Banking on the banks for expansion (Slowdown is here, GoI banks on Banks for help)

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 Banking on the banks for expansion (Slowdown is here, GoI banks on Banks for help)

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• Claims versus Reality : When it was claimed in 2005 that fiscal policy that was profligate had no more role to play in national economies, the reality knocked via the global financial crisis 2007. The US raised its fiscal deficit 3 times. No one objected! But in 2019, the Indian slowdown is not being met with such a strong response at all.
• The NDA-1 track record : It could not truly accelerate the economic growth, but presided over a gradual slowdown from 2016 onwards. Today, they seem clueless, and are offering post-Budget fixes.
• Three 'solutions' : The FinMin announced (a) Auto sector incentives, (b) Banking sector changes, and (c) Income Tax related changes. 

1. To address only auto sector problems when many others are also in trouble, is bad governance.
2. Major changes are proposed in banking sector.
3. Compulsory retirement of I.T. officials shows not all is well within the department. But just by changing (automating) the process of notice issue, we tackle only one part of the process. That is no guarantee that honest firms won't be hounded.

• Banking sector proposals :

1. Recapitalisation : The Rs.70,000 cr recap for public banking will push more than Rs.5 trillion for credit expansion. This Budget announcement will be now fast-tracked (earlier it was to be over a long term). 
2. Loan decisions : If a loan goes bad, the officials won't be hauled up. The distrust in lending processes has harmed credit and lending exercises. 
3. Governance reforms : The above show clearly that a fundamental governance reform is needed to ensure that honest behaviour and zero political pressure is created in running PSBs.
4. Monetary policy transmission : The govt. is almost indicating that RBI repo rate cuts be transmitted quickly by banks to retail customers. But can commercial bank rates be so easily tied to policy rates, when each Bank has its own set of cost factors to be addressed?

• Economic revival : Even if lending rates are automatically set to be reduced, can economic revival happen just like that? The GoI thinks Yes. But experience suggests that monetary policy alone may not reverse a slowdown so easily.
• Raise versus Reduction : Investor behaviour is simple – interest rate rise can dissuade investors from investing, but interest rate reduction may not bring in immediate investments. Only the expectation of future profits will motivate investors to put money into new projects. Govt. should work on changing that sentiment. Lowering interest rates does not work towards that.
• Tug of war : Govt. accepts we are slowing down, and need more private investment. Private firms believe they'll invest only when growth returns! Why is the govt. talking only about private investments? What if that never happens?
• High growth phase 2003-2008 : In that very high growth phase (8% p.a. and more), India saw -

1. Very high agri growth rates
2. High public investment
3. High exports.

• Today's govt. is not tackling any one of these 3 factors. Even if we avoid (c) due to trade war, what about (a) and (b)?
• Suggestions : Spread the scope of MGNREGA. Build assets to push agri output. Push more public investment - something that the PM-KISAN scheme has constrained badly now. Nothing else will work.
• Summary : To tackle the current slowdown, only more public investments and a focus on rural areas will help; nothing else will fundamentally change anything.

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