Be that as it may, the Annual Report (2014-15) of the RBI, released late last month, has a novel feature of Governor’s Overview running to eight pages that provide a synoptic picture of the state of the banking sector in general and the broader economy in particular. With his characteristic outspokenness, Governor Rajan said notwithstanding the immense efforts in recent years of both the Government and RBI to restore macroeconomic stability to the economy, three areas remain ‘work in progress’ from the perspective of the apex bank. First, economic growth is still below levels that the country is capable of. Second, inflation projections for January 2016(as of early August 2015) are still at the upper limits of RBI’s inflation objective. Third, the willingness of banks to cut base rates—whereby they forego income on extant borrowers in order to attract more new business- is muted; not only does weak corporate investment reduce the volume of new profitable loans, some bank capital positions, weakened by non- performing assets, may prevent them from lending freely, the apex bank agonized.

On medium-term challenges confronting the banking industry, Rajan minced no words to rail against the past “fashionable conviction” that the pace of regulatory reforms had to be limited by the capacity of “our banks, especially our public sector banks” (PSBs). He justifiably warned the current stress in the banking system suggests that the real economy will not wait for the banking system and a slow pace of reform could lead to greater, rather than lower, risk residing in the banking system.

Stating that financial sector reforms need to move on many fronts, Rajan unequivocally contended that “for a country as big and populous as India, reforms cannot be shots in the dark, subjecting the economy to greater uncertainty and risk”. The Modi sarkar, waffling and humming on the reform front for far too long, having wrested a major electoral gains in 2014, should bestir itself on doable and deliverable reforms as the time is running out. It is not for nothing Rajan contended that “wherever possible, we have to move steadily but firmly, ever expanding the scope of reforms while always limiting the uncertainty they create”.

The fervor with which the Modi government came out with slogans like “Make in India and zero effect and zero defect”, pushing amendments to land acquisition act and suddenly reneging on it in the face of obstructions and deferring the passage of the crucial Goods and Services Tax Bill constitutional amendment legislation beyond April 1, 2016 for want of requisite support in Parliament betrayed no steady and firm movement on the reform front so far. As the report argues, easing the doing of business in India has now become a widely cited constraint on the revitalization of manufacturing. Areas that require significant changes in this context, the RBI said, include legal and regulatory environment, labour market reforms, tax regime and administrative environment.

No doubt, the Modi sarkar sets store by financial inclusion and helping out to small producers through initiatives such as small finance banks and MUDRA Limited for refinancing and securitization services to unincorporated lenders. Rajan also echoes similar views by underscoring the need to ease lending to small producers, whether they are farmers, self-help groups or petty businesses. For this, he said, there is a need to improve the structure and working of credit information bureaus, collateral registries and debt recovery tribunals—ironically credit flows easily only when the lender is persuaded that he will get his money back, so easier access to credit necessitates closer attention to default prevention mechanism. Hence Rajan aptly surmised the most important source of collateral value as land and underlined the need for “better digital mapping and clean records of land ownership across the country so that it can be used more effectively as collateral”.

Referring to the prospects of the economy in the second year of the Modi government (2015-16), the apex bank is optimistic on indirect tax collections, going by the robust record in the first four months, to achieve budget estimates, though contingent upon a recovery in manufacturing and services. It urged the authorities to front-load “plans for disinvestment” to take advantage of supportive market conditions and also to forestall cutbacks in capital expenditure to meet deficit targets. It rightly warned against such cut backs compromising the quality of fiscal consolidation, adding that fiscal consolidation has primarily been effected through “aggressive cutbacks in expenditure, both on the revenue and capital accounts”. This is due to non –realization of budgeted non-debt receipts. As a consequence, the burden of fiscal consolidation has disproportionately fallen on expenditure compression. In the process, certain productive expenditures under the central plan suffered cuts in excess of 20 per cent over budget estimates during 2012-13 to 2014-15 (revised estimates). These include irrigation and flood control, communications, rural development and education. Plan capital expenditure suffered a shortfall of 14.4 per cent, on an average, during this span.

Noting that in the past three years, the government has been effecting a cut of about 19 per cent in the actual capital outlay over budgeted levels in view of revenue shortfalls, the apex bank said a comprehensive fiscal consolidation strategy will also need sustainable improvement in government revenue. It is time mandarins in the Ministry of Finance pored over the weighty suggestions from Mint Street set out in the apex bank’s annual report so that the stakeholders and shareholders in the economy stand to benefit over the long haul through a purposive package of actions on the ground, policy analysts wistfully say.(IPA service)