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01
November 2018
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Direction (The Total Investment & Insurance Solutions)
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 11/1/2018 India's
current economic scenario not like 1991 crisis: Bimal Jalan 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.The Total Investment &
Insurance Solutions
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