By Harihar Swarup
The Indian economy was expected to collapse due to a pandemic. But the recovery is better than in most countries. An appropriate counterbalance – cyclical policies made this possible, but it worked because the reforms had reached an adequacy threshold. In the recent past, growth has suffered from an exaggerated focus on structural reforms, while the elimination of shocks has been neglected. Current policy has responded to this. But there is talk again about the need for reforms. What reforms are then needed?
A major objective of international institutions such as the IMF-WB is to ensure benefits for other countries from India’s growth, especially for the main financiers which are the major capital exporting countries. It follows that they want to ensure freer markets and less restrictions on all types of capital flows. Much of this is in India’s interest as we need more capital and better integration with global markets. But a democracy cannot ignore the concerns of its own citizens. The IMF-WB’s holy trinity of structural reforms to land, labor and other market openings harms many domestic citizens and, at one point, encounters strong opposition at a high political cost.
Liberalization has reached a point where yields are declining. What is achievable in the above is now certainly in flux. Further organic reforms will take place as the states are completed. Improving the supply side has many more aspects. In choosing from the reform menu, the center must be guided by feasibility and pragmatism and ensure that the benefits are shared by a majority.
The emphasis should be on exploiting the special circumstances that are currently in India’s favour. These include the boost that Covid-19 has given to the digital aspect where India has a comparative advantage, the possibility of diversifying the supply chain away from China, transitioning to a net zero economy and leveraging green initiative as a resource. of investments and calls. Attention should be paid to developing skills and capabilities, improving employability, increasing infrastructure, reducing logistical and other operating costs through better coordination between central states, and improving the quality of governance and countercyclical regulation with good incentives. Much can be done to improve the data and privacy functioning of courts and police. Rather than wasting political capital on reforms that meet strong resistance and shock the system, reforms should reinforce favorable trends.
Privatization of banks is one of the reform agendas. There is a recommendation to privatize most public sector banks, starting with those that are doing well. But the argument that BCBS is a drain on taxpayers’ money is based on the experience of recent decades. In the 2000s, they outperformed private banks and were more resilient to the global financial crisis. NPAs rose as they were forced to lend to infrastructure where there are inherent asset and liability mismatches for commercial banks. In addition, it was the first time that loans were made to private companies. Therefore, a full resolution had to wait for the defining regulatory framework for bankruptcy. Improvements in PSB governance and risk-based lending profiles have resulted in declining NPA ratios and strong capital adequacy, even under the pandemic shocks. Social schemes that were a drain on PSB funds are now largely financed through direct government subsidies.
Diversity in institutions and approaches ensures a more stable financial sector. PSBs are trusted by many savers. They have collected Rs. 1.7 trillion in their Jan Dhan accounts, while private banks barely have .PSBs, can leverage their advantages in cheap deposits through joint loans and partnerships. The economy has experienced very low credit growth in recent decades and is poised for a turnaround. Private banks alone could not increase lending sufficiently – when PSB lending slowed. Now is not the time to disrupt the recovery in credit growth. PSBs should be given the opportunity to compete and raise funds on their own. Only those who cannot, or have some other serious weakness, should be allowed to leave through privatization or merger. The strong will prosper. (IPA service)
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