By Anjan Roy
On the New Year’s Day the Reserve
Bank of India put in place a mechanism for restructuring the stressed assets of
the medium and small scale sector. Individual banks have been advised to take
up stressed loans of these units and work out schemes which will enable them to
continue getting funds for their operations.
In fact, something similar had been
asked by the government from the RBI while pointing out that shortage of
liquidity was clamming up the economy. RBI had disagreed and maintained that
there was enough liquidity. For all practical purposes RBI has now acceded to
the government request for infusion of fresh funds under its new governor
Shaktikanta Das. Without a hitch, and scarcely making any noise, one of the
points of contention between the RBI and the government has been resolved.
At this point of the start of a new
year, the natural question that comes up is: will it be as smooth always? The
pitched battle fought out in the open between the RBI and Union finance
ministry ceases to bother for the rest of the current year? Looks like the
tones will not be shrill and differences may be sorted out in hushed tones
internally.
Before that, let us try to probe why
funds shortage had become such a contentious issue between the government and
RBI.
One must remember that all talks between
the two sides in the first half have had the undertone of the forthcoming
election. Whatever happens to the basics of sound economic management,
elections would surely override those concerns.
Serious shortage of credit in the
run-up to the election could make or unmake a government. Funds shortage would
automatically leave its shadow on the employment situation. As such, the
vaunted goal of providing millions of jobs every year has remained as far from
reality as when it was promised. Jobs have not come and on top of that if there
are some job losses because of funds shortage, this would be double whammy for
the ruling party.
The government had wanted the RBI to
turn the funds tap on so that these could grate the machine no matter how
subprime such fresh accommodation to industry and business could be. The RBI’s
clamp down on banks having large portfolios of bad debts and its gag order on
them prohibiting fresh lending could have created such a situation of
widespread job losses.
But then, why such abject dependence
on funds from the banks for keeping the medium and small scale sector humming?
After all, the government had set up the so-called Mudra Bank, which was
supposed to cater to the funds requirements of the tiny and smaller units that
created the most number of jobs. It had stated a core fund of some Rs90,000
crore at the Mudra Bank kitty for offering loans to small and any units. Did
that fund reach the intended beneficiaries? Going by the noises raised, it does
not appear so.
In fact, during some of the trips
outside the confines of the cities and towns, this correspondent found hardly
any awareness about the Mudra Bank and its funding activities in the course of
conversation with local small businesses. Whatever funds might still have flown
from the Mudra Bank to beneficiaries might really have been the rechristened
priority sector loans.
Thus, the Mudra Bank did not do what
it was meant for: providing additional funds to the smaller units on a
sufficiently wide scale to make a difference. In the absence of any such fresh
financial intermediation, the small and tiny units had come under stress in the
wake of the sudden evaporation of funds after the IL&FS crisis. The
unofficial sources of funds for the informal sectors had vanished all of a
sudden.
Now that the RBI has set in motion a
process of resuscitating small scale funding through more active interventions
from banks, many of these units could start stepping up their operations.
The other issue that still persists
between the government and the RBI during the course of 2019 is handling of
inflation threat and setting of interest rate. The year which is immediately
behind had proved to be really stable so far as prices in general are
concerned.
Inflation rate had remained
range-bound and mostly stayed below 5%, if not lower most of the time. Even on
last count, prices have remained lower than the RBI threshold. The question,
however, is about inflation perception.
The expectations about prices rising
have turned out to be lively. With the world oil prices jumping up and down,
the sheer volatility had instilled a sense of fear about its impact on the
general price line. Oil price has proved to be tremendously technical in
nature, there meaning that stock levels of crude oils with major suppliers and
consumers, the views of the oil cartels and a couple of large producers and the
reaction of US shale producers have become defining guides for oil price on the
global markets.
Leaving aside the influence of global
oil prices and their impact on domestic Indian consumer prices, the critical
factor in inflation watch is the trend line of food prices. There have been
some surprises there as well. The prices have remained muted even in the high
summer months when vegetable and food prices had customarily tended to rise.
This gives scope for maintaining easier stance of monetary policy than
otherwise.
Will these trends continue in the
current year? If the prices front remains benign, there is little chance of a
flare-up between the monetary policy guardians and the government. Peace might
thus prevail without the North Block asking for interest rate cut and
incentives for the economy every now and then.
Thirdly, with the government saying
they are not immediately interested in pawing upon RBI’s so-called treasure
trove of some $50 billion, a major fight is already avoided. A high-level group
has been constituted to work out principles for sharing the funds and that
means putting the issue into limbo. There is no question that the aiding
principles for this could be evolved before the next election so that the funds
could become handy for popular programmes.
Lastly, the new governor can be
expected to be much more reconciliatory than combative by his training as such.
A lifelong bureaucrat is not a natural fighter. He is rather a problem solver
in the sense that he will try to wriggle out with some solution instead of
sticking to some points of principle when it comes to a crisis.
2019 could thus see truce and peace
between government and RBI and the basic causes of the differences have already
been either resolved or put under the carpet. And then, when the next
government takes office after the elections, enough would be on the plate to
savour than bracing for small time skirmishes. (IPA Service)
The post Less Prospects Of A Fight Between Govt And RBI In 2019 appeared first on Newspack by India Press Agency.
