Cost of capital to go down by year end: Sanjeev Sanyal

By: |
Published: July 10, 2019 12:51:56 AM

IBC is the biggest reform which has taken place and cleaning up the banking system is almost over.

Sanjeev Sanyal Sanjeev Sanyal

Principal economic adviser Sanjeev Sanyal on Tuesday said cost of capital will come down by the end of the year since “the whole architecture of interest rates will come down”. This would happen with inflation already anchored and government leveraging its external balance sheet.

He said 90% of India’s fiscal deficit is on account of interest payout. The government’s primary deficit is only 0.3%. The cost of capital has to come down since we want to have an investment-driven economy, which should be 35% of the GDP.

According to Sanyal, the Insolvency and Bankruptcy Code (IBC) will go a long way to reduce the cost of capital because as it cleans up the banks, the rates begin to lower. IBC will help reduce the spread between the deposit rates and lending rates. The spread at present is too high and lowering the spread is the government’s primary target. IBC is the biggest reform which has taken place and cleaning up the banking system is almost over.

However, the government is expected to fix the sovereign benchmark for external borrowings by September and this would give a leverage to its external balance sheet. At the end of March 2019, India’s total sovereign debt stood at $10.38 billion, which is 3.8% of the GDP. India aims at a gross borrowing of Rs 7.10 lakh crore but the bulk of borrowing will be done in rupees from domestic sources. But the cost of foreign funds are very low, whose advantage India should take, Sanyal said.

Enforcement of contract was another important aspect in making India an investment-driven economy and for that the courts of the country required to reach its sanctioned strength. “There are 35 million cases pending in the country’s courts of law and to attain 100% clearance, which means there would be no addition to the existing backlogs, the Supreme Court needs one additional judge, who has already been appointed, the high courts need 93 more judges and the lower courts 2,300 more judges. “This is already the sanctioned strength and it needs no extra efficiency in the functioning of the courts to attain 100% clearance or prevent piling up of new cases above the existing 35 million,” Sanyal said.

However, to clear the existing backlog only 23% improvement in the functional efficiency is required in the lower courts and 18% improvement in functional efficiency is required in the Supereme Court. The apex court functions for only 190 days a year and the government needs to see whether the number of functional days can be increased. On the cost of logistics, he said that specific bottlenecks in the entire value chain of logistics needed identification, which could help in reducing the cost.

Do you know What is Repo Linked Lending Rate (RLLR), Wholesale Price Index (WPI), Public Debt, Finance Commission Grants & Other Transfers, Economic Survey? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.