By Biswajit Choudhury,
New Delhi : The sharply depreciating rupee amidst rising global oil prices and the massive foreign funds outflow from the capital market are not crises comparable to the likes of the balance of payments (BoP) emergency India experienced in 1991 because the country’s fundamentals are stronger than before, its BoP is strong and it has one of the highest levels of foreign exchange reserves, says former RBI Governor Bimal Jalan.
On the Reserve Bank of India (RBI) refusing to raise its key lending rate in October as a way to counter the falling rupee and the fund outflows, Jalan told IANS in an interview that in setting its interest rates the central bank’s monetary policy committee has its own set of considerations like inflation, growth and the global economic scenario.
Instead, Jalan, also a former Finance Secretary and Chairman of the Prime Minister’s Economic Advisory Council, says in his latest book — “India Ahead 2025 and Beyond” — that though the country’s fundamentals are much stronger today, it faces several old and new challenges in the area of politics, economics and governance.
“What is happening to the rupee is not a crisis… it is not a situation like in 1991 when we had a grave balance of payments situation. Now we have a much better ability to intervene, the economy has high capacity, we have hi-technology… our fundamentals are strong,” he said in reply to a question.
On the ongoing sharp foreign fund outflows from the capital market, Jalan pointed to the earlier flush of inflows in the preceding period.
“Financially we are in a much stronger position now than, for instance, we were during the Asian financial crisis in the nineties. We were able to handle that crisis, and we can handle this outflow situation now,” he said.
The Asian financial crisis was a sequence of currency devaluations and other events that began in mid-1997 and spread through many Asian markets. The currency markets first failed in Thailand and the contagion spread rapidly throughout Southeast Asia, in turn causing stock market declines and reduced import revenues.
On the other hand, the former Governor pointed to the need for reform in the wider area of political economy as elaborated in his latest book, which would include strengthening the prudential, provisioning and capitalisation norms of state-run banks to bring them in line with the best international standards and reduce the possibilities of future financial crises.
The accumulated non-performing assets (NPAs), or bad loans of banks, which have crossed a staggering Rs 10 lakh crore, are a matter of great concern, he writes.
“PSBs (public sector banks) have to decentralise. Banks report now to the government, which should withdraw from the actual day-to-day governance of banks,” Jalan said.
“The government should restrict its role to deciding on policy and monitoring the performance of banks. It has to decide to do this reform.”
He pointed out that some reform measures, like the RBI’s Prompt Corrective Action (PCA) framework for banks and enactment of the Insolvency and Bankruptcy Code (IBC), had been initiated to deal with the NPA crisis which had provoked risk-aversion among banks and has been accompanied by a significant decline in private corporate revenues and investment.
“All these measures could have been taken a little earlier… one or two years ago,” he said.
Declining to comment on the RBI-government relations, Jalan, instead, drew attention to the many old and new challenges in the areas of politics economics and governance that the country faces which are the focus of his book.
“These can only be met if we are able to generate sufficient political will to pursue the right policies and shake off the dead weight of the past,” he said.
The RBI has recently underlined the importance of its autonomy and warned that the government’s focus on short-term goals could be harmful to the economy.
At a public lecture in Mumbai last week, RBI Deputy Governor Viral Acharya said undermining the regulator’s independence could be “catastrophic”, citing the examples Argentina’s former central bank chief, who resigned following a dispute over the transfer of reserves, and the recent criticism of their central banks’ actions by the US and Turkish Presidents.
Finance Minister Arun Jaitley retaliated by alleging that the central bank looked the other way when indiscriminate lending happened between 2008 and 2014 leading to the NPA crisis.
Media reports earlier this week said that the government has invoked Section 7 of the RBI Act that empowers it to consult and direct the RBI to act on issues that it considers necessary in public interest.
Facing criticism for invoking a hitherto unused section to issue instructions to the RBI, the government on Wednesday said that it respected the autonomy of the central bank but within the framework of the RBI Act.
(Biswajit Choudhury can be reached at email@example.com)