INTERVIEW. ‘The 7% growth that we’ve achieved is not to be sneered at’

We certainly have a lot of the right regulations in place. We have two or three issues that we need to be aware of as we go forward. One is the danger of over-regulation, which has always been a problem in the past. Sometimes, what we have is a combination of too many rules but too little enforcement when in fact what we need is a much lighter rule book with strict enforcement since that that creates a heady respect for rules. To deal with the problems, we tend to put too many regulations without seeing whether the existing regulations are being properly enforced. This can can get us to the wrong point. But broadly, over time, the regulations have kept pace with the modernisation of the economy while taking into account all of the new technological developments and challenges.

We have come a long way and the 7 per cent growth we have had on average is certainly not to be sneered at. It is the joint work of multiple governments and is a testimony to the fact that we did do something right over this period. We need to do more going forward, but we certainly should give ourselves a congratulatory pat on the back.

We are still a poor country on a per capita basis. Yes, we may be overtaking the GDP of the UK and France soon, but our population exceeds theirs several times over. I think we need another 20 years of this kind of growth. That means we have to do a lot of things right, because, as we grow, it becomes harder and harder to generate more growth. My sense is we are at a point wherein we need a second or third generation of reforms. There are many areas where we still constrain our economy significantly, and if we don’t have that set of reforms, growth is going to be progressively slow.

We need to rethink a few things much more clearly. Take agriculture, for example. It has come a long way in the last 35 years. We are the world’s largest milk producer, for example, but productivity is still very low and too many people depend on it. So, how do we take people away from agriculture while increasing productivity so that farming doesn’t become an absorbent of government funds and doesn’t require a loan waiver every few years. A farmer should stand tall and proudly say I am making good and I am earning well. How do we do that? Our old methods of Minimum Support Price, procurement...they just are very ineffective. So clearly, we need the next generation of reforms. For example, the crop insurance scheme: how can we make it more effective so that it actually helps the farmer when the crops fail? How do we ensure that the farmer does not overuse fertiliser? How can we make him adopt new technologies?

Similarly, we need to rethink the role of the public sector and we can enable the private sector to flourish. How do we get more innovation? How do we get manufacturing to grow more strongly? There is a fair amount of discussion on Make in India but we are yet to see the fruits. We are not making in India; if we are, our exports would be significantly higher. How do we build the entire system where manufacturing can really flourish?

How do we enable the banking and financial sector to take more risks but in a contained fashion? Today, we have uncontrolled risk-taking. These are all problems we need to think about.

It is obvious we need far more infrastructure that we have. What is important is that we make it easier to build the infrastructure. There are bottlenecks everywhere — right from the planning process to land acquisition to financing — which is why few infrastructure projects have come up on time. We need to look at land acquisition and figure out how to make the process fair and timely.

And that leads to the issue of doing business. We need adequate infrastructure for this. If you want to set up an office in Delhi, it is impossible to get the right location at a decent price. If remote areas, we need road and power connectivity.

Apart from infrastructure, the Inspector Raj problem persists — too much bureaucracy, too many rules that are poorly enforced and too much scope for corruption. We need to look at all that and improve it. The problem with the ‘Doing Business’ indicators is that there is a temptation to focus on those precise indicators in the precise locations where they are measured — Delhi and Mumbai. So you can end up with what looks like a very great improvement in ranking but only a modest improvement on the ground. The proof of the pudding is when the businessman tells you that he finds it much easier to do business in the country.

We have to work on this process and the IBC is work in progress. The problem with the IBC is that the promoters are gaming it like everything else. Not every promoter, but a certain category of promoters who have always gamed the system. And the reality is unless the IBC can make these guys fall into line, we will not accomplish our task. To some extent, the problem is that the bankruptcy rules are quite draconian for the small guy, but when it comes to the big guy, he finds ways to play with the system and prolong the court process. Suddenly, the promoter finds he does have money to pay after the bankruptcy process is under way for some time. Why didn’t he pay if had the money before? How come at the end of the process, he suddenly says he has money to pay and they must consider his claim. These kinds of things the Bankruptcy Code should short circuit and send these guys packing. It should say, if you have delayed for long, then either you admit to having essentially misled the system or you quietly give up your possession. It is high time that the defaulting promoters were put in place.

In the clean-up process, there will be stuff that will be unearthed over time. IL&FS is largely infrastructure, which is the real problem. It isn’t all that surprising that finance companies that are heavily involved in those areas eventually get into trouble. But if we continue this process, we should make sure that it does not affect the clean-up. I would say the clean-up involves governance reforms, and unfortunately, we haven’t made much progress on this in the last few years. There was lot of hope that with all the Gyan Sangam and so on, we would go much further. Unfortunately, that part of the reform process has been stymied and we need to think very carefully about how we get good governance, not just in the public sector but also in the private sector banks.

I have made my views on this clear in a speech I gave. I don’t think this is the RBI’s money. The RBI is holding it for the Government of India, and ultimately, the people of India. So I think the real issue which the Bimal Jalan committee is going to look at is what is the pace at which it can be paid out and in what form can it be paid out so that it is not inflationary. I have made my views clear that the Bimal Jalan committee is a respectable committee. I think that it is a bad idea to use the RBI’s reserves for budgetary purposes and to fill budgetary holes, but there should be no question that the money the RBI generates is ultimately something that belongs to the people of India.

The RBI’s view has been that some diversification after some initial guidance from the promoter is good because overly concentrated ownership of banks will tend to concentrate too much power — economic and financial — in the hands of a few people. In general sense, yes, it’s important to have the promoter oversee the process initially and have a large stake as an incentive to do that. But over time, they should rather stay away. Even with a 15-20% stake, because of the limitations on a bank takeover in the system, they can have a fair amount of control, except on the shares that are controlled by others. So they can share ownership with others while still having a fair amount of control. In the RBI’s view, this has worked reasonably well in the past and I think that’s what they have been trying to do.

There are pros and cons. We have an example and we will see how it works out with the Bank of Baroda, Dena Bank and Vijaya Bank merger. The question is how did North Block take this decision and what parameters are considered in terms of which banks to merge. Is it trying to strengthen the weak banks or weaken the strong banks in the process? Now, the pro is that we will get a much stronger big bank rather than three moderately sized banks. The worry is that with all the bad loans in the system and different cultures, it may not work together. So there are lots of issues with the mergers. I am not averse to the experiment but I think we have to give it every possible help to make it succeed and learn from the experiment.

We need to understand technology, so let’s not ban technological innovation unless we are absolutely sure it’s a bad innovation. But let’s try to let it flourish. This is the kind of attitude regulators around the world have adopted to create a kind of sandbox where it can play. Singapore has created such structures formally and maybe it’s worth contemplating whether we can create such a structure wherein new innovations can be rolled out under the eye of the regulator with some leeway, and we will see how it goes. If it works, the regulations can be changed. If it doesn’t work, then the innovations can be shut down. We need more experimentation. I am not convinced that banks will be out of business with these things or an infotech company will be the banker. I think some mix of the two will work better.

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