Former CEA Arvind Subramanian says RBI autonomy critical but it’s also important to hold it accountable as there have been lapses like in case of IL&FS.
New Delhi: The autonomy and independence of the Reserve Bank of India (RBI) are non-negotiable and of utmost importance, former chief economic adviser (CEA) to the Modi government Arvind Subramanian said Tuesday.
Speaking to ThePrint, Subramanian strongly supported the actions of former RBI governor Urjit Patel, who quit last week after a prolonged tussle with the government.
The former CEA said that though issues relating to cooperation and communication have been raised in the last few months, Patel did a terrific job while in office and must be credited for trying to get the financial system back on track.
‘Need to address NPA issue’
Subramanian said the Prompt Corrective Action (PCA) framework, imposed on 11 weak banks, was the need of the hour to arrest the non-performing assets (NPA) damage.
“So much has been spoken about the PCA norms and that they were unfair and have crippled the banks, but the NPA problem has been there for the last eight years and, fundamentally, we need to address the problem,” said Subramanian, who quit in July.
The gross NPA in the country’s banking system as of March 2018 stood at Rs 10.3 lakh crore, or 11.6 per cent of the total advances made by the country’s banks. In March 2017, it was 9.6 per cent.
Banks that have been placed under the PCA framework have to follow restricted lending norms, which, in turn, have squeezed liquidity.
Besides industry bodies and banks, the Union government has been demanding a relaxation in these stringent PCA norms.
“People say that these banks are not being able to lend, but why should they be allowed to lend? The problem of NPA is due to their reckless lending in the past,” said Subramanian.
“Do you want to make the same mistake by allowing them to lend? There has been no change in their governance, so why should they be allowed to make the same mistake,” the former CEA asked.
Also read: Piyush Goyal slams RBI under Urjit Patel — one cannot have power without being responsible
RBI autonomy
Subramanian also said that while the RBI’s autonomy was critical, it was equally important to hold it accountable.
“There have been regulatory and supervisory lapses, as we see in the piling up of the NPA and the failure of IL&FS. How is it that it was not identified at the right time?” said Subramanian, adding that the NPA issue has been brewing since 2011.
“Last few RBIs need to be answerable for this problem,” he said, referring to the regimes under earlier governors.
Subramanian said the new RBI governor, Shaktikanta Das — his former colleague at North Block — is a “team man” and is known for his inclusive approach.
“The measure on RBI’s autonomy will depend on how much fundamentally the central bank has managed to reform the financial sector,” he said.
He also stressed the need to redeploy RBI’s excess capital, a suggestion he has repeatedly underlined in his economic surveys and recent book Of Counsel: The Challenges of the Modi-Jaitley Economy.
“I am in favour of utilising that excess capital but at the same time I have said that it should not be used for financing fiscal deficit. I have said that the money should be used for bank recapitalisation,” he said.
Also read: Former RBI Governor Urjit Patel paid a heavy price for his unseemly power grab
‘Most exciting job’
On Tuesday, Subramanian said the CEA’s job was the most enjoyable one he has had.
“Any day I would say that my job as the country’s CEA was the most exciting as well as challenging,” he said.
While many of his prescriptions for the Indian economy were yet to be implemented, he was satisfied that the proposal on Universal Basic Income (UBI) — an income guarantee to citizens to cover their basic needs — is being widely discussed across platforms today.
He also said that his suggestion of using the JAM trinity (Jandhan Aadhaar Mobile) to carry out Central government schemes was well received.
In advice to the newly-appointed CEA Krishnamurthy Subramanian, he said the advantage his successor can enjoy is the fact that he has previously worked with RBI deputy governor Viral Acharya.
“The problem for him would be the political calendar. And given that we will be going in for elections, there will be very little time for him to settle down and it takes a few months to understand things in the government.”
There is no difference between bank recapitalisation and fiscal deficit. It is these semantics that politicians expect their advisers to come up with. The RBI’s reserves are like a chaste woman’s mangalsutra, never to be counted as a family asset.
… for senior folk …
At least on ILFS, the responsibility does not lie with the RBI. This institution – a deep state in the economic domain – was up to its ears in dealing with state governments in individual infrastructure projects, quite apart from its own ownership pattern. How it was awarded those projects, how it executed them, many of its financial practices and fudges, must have been known to hundreds of senior public functionaries. Many of them would have would have been coopted in some form or the other. ILFS’ financial problems were also building for at least two or three years. Plenty of time for endorsing folks to have intervened, without waiting for the inevitable defaults.
It’s funny how Arvind Subramanian has found his true voice only after retirement. While in job, he never even told us if he wasn’t or was consulted on demonetization. As a true professional ADVISOR he should have spoken his best advice while he was in service. He was paid a salary out of India’s people’s money and not out of BJP’s party funds.