(Laughs) In some sense, I am enjoying looking back. The book is a product of that, yes. Now that you say it, yes, it is a good direction. But of course, I.G’s stature was so high — he went to IIM and LSE after his stint in RBI.

I.G. Patel played a crucial role in the nationalisation of banks. Today we seem to be going back on that in some sense. The Government doesn’t have enough money to capitalise banks for future requirements …

I’ll answer that in two parts. Not having enough capital is not much of an argument. If you have to provide it for a worthy cause, the Government will do it. Ultimately, the banks’ existence is because of an indirect sovereign guarantee — everywhere in the world. Banking and government — in some sense, it is the biggest con game going on (laughs)! The Government licenses banks to accept non-collateralised deposits — virtually telling people that your deposits are safe. The banks in turn agree to lend to Government whenever Government wants. This is a compact. The finance industry is represented by banks.

The issue of whether there should be public or private ownership is a second level of detail. If you don’t want to provide capital, you can provide deposit guarantees which are almost as good. So in my view capital is not an important issue.

If you look at the issue of public ownership, in those days, public ownership was considered good because it was considered an instrument of public policy. But once public policy is itself considered highly politicised, then the question comes about how public ownership is used. Institutional dynamics have shown that public ownership may tend to be more political than objectively economic. That has been the experience.

Therefore some countries, in the developed and developing world, have gone totally into the private sector. In the Indian context, the decision was taken in broader public interest to go for public ownership. Of course, after that, we now have a mix of both public and private banks. Now, the Government as the dominant owner is running the public sector banks. How they are running it is the issue.

If it is concluded that the political economy is such that you can never trust the government to manage banks in public interest then you go to private sector. But if you go to private sector, then you should have adequate regulatory mechanisms. So there are two issues here.

Public sector ownership in India was not as efficient as expected. Private sector banking in West has resulted in a crisis. Now, if India expands private sector, please do so, knowing, that if you do not have the proper regulatory framework, then it will be more expensive than having an inefficient public sector. Incidentally, I feel a mix will be useful — because if the private sector misbehaves, the public sector can expand. The information available from public sector is probably more authentic. I articulated this in a lecture last month in Basel.

Should we have more private banks?

Yes, we can have a little more of private banks. But what sort of private banks? Western experience shows that if you have conglomerates, then they become either too big to fail or too difficult to regulate. Now in India, we have a situation where in the financial sector, large industrial groups have strong presence in mutual funds, NBFC as well as insurance. Now if you add banking also to this, regulation becomes a challenge.

I would say that we need a combination of public ownership, private ownership, competition between the two, good regulation and good governance. We need to take an integrated view.

What are the lessons from the book that are relevant to policymakers today?

There are so many tools of macro-economic management that we have discarded because it was found unsuitable. Now I find it is good to revisit it. Was there something wrong with the tools or with the way we used them? Could we take the tools and use them differently now? One example is selective credit control.

Secondly, I.G. eschewed ideological extremes. Even in 1991, he said the private sector is good and it can deliver, but don’t undermine public sector.

Thirdly, while talking about institutional context, repeatedly, he says that given the political context in India, there should be a sea change if the fisc has to be brought under control. He virtually says the fiscal situation will continue to be worrisome.

Fourthly, and most importantly, he says that reforms should not be considered a laundry list — you do this and this and reform is over. Reform is a continuous rebalancing of various factors and priorities.

Here he makes a distinction between micro- and macro-economic policies. His thesis is that reforms should concentrate on micro-economy. Macro-economic policies cannot increase coal production, energy production or water usage. He lays emphasis on improving productivity sector-wise and competitive efficiency at the micro-level. That is the most important lesson to learn now.

Do we have to live with supply shortages for some time?

What you are asking is whether anything can be done, pending the lag in improving supply elasticities. That is the real bottleneck. Trying to do anything else is only an impression of doing things and will not make a material difference.

In my view, it is far better to accept that at the current stage of real economy, structural rigidities and infrastructural bottlenecks, if growth is to be moderated to 7.5 per cent for the next two to three years, so be it. This is better, rather than induce imbalance and struggle. And even 7.5 per cent rate of growth is respectable.

Therefore, we should be prepared for a rate of growth that is consistent with current supply rigidities and contemplate how to overcome it and accelerate growth. Even the assurance that we are doing this will improve sentiments.

Resetting expectations can itself revive ‘animal spirits’. It will be more credible. Uncertainty is the biggest problem for enterprises and sentiment.

(This article was published on July 20, 2012)
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Comments:

DrReddy has given very good inputs based on DrIG patel's thinking to manage the present ills of the economy.Micro management is essential to improve supply constraints and bring in cost efficiency and that is the need of the hour to contain inflation. Micro management in the area of coal supplies,electricity generation and distribution,oil procuremen processing and distribution,agricultural productivity, procurement,storage, transportation, marketing etc will certainly improve the supply constraints and bring down costs to manage inflation at the desired level.Corruption and black money are prevalent in all these ares because of very poor administation and this is exactly where micro management efficiency can bring in result.Over a period,micromanagement has lost its significance under liberalised approach and this has caused economy a lot of problems.Reforms at macro level and reforms of administration at Micro level can definitely solve the present economic crisis.Good interview.

from:  Dr.T.V.Gopalakrishnan
Posted on: Jul 21, 2012 at 07:59 IST

I entirely agree that the regulatory framework and the shareholding
guidelines have to be in place before granting new licenses toprivate
sector banks. One cannot escape noticing the extremely long rope given
to Kotak Mahindra Bank to dilute promoters' shareholding. This not only
created unlevel playing field but also kept the financial system in the
country under the risk of instability. We should not repeat the same
mistakes this time by hastily rushing to further "reforming" banking
sector.

from:  Vinay Shah
Posted on: Jul 21, 2012 at 11:47 IST

"Most of us (policymakers and ...) are so much concerned with immediate issues and challenges that we tend to think incrementally. If there is a problem, our concern is how to respond to it."

he is right!

Sri. Kamaraj the former chief minster of Tamilnadu, introduced free schooling upto matric, along with free lunch around 60 years back. it was a paradigm shift. he did not care about financial commitment just as any parent will not worry about his wards' education! it was revolutionary. even the marxists in W.Bengal and Kerala and our great leader Pundit Nehru could not visualise the benfits such a programme!

it pays continuously increasiing and rich dividends to Tamilnadu!

we need an out of box thinking to tackle the problems facing our country!

one is that the income tax on individual and corporates are pegged at 10% at the maximum.

that should increase investment and employment and all the benefits that go with it. heaven nor hell is going to fall!

from:  raman
Posted on: Jul 21, 2012 at 14:49 IST
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