Former CEA Subramanian sees PSU mergers like PFC-REC as signs of ‘state is back’; votes for a separate fiscal council & only-advisory role for RBI board.
Former chief economic adviser (CEA) Arvind Subramanian has cautioned against any regulatory forbearance in a seeming endorsement of the central bank’s reluctance to loosen its capital adequacy norms for banks and open a special credit window for non-banking finance companies (NBFCs).
Speaking at the Idea Exchange Programme of the Indian Express Group on Monday, he said, “Should the (PCA) banks be allowed to lend and grow out of the problem? Should there be any regulatory relaxation for NBFCs or capital norms (for banks)? Eight-nine years into the twin-balance sheet challenge, I don’t think we can any more afford to say we should relax regulatory constraints because that would be kicking the can down the road and making the problem worse.”
The former CEA, whose book, ‘Of Counsel: The Challenges of the Modi-Jaitley Economy’ was launched recently, however, wants the Reserve Bank of India (RBI) to be made accountable for any regulatory or supervisory failure.
Asserting that the central bank definitely has excess reserves built up over the years, Subramanian wondered why the RBI chose to miss its own Mario Draghi moment and didn’t, on its own, suggest conditional transfer of surplus to the government. (At the height of the euro zone crisis, European Central Bank chief Draghi in July 2012 famously said: “…within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”)
The former CEA, however, added that any surplus transfer to the government must be used to fund long-term investment (like recapitalising state-owned banks) and not short-term consumption.
Amid a raging debate over the need to change the RBI’s governance structure, Subramanian, who quit as the CEA in late July, endorsed the view that the central bank’s board should continue to play only an advisory role and policy-making should best be left to the management.
The board, headed by the RBI governor, currently consists of two government nominee directors, four deputy governors and 11 independent directors from different walks of life. In recent months, following a tussle between the finance ministry and the central bank over a host of vexed issues, there has been a clamour for further empowering the RBI board. Senior government functionaries have joined the chorus by pointing out that the powers currently being enjoyed by the RBI executive management actually devolved from the board, the repository of the RBI’s authority under law.
Highlighting that the “state is back” through a string of merger and acquisitions (like ONGC’s acquisition of HPCL, LIC picking up a majority stake in IDBI Bank or PFC’s purchase of REC), Subramanian said the process of seeking genuine privatisation post-liberalisation seems to have been reversed. Such moves, if intended to artificially maintain the fiscal deficit target (in deference of importance attached to these by the rating agencies), are not desirable, he said, supporting the idea of an independent fiscal council which could make real-time interventions.
Subramanian didn’t mind the recent decision of the central bank board to relax the capital conservation buffer deadline, as it is not a very large component of banks’ overall capital requirement. According to the RBI’s capital adequacy norms, banks are required to maintain the minimum capital-to-risky-asset ratio (CRAR) at 9% (higher than the Basel-III requirements of 8%). On top of this, they were mandated to keep a capital conservation buffer of 2.5% in phases by March 2019. The implementation of the last phase of the buffer requirement?0.625% in 2018-19?has now been deferred by a year. The finance ministry wants the RBI to tweak the “stringent” capital norms and align them with the global practices. The RBI, however, has cautioned against “any push for dilution of standards in the name of aligning them with international benchmarks.”
On the goods and services tax (GST) revenue trailing the budget estimate – the average monthly collection so far has been about Rs 97,000 crore, which means for the Centre to meet its budget target for GST, the collections in the last four months of the fiscal should be Rs 1.2 lakh crore/month –, Subramanian said it might not be the right way to assess the GST revenue against the budget projections. A buoyancy of 1.2-1.3 over nominal GDP growth would yield GST revenue growth of 11-12%. Actual collections, he said, might not be far behind that level.