‘The economy’s not a steam engine’

Richa Mishra Surabhi | Updated on January 11, 2018

Sanjeev Sanyal, Principal Economic Advisor to the ministry of finance.

Principal Economic Advisor Sanjeev Sanyal believes in the power of adapting in an evolving economic ecosystem

“Woh toh sirf history baat karta hai, economics bolega kya?,” or “Isn’t his approach to economics totally different?” — These were some common responses when Sanjeev Sanyal was appointed Principal Economic Advisor to the ministry of finance in February.

“Yes, my economics is very different from that of conventional economists as I do not believe in equilibriums. My idea of the economy is of an evolving ecosystem — a complex, adaptive system where there is no predetermined path or perfect end-state. For me, economic management is all about feedback-loops and adaptation,” says the author of The Indian Renaissance: India’s Rise After a Thousand Years of Decline.

Basically throwing a fish in the pond and allowing it to swim? “First make sure it is a fish, and then you throw it in the pond. Then you observe how it swims and react,” says Sanyal.

Another perspective

Interesting, but how does his thinking fit into the government’s scheme where every step is measured and there is a set method for doing things.

“I am against the socialist nanny state, but I am not a libertarian. I favour a strong but limited state — not a minimal state. The state must have a strong role in areas like internal security, defence, enforcement of contracts, justice, backbone infrastructure and other framework related issues,” he points out.

An ideal situation! But, it’s not easy for governments to let go power. There seems to be a contradiction between Sanyal’s position and how governments usually react to situations.

Sanyal disagrees. “In my writings, I make the case that the Chanakyan state was far superior to the nanny state of Ashoka. Remember, Chanakya created the Mauryan empire and Ashoka caused its collapse... The kind of policies that are now coming relate to framework type things, for example the Goods and Services Tax. GST is not only about creating an internal market, but also a framework which feeds to many other things: extending the tax net, creating big data on how people earn money and how the economy functions,” he says.

But, given the federal structure that India has, States play a strong role. So, can the GST concept be applied to agriculture, labour, jobs and above all the weak banking system?

“The economy is not to be viewed as some sort of a Victorian steam engine — when it slows down, you put in some more coal, and when it speeds up too much, you apply the brakes,” says Sanyal adding that “the most common approach to solving an economic problem is to design a good plan and implement it meticulously. This is why one hears iska plan theek nahin tha, or plan achcha tha par implementation nahin chala”, he points out adding that “no one gives a third view”.

The way to do it is to get a general framework and then use continuous feedback loops, he says, adding: “There is no perfect system…you use feedback and adapt along the way.” This appears to be the way GST has been introduced.

But then, how will this work for the sector he is closely involved with — banking? A weak link in India’s current economic framework and unlike GST, where a framework worked, here, the same shoe size may not fit all.

“The approach we have taken is to go directly to resolve the stressed asset as opposed to creating a bad bank. We know the bankruptcy process is untested, but we will watch closely and adapt,” he says.

Critics believe that creating three-four big public sector banks may be a solution. Should the Government do it or is privatisation the answer? “Let’s not confuse the two. The NPA and consolidation issues are separate, the former is the immediate priority,” Sanyal says.

“In many sectors, ideally, the Government does not have to be involved, for example, running airlines. But in banking, it has to be mixed. Agreed there are problems in PSBs, but so is the case in private sector banks. There is no case for zero PSBs. A mix of public and private financial institutions is advisable. It is the same for other sectors like education and health. Similarly, many people argue for only four or five large public sector banks. However, we will end up with too much concentration and a too-big-to-fail problem. We will aim for something in the 10-15 range,” he says.

While catching the bull by the horn could be a one way of dealing with challenges in banking sector, this is easier said than done.

Given that the Government would like banks to get out of non-core businesses, would it still make sense for PSBs to seek monetary help from the finance ministry to fill the gaps?

“The banking sector has NPAs. Some part of it is provisioned, some will be recovered, but some of it will be a hole in the balance sheet. The hole will have to be filled to meet norms. As the main owner, the Government will have to top it up in some way, but there are several options,” Sanyal says, adding, “The number will be large but not unbearable. We can finance it in many ways including bringing down government stakes to 52 per cent, some money from the Budget, from the RBI, recap bonds… There are all kinds of ways to do it.”

“The amount to recapitalise is not a constraint, the constraint is getting the NPA problem resolved because unless we do that there is no point in throwing good money after bad,” he points out.

With a framework in place, Sanyal is confident that “once the machine gets running, lending will start. You will see things happening in the next few months”.

Published on July 30, 2017

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