A HIGH RISK GAME

The former RBI governor’s new book sidesteps the political quarrels of his tenure to focus on the ‘drama of monetary policy’. Exclusive excerpts

- Urjit Patel

THE CREDIT MARKET IN India is prone to perilous setbacks, with the extant prolonged non-performing asset shock being the latest one. At the heart of the subject is the increasing risk, in effect, due to the failure, over decades, to arrest a creeping banking sector-visualisation; ownership of banks as a means for day-to-day macroeconomic management rather than primarily for efficient intermediation between savers and borrowers. Indian finance ministers, somewhat unusually as compared to colleagues elsewhere, declare ‘credit budgets’ on behalf of banks in the annual finance speech; state chief ministers, for their part, announce quinquennial write-offs; in 2008, in the lead-up to elections in the following year, the Union government did both simultaneously! How we got here feels like a case of an Overton window in India’s political economy, where ‘gradual shifts over time make [previously] abnormal situations feel normal to anyone watching on’. An inexorable upshot in such cases is that the financial burden on the national balance sheet snowballs and policy contradictions catch up.

A positive outcome of successfully overcoming the current challenge would be a low-hanging opportunity to boost growth by putting moribund capital stock to work. The Indian financial ecosystem has been dominated by the official sector for much of the last half-century. The involvement is manifest through three broad channels: (i) unfettered ownership of numerous intermediaries; (ii) mobilisation of resources; and (iii) policy prescriptions on credit. These encompass marshalling of financial savings and its utilisation for investment and working capital. The government’s instrumentality is both direct and through those of the entities it owns, as well as indirect, owing to statutory restrictions and social lending requirements.