Sanjeev Sanyal, Principal Economic Advisor, Ministry of Finance from the sidelines of the Motilal Oswal Global Investor Conference spoke to CNBC Asia on issues concerning the Indian economy like NPAs, currency appreciation, growth.
Talking about the downtick in growth in India, he said there are several short-term factors that are responsible for the economic slowdown, like the uncertainty created by introduction of the new tax regulation GST, demonetisation but the government will take necessary measures to unwind the concerns. Moreover, the government is also concerned about global uncertainty and sluggishness in global economy.
Meanwhile, the efforts of the government up to clean up the banking systems of its non-performing assets (NPAs) meant credit to private sector got constrained. However, the government has made a fair amount of progress of NPA resolution and by the beginning of next year credit is likely to get expanded.
“Building blocks of another round of expansions are being put in place,” he said.
The government gave up the Bad Bank idea quite some time ago and are now using a completely different method to clean up the banks, which is the new Bankruptcy law under which some 50 odd top defaulters have been identified.
When asked what government’s stand on the appreciating rupee was, he said the Central bank of India – The Reserve Bank of India has long established way of managing the exchange rate and they have managed it was the last many decades.
With regards the bilateral surplus with the US is concerned, he said overall India runs a small deficit, so from the government’s perspective the deficit is not a major constraint but will keep a close watch on it and manage exchange rate accordingly.
Below is the verbatim transcript of the interview.
Q: One of the big questions that investors and market watchers are asking is with this Cabinet reshuffle, it is two things that are happening. One, Prime Minister Modi is bringing in professionals, bureaucrats to run several portfolios, that is one thing. And the other thing is, he is freeing up Arun Jaitley to focus specifically on the economy. This is an economy which is growing at its slowest pace in three years and they want to know is this going to work? The short answer in your mind is what?
A: Obviously, you know that the economy has slowed down, that is true. Some short-term factors were responsible for it. One, of course, the uncertainty created by both, the introduction of the new tax system, the goods and services tax (GST) and before that, the demonetisation. Nevertheless, we are concerned about the pace of the economy and as you will see, measures will be taken to unwind that.
In particular, we are concerned about global uncertainty and the general sluggishness of the world economy, of course, we cannot do much about that, but also a major clean-up of our banking system that we are carrying out right now which also means that credit to the private sector has been constrained. However, the clean-up of the banking sector is progressing apace and we should begin to expanding credit out again by the beginning of next year. So, the building blocks of another round of a rapid expansion are being put in place.
Q: What I want to talk to you about is this, the strong and appreciating Indian currency, the rupee. India already runs a significant surplus with the US. Is this too much of a good thing and where do you think the current government stands on the appreciating rupee? So far, they have been pretty hands-off.
A: The RBI has had a very long-established way of managing the exchange rate and that will continue. They tend to get in the way of very rapid movements, but by and large, they manage it in the way they have managed it over the last many decades and will continue. As far as the bilateral surplus with the US is concerned, the fact is that overall we run a small deficit. So that is what look at from our perspective. The deficit is not a major constraint, but nevertheless, we do keep a watch on it and in the long-run we will manage the exchange rate accordingly.
Q: Bringing you back to what you were talking about, un-choking this issue of banks saddled with legacy bad loans, infrastructure loans that basically did not pan out the way they should have. Which way is the government moving on this because this whole idea of a bad bank to soak up or to transfer all that bad money into those, has that gained traction? Is that the route that the government is going down? Is that where we are headed?
A: No, the bad bank idea was given up quite some time ago. We have been cleaning up the banks using a completely different method for quite some time now which is that we are using a new bankruptcy law and we have identified some 50 odd top defaulters which account, by the way for something like 60-65 percent of the overall bad loans portfolio. And we have been focusing on them and using the bankruptcy code and oversight committees to try and resolve them rather than put them into a warehouse like a bad bank. So this process is much faster. We have already made a fair amount of progress down this line. There are some degree of liquidation and the resolution is already in place and by the end of the year, a large part of this problem will be done.
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