UP results and Aspirational India

The results of the recently concluded elections in the five States have reaffirmed the winning political narrative of 2014 Parliamentary elections — developmental economics. Aspirational India has rejected the politics of ‘social justice’ and ‘inclusiveness’ a la social engineering. It has also discarded the model of coalition politics and transited to a clear mandate and diffused responsibility to full accountability. Deliver or get booted out.

This transformation looks to be an expression of trust deficit in the competence of social engineers and their model to deliver the promise.

The Indian economy has been struggling on its feet to lift up from a moderate to high growth trajectory of 8 to 10 per cent. Even the critics acknowledge that the current national political executives have been at work. The focus has been widespread from the ease of doing business to building physical and social infrastructure. It is easy to pontificate that better could have been done.

Since perfection is a journey, it is possible to point out sub-optimalities as also log into legitimate explanations. NDA-II inherited a sick economy — high inflation, fiscal and current account deficit, stressed balance sheets, low financial savings and declining capital formation. The global headwinds have been so far been chilling. Sustaining even current rate of GDP growth is an effort.

The Modi government is determined to bring about structural adjustments from less to more formal economy albeit contracting black money and its expansionist components. The transition is being peddled by a number of initiatives, the latest being ‘demonetisation’.

Such structural adjustments are undeniably a boon for the medium and long term growth of the economy and better social and political order. But in the short term, setbacks are inherent in every transformation. The ability to navigate the possible damage has been appreciable. The RBI opines just after four months that negative impact of demonetisation is over.

Nevertheless, there are some serious impediments in the takeoff to the next orbit of growth even after the structural adjustments settle down.

The credit off take being the foremost consequenced by the stressed balance sheet of the Banks and Corporates. Underutilisation of the installed capacities along with the prospect of low demand is yet another reason. Sailing through these impediments is essential to spark greater capital formation.

The Government is boosting the demand by higher public spending on social and physical infrastructure. It is also providing more money in the hands of government employees and the rural populace. The high growth of agriculture is bound to take the rural demand cycle northwards.

However, inspiring the confidence and building capacities for financing remain inadequately addressed.

The NPAs of banks need a resolution. India is a democracy and the public scrutiny of every decision sometimes unleashes clouds of disproportionate accountability; yet decisions have to be taken. The skills of public sector banks are in the area of lending and not in the resolution of distressed assets.

In one of the public forums recently, where I had advocated segregation of stressed assets to an entity with special skills to resolve better and faster, I was challenged by one of the honourable members of the Banks Board Bureau (BBB). Notwithstanding, the example of the Spice Jet quoted by me, the member held on to his confidence on the banks’ ability to deal with. If the NPAs are not separated from the balance sheets of the banks, the problem may linger and continue to challenge the growth of the economy. In the last three years the problem has only accentuated.

Fortunately, the Government has garnered the legislative support for the ‘Bankruptcy Law’ in Parliament in the meantime. The RBI, which took the opposite poll position in 2014 seems to be in terms with the reality.

In fact, a significant amount of foreign capital and skills are waiting to sneak into and help in navigating one of the foremost impediments of turning the lending cycle. The format of such segregation can be worked out for optimal results.

The building of a vibrant debt market continues to be work-in-progress. Notwithstanding the lapse of 11 years when the capital market regulator made the beginning, a number of committees and bits of initiatives off and on, it remains a non-starter.

The commercial banking balance sheets have short term liabilities. Long-term assets create a mismatch. Further, borrowers find it convenient to line up before the bank rather than the capital market.

The absence of debt market is cited as the reason. Actually, entrepreneurs find the business with banking convenient. Capital market demands viability of projects, transparency, competitive pricing and accountability, which they escape.

The death of developmental banking with the conversion of ICICI and IDBI into commercial banks shifted the burden of such funding on the shoulders of commercial banking.

Astrologers are not needed to predict that every time high tides of economic growth recede, the NPAs will surface and the mismatch will create a mess in the Banking industry. NDA I faced similar challenge albeit of lower order and building of vibrant debt market as an alternative mechanism was sought to be promoted where junk bonds and even stressed assets could be traded.

Unfortunately, coupled with crony capitalism and indiscrete lending, the NPAs have become a monster and patch work cannot help now.

Whereas, short term warrants surgery of segregation, medium to long-term medicine is a vibrant debt market. The natural investors in long dated paper — life insurance and pension funds are growing exponentially and their silent cries for a liquid debt market are lost in the din of regulatory turf.

Financial needs of building India’s infrastructure are enormous. Over the next five years, a minimum investment of $1 trillion in infrastructure is necessary to facilitate the GDP growth of 8-10 per cent. Insurance companies, provident funds, NPS and infrastructure funds are, on an average, collecting nearly ₹4 lakh crore annually and growing.

Even if, 25 per cent of this (15 per cent is the minimum as per regulatory direction for insurance and pension) is mobilised for building new infrastructure, a significant percentage of that requirement can be met.

The building of ‘vibrant debt market’ cannot be consigned to the basket of pending tasks. The immediate and sharp focus has to be provided by SEBI, RBI, MoF et al . Delivery of the aspiration of ‘New India’, which have heightened during campaigning in UP can be enabled only by double digit growth of the economy for several decades.

The writer is former chairman of SEBI and LIC

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