Lest we forget

The partial or complete shutdown in major economies, including the US, Europe and China, stringent restrictions on international trade and the movement of people, including social distancing, has impacted India negatively. On March 24, Prime Minister Narendra Modi announced a 21-day national lockdown. Unless a medication for the coronavirus is found soon, it is likely that in fiscal 2020-21 Indian gross domestic product (GDP) would shrink by 5 per cent or more in real terms. The underlying assumption is that India would lose a month’s economic output due to the ongoing shutdown.

Amidst this virus induced economic gloom, foreign institutional investors (FIIs) have reduced their investments in Indian equity and debt. In fiscal 2019-20, at the end of December 2019, the net equity and debt inflows were $7.7 billion and $3 billion, respectively. By March 20, 2020, net equity inflows had shrunk to $3.5 billion and the net number was negative $4.2 billion for debt due to huge outflows. Therefore, the net FII capital outflows from India in the last three months amounted to $11.4 billion. It is the same sorry story as in 2008-09 and August-September 2013 with foreign capital looking for a safe haven in dollar-denominated instruments at times of economic uncertainty.

Clearly, government spending at the central/state government and local body levels has to go up to address the sharp fall in income for Indians, particularly those who depend on daily wages. The quantum and nature of funding support which has to be provided should be based on extensive consultations between government and independent experts who are knowledgeable about those who are hurting. Hopefully, the Rs 1.7 trillion stimulus and funding package announced by the finance minister on March 26 is based on exhaustive interactions, including with banking, agriculture, transportation and public health specialists.
That said, it has been obvious to most for quite some time except the deliberately obtuse that the Indian rupee is highly overvalued. On March 16, the Reserve Bank of India (RBI) supported the rupee by selling two billion dollars with a forward provision to buy back the dollars in six months. As Brent crude oil prices have halved to about $27 per barrel, this is an opportune time to let the rupee slide downwards to 85 or more to the dollar over the next 12 months.

illustration: Binay Sinha
Given the current macroeconomic uncertainties and collapsing Indian equity indices, which have dropped by about 35 per cent in the last one month, the recent questioning of YES Bank founder and ex-chief executive officer Rana Kapoor by the Enforcement Directorate may soon be forgotten. It is incredible that YES Bank had disbursed loans to 103 firms owned by Kapoor’s family. It was also reported that Anil Ambani’s firms received Rs 12,800 crore in loans from YES Bank. On March 19, 2020, the Enforcement Directorate questioned Anil Ambani about possible kick-backs to Rana Kapoor in exchange for loans received from YES Bank.

Public memory is short and this is particularly true for financial blunders and scams. For instance, the recapitalisation of public sector banks (PSBs) over the last five years has cost taxpayers around Rs 4 trillion already. The better run private banks in India such as HDFC Bank are majority foreign-owned, achieve higher returns on capital and their net non-performing assets as a percentage of loans are lower. However, it is worth reflecting what would happen if, say, 90 per cent of Indian deposits were with private sector banks instead of the current fraction of about 40 per cent.

At the first sign of a bank getting into trouble there is a chorus from all quarters starting with depositors, for the bank to be bailed out as it was in the recent case of YES Bank. If there is a sharp drop in depositor confidence, it does not matter if the bank is privately or publicly owned. In such situations taxpayers are forced into making outright grants. There are many examples which confirm this assertion, including the remedies implemented after the 2008 crisis in G7 countries. And, on March 24, 2020, the US central bank, the Federal Reserve, announced that it is again prepared to purchase an unlimited amount of government, mortgage-backed and corporate debt securities which could total more than the $4 trillion injected by the Federal Reserve in 2008-09. Separately, on March 25, the US Senate has approved a Trump government stimulus plan totalling $2 trillion.

In India it is political executive malfeasance along with the acquiescence of senior civil servants that make our PSBs prone to crony lending. We look for all manner of solutions to bind the hands of the government to appoint above-board specialists to head financial sector institutions and corresponding regulators. Although government has set up appointment panels at arm’s length from itself— e.g. the Banks Board Bureau — the current sub-optimal government approach cannot be improved unless transparency in selection procedures is incorporated in law.

It is not long ago that those involved in financial scams such as Lalit Modi-Indian Premier League, Vijay Mallya-Industrial Development Bank of India, Nirav Modi-Punjab National Bank, Chanda Kochhar-ICICI Bank and Ravi Parthasarthy-Infrastructure Leasing & Financial Services Limited (ILFS) were cited as shining representatives of private sector enterprise. As the months have lengthened to years, there seems to be little follow-up action by the government. Consequently, it is not surprising that there are frequent instances of Indian financial sector fraud. Newspapers could carry a table, say on the first Wednesday every month, about the progress made in serious cases of wrongdoing, who were the board members and senior managers when the fraud took place and report on action taken by government. If no updated information is available from official agencies, “Nil” entries should be reported.

To sum up, people get governments they deserve. Governments get the heads of regulatory institutions, including the RBI and Securities and Exchange Board of India, and heads of financial institutions they appoint. We need to reflect as a people who we are electing and hold them accountable for their choices rather than this misleading distinction between public and private ownership alone.

j.bhagwati@gmail.com; The writer is a former Indian Ambassador and World Bank Treasury professional


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