Arvind Subramanian on note ban, AQR for NBFCs, credibility of macro data & more
- RBI is one of India’s most legitimate, most credible institutions,
- We need to do an asset quality review (AQR) for the NBFCs.
- Overt politicisation of RBI board will not be good in the long run.
How would you term the demonetisation process?
The term we used in the survey about this was “large structural shock. ” That is how economists speak. Withdrawing 86% of cash can be called severe. You can call it extreme, you can call it draconian, you can call it a large structural shock. Pick your term, it is basically the same.
One puzzle is of course, a lot of hardship was imposed on the informal cash sector and yet politically it was, at that stage at least, very successful in the UP election. For me, the political economy lesson from this is: it is easier to impose difficult policy actions when many people are affected as opposed to a time when only a few vested interests are affected.
Why was the impact on GDP was fairly muted even as we took away 86% cash? One, it could be, we are measuring the wrong thing. For example, GDP does not have the informal sector, the agricultural impact has not come through or could it be that we have a genuinely resilient economy and that there is something special about India? Or is it a case that we just do not understand how cash works in the economy?
That RBI has been ultraconservative, akin to paranoia. But is not this paranoia held us in good stead?
A good question. I give RBI a lot of credit. It is one of India’s rightly most legitimate, most credible institutions and we have a collective self interest to preserve that.
Two, by definition, they are a conservative institution and they must remain a conservative institution. A technical assessment of excess reserves does not translate into an automatic right that it should be passed on, especially that it will be passed on for financing deficit or expenditure. It should only be used for recapitalising and only if the government lives up to its part of making the recapitalisation work.
If this money were used for anything else like financing, I would be totally against it. In this case, my view always was that maybe the RBI in the early stages, when lack of money was an issue, could have been more bold and imaginative and said look we can use our balance sheet. But I would not be in favour of government unilaterally taking that money from RBI, especially not for financing the deficit or anything like that.
Why do you believe matters came to the extent where there was complete breakdown of dialogue, invoking of Section 7?
It is a very fair question why it came to that. Both sides need to do some soul searching on why this has happened. RBI and the government will not always see eye to eye and that is as it should be. There must be some creative tension but what is not negotiable or what should not be undermined is that basic sense that this is an institution that will be allowed broadly to have a freedom of action and not be overtly politicised in any way.
One reason we have the RBI is that it is a bulwark against political cycles. We know where we are on the calendar and we do not want imprudent lending. Both sides need to be aware of that.
One of the issues where the government and the RBI have a huge difference is liquidity and the government believes that there is not enough liquidity at least for the NBFCs. The RBI believes it is the system wide liquidity that they are going to look at. How does one kind manoeuvre through a puzzle like that?
I read someone saying that you have to grow yourself, lend yourself out of the PCA problem. But I just want to add one thing to what you said, that it was an over-exuberant and imprudent lending that led to this problem in the first place. If the underlying governance mechanisms and incentive mechanisms have not changed, just opening the spigots is not going to help. NBFC problem has become a new problem.
Are you red-flagging more NPAs in the making? Are you worried the NBFCs could throw up more NPAs eventually which is going to feed into the banking system?
Like Raghu did an AQR for the banks, we need to an asset quality review (AQR) for the NBFCs.
Administered by the RBI?
Remember it has to be done a bit cooperatively because the biggest NBFCs are in housing, RBI does not regulate them. There are all these cooperation issues. What the AQR did was …
It told you at least the magnitude of the problem.
Exactly. And the magnitude mobilised political action. Similarly, in the short run, you say oh my God! this will spook markets etc. But if there is something spook worthy, it is better that it comes out.
You have written that RBI deserves credit for maintaining the integrity of the PCA process amidst pressure from the government to dilute it. We now have this whole debate and there is a technical committee within the RBI looking into this. Can RBI afford to look away?
When we speak about reforms of the banking system, I have always said that for some banks we have to have more privatisation. But for the weaker banks that are fundamentally weak, consolidation is not a solution.
How do we exit from weak banks and the prompt corrective action framework is kind of Mr YV Reddy’s answer that over time, shrink the balance sheet. Some amount of that has to be maintained. That is the way forward.
There is a board meeting right around the corner and there are many people who believe that RBI should be a more board governed institution. What do you make of this attempt to make RBI a more board governed institution?
Any overt politicisation of the board will not be good in the long run for us. We should try and to the greatest extent possible, allow the autonomy and decision making space. But I guess all these things work if the underlying relationship is in a reasonably good shape.
For the first time, the credibility of our macro data is under question. It has been spurred by the involvement of a politically appointed body like NITI Aayog. Nowm there are fresh reports that NITI Aayog actually denied a study that showed the previous government in a better light. Doesn’t this muddy our future and our past?
It is a very good point. The way I see is this; certainly if as an economist you presented the data for that period and this period would demand an explanation why all the other indicators were so different and yet growth was so similar, it would naturally raise questions.