Politics alone won’t save the day for BJP

Venky Vembu | Updated on October 31, 2019

Unsafe deposits: Customers battle to regain their savings at a Mumbai branch of the troubled Punjab and Maharashtra Cooperative Bank - Arunangsu Roy Chowdhury   -  The Hindu

The less-than-emphatic win inthe recent elections in Haryana, Maharashtra and J&K is an alarm for the Centre to get its economics right

Late last year, the CIA declassified a cache of Cold War-era jokes that its operatives had gleaned from the erstwhile Soviet Union in the line of their cloak-and-dagger duty. The jokes, which had been circulating ‘underground’ in that country, were centred around the hard life of the proletariat in the Communist regime, and the sheer incompetence of the erstwhile Soviet leaders. Narrated by Soviet citizens themselves, most of them channelled a self-deprecatory, wry attitude that masked a sly form of counter-culture revolution in a country where most avenues of free expression invited stern punishments.

One of the more tame jokes, as narrated in the 1950s by Allen W Dulles, the longest-serving CIA director to date, ran thus: Ivan, a Russian, reappears in Moscow after an absence of 15 years, and explains to his concerned and inquisitive friends that he had been in prison for saying that Joseph Stalin was a fathead. A friend notes commiseratingly that while criticising the leader was a serious crime, a 15-year sentence seems extraordinarily long. “Oh, I only got a year for that crime,” Ivan responds. “The other 14 years were for revealing a State secret.”

Last fortnight, a high-ranking bureaucrat in the Odisha government went public with the nearest thing to an ‘open’ secret when he sent out a directive alerting State entities to downbeat reports about a few banks and the public’s apprehensions about the safety of their deposits in them. In particular, he drew attention to the fact that bank deposits are insured only up to ₹1 lakh.

The alert, reported in the media, justifiably set off alarm bells, but within days the bureaucrat withdrew his directive and clarified that the “State government does not have any view of the fiscal health of any particular bank”. That responsibility, he noted, entirely rests with the Reserve Bank of India (RBI).

That last-stated position is exactly right: Only the RBI can decide on the fiscal health of Indian banks, and the Odisha bureaucrat had clearly stepped beyond his ken.

Even so, it says something about the mood among rattled depositors that the directive validated their deep-seated concerns that the financial system is fraught with frailties. After all, only days earlier, even private banks had begun reminding customers — by way of rubber-stamped messages on their passbooks — that in the event of “liquidation of the bank”, only deposits up to ₹1 lakh would be covered. The banks were merely abiding by an RBI circular from June 2017, but the recent troubles at the Punjab and Maharashtra Cooperative (PMC) Bank, and the plight of depositors who find themselves cut off from their lifetime savings, have heightened fears that such doomsday scenarios are not quite beyond the pale.

There are, of course, vast differences in the regulatory mechanisms that govern cooperative banks (of the PMC kind) and other banks. Yet, when the words “liquidation of the bank” roll so readily off the tongues of bankers (and bureaucrats), it is easy to account for depositors’ diminishing trust.

Nor has the RBI done a masterly job of arresting the erosion of public faith and the slide in its data credibility. Specifically, in the context of the bad-loan contagion that is sweeping across non-banking financial companies (NBFCs), the central bank’s assessment, as reflected in its Financial Stability Report, that gross non-performing assets (NPAs) of NBFCs accounted for only 6.6 per cent of their advances as of March 2019 stretches the limits of credulity. Sooner or later, those numbers will have to be reconciled with harsh reality. It’s a fair bet it won’t make for a pretty sight.

RBI mandarins may well believe that there is some merit in the staggered release of bad news in trickles, rather than as an avalanche. Yet, it is hard to escape the conclusion that the central bank has already suffered an erosion in the ‘book value’ of its reputation. Which may account for why trust in the financial system stands on such slippery ground.

How can this trust deficit be bridged? The Centre, for its part, is not insensitive to the gravity of the problem, but the Bharatiya Janata Party finds itself far too distracted by the Grand Drama of the political stage. The party’s enormously successful run in election after election, culminating in the National Democratic Alliance’s emphatic return to power in May, also means that it is propelled less and less by the performance-linked incentives that typically drive parties.

But last fortnight’s results from the Maharashtra and Haryana Assembly elections, and the local body elections in Jammu & Kashmir, have for the first time given the party reason to reflect more critically on the perception that its management of the economy has been flawed — and that a crisis is nearer at hand than it may have reckoned. The party may have returned to power in both Maharashtra and Haryana, but the ground beneath its feet is distinctly seething with resentment.

For an organisation that is obsessed with political outcomes, the choice couldn’t be more stark: Perform or perish.


Venky Vembu is Associate Editor, BusinessLine; Email:

Published on October 31, 2019

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