‘India’s original sin is fiscal dominance – that the inability of the government to contain its fiscal spending drives its suboptimal behaviours elsewhere,’ said former Reserve Bank of India Governor Raghuram Rajan in his recent post on Linkedin.
His comments came while reviewing former RBI Deputy Governor Viral Acharya’s book ‘The Quest for Financial Stability in India’. Rajan said the book clearly explains how India could have done much more to deal with the bad loan issues that now prevails and stabilize the financial sector way before the pandemic hit.
Rajan described how the financial system in India has always been an egg-hen case. There are many reasons for the prevalence of a poor financial system, starting from the unwillingness of the ruling government to take advice from the central bank, and instead of persuading the banking regulator to relax regulations so that banks can avoid loss recognitions.
‘For instance, because the government has limited funds, it is reluctant to recapitalize the public sector banks when they have to recognize losses on their bad loan,’ Rajan released a statement.
He also said that the past Indian governments, knowing they have the power to overrule the RBI, have taken the RBI’s advice in times of crisis. ‘What appears from Acharya’s book is how he had some advice for the current government to fix the legacy problems including Non-Performing Assets (NPAs), but unfortunately, too little of the advice was taken, which is one of the reasons we are where we are. Acharya is silent on why this was the case, though readers can guess,’ Rajan said.
The government has done unnecessary spending, leaving itself with little spending for the emergency times like the current. The government pushed lending to medium and small firms, and now the NPAs from this sector is alarming.
Rajan suggests that recognizing bad loans and resolving bankruptcies on time are among measures that can help revive the economy post the COVID freeze. Only adequately capitalized banks can ensure growth, not the weak ones, it further read.
He opined the government can still adhere to the measures given in Acharya’s book, starting from addressing the bad loan problem.
The government can also take Acharya’s suggestion of tasking two sets of asset management companies for the cleanup- private sector for corporations that need debt restructuring and national asset management company for surplus assets, says Rajan.
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