All our econometric models which we draw for projecting inflation have gone for a toss: Madan Sabnavis, Chief Economist, CARE Ratings. – The Economic Times–16-06-2017

In an exclusive interview to ET NOW, Madan Sabnavis, Chief Economist, CARE Ratings says that lowering interest rate cannot be a panacea for an economy like India.

Edited Excerpts:

To expect a committee of creditors to find an answer within six months, to what a committee of bankers have not been able to, is that what liquidation is all about? So even if you accept that there will be some kind of a haircut which the bankers take, is liquidation what we really looking at as these are assets which have been created in a capital scarce country. Are we being a little naive in thinking that liquidation really is the answer?

I would fully agree with you because as you are mentioning liquidation should be the last resort and definitely not the first option but I think the kind of enthusiasm we have today is because it appears we have reached some kind of a dead end when it comes to NPAs. We all know the numbers are going up, we are not anyway close towards the resolution path and therefore this current insolvency quote and what RBI is doing in terms of identifying these assets and then referring them to the committees which will finally take it up is just a good beginning. We really need to wait and see as to how this really progresses and whether there will be any kind of a worthwhile solution which comes about. As you rightly mentioned I do not think we can straight away write off or liquidate these assets in order to back things to equilibrium It will be highly disruptive especially for the future of banking. But yes it would be a bit naive for one to think that the solution has come about, this is just another of attempts which have been made to sort of this issue which is fairly deeply entrenched in our banking system and one will have to just wait and see how it turns out.I think I am not quite sure if the committee members would be adequately equipped to handle issues on banking where decisions have been taken purely on commercial grounds. So there will be some bit of time which will be taken to reconcile. I do not think that is going to happen that fast but then, it is always better to have some kind of a system in place so that there is some hope after some time.

I wonder whether you share my fear on this score. Ultimately, we have to find the private sector for many of these power projects, telecoms, steel mills. We find the good old worry at the public sector, a SAIL taking over the steel companies and NTPC and NHPC taking over the power companies. So once again we pass the problem from the right hand to the left hand ultimately it is taxpayer who is always at the bottom of the food chain. That is my biggest fear. We will find that the public sector is forced to step into the breach and take over these assets at nominal prices which are not very favourable to them. DO you have similar fears ?

I agree with you because I think that is something which is very much likely, as you were saying we need to distinguish between those NPAs which have become NPAs on account of industry related factors and those which are wilful defaulters. So the final transfer could take place to the public sector and we could end up in this kind of same situation which we had in case of banks, when we had certain private sector banks failing. Finally what happened was we have a public sector bank come and take over the private sector bank. So we could be having a similar kind of situation out here. ​

In fact that is probably the benefit of being in public sector because once you are in public sector, it is assumed that there is a central government support and therefore the enterprise can never really fail. So even though we have Air India having accumulated debt of say around 50,000 crores, we feel that there will never be a case where there will be a default coming through because the central government is going to step in. In fact on this particular issue of airlines, I always feel that if we were able to take this bold decision for the discoms and make sure that the debt was transferred to the state governments a similar thing should also be done for public sector units and I think it should be starting for Air India where we actually transfer this contingent liability on to the central government books and then make sure that Air India sorts of in a clean way then you go in for a disinvestment, get in private players to also participate in the equity that would probably be the right way to go.

Yes absolutely because in fact the only way to go is to get the government out of running airlines, running banks and running hotels, a whole host of things which brings me back to my next topic of bank mergers. How far will bank mergers really solve the problem? Instead of two small bad banks, you have one large bad bank. I know you have written on bank mergers and I think you were little bit more enthusiastic or little bit more optimistic about it but I again as I said I am sceptic journalist maybe but I do not feel that mergers will solve any problem unless it is followed up by allowing these banks to function at arm’s length distance from government and allowing government’s stake to come down below 51%. Do you see that happening or will we just see a series of shotgun marriages?

Even I am very sceptical about this particular issue. In fact, I have always been sceptical about two public sector banks merging because what happens is if their basic ethos does not really change, I am just having mathematical summation of two balance sheets and profit and loss accounts. So what is really going to happen is that you are able to cover up for the bad bank but on the whole the balance sheet remains where it is because finally at the end of the day the public sector banks will the government and their overall aggregate balance sheet of these public sector banks will remain the same because give or take your subtracting certain bad numbers from the aggregate, so I really do not think that is the right solution for public sector banks where you start merging them with a stronger bank because you have to be very clear about what are you going to do to excess staff, what are you going to do to the extra branches, the ATMs and whatever you have, how exactly this kind of an integration going to take place. Now that is a physical aspect of it. The second part is how are you going to run the banks? If it is going to be run the same way in which they were, then I do not really think it will matter materially and maybe another five or ten years down the line we may run into similar kind of problem. So I think if we are talking in terms of merger of banks, it is better to go in for an open sale of stake where the government also bring its share below 51% but then it is easy for us to say that the government should lower it. I am quite sure there are lot of compulsions where the government is not willing to go below 51%. So what we are talking here of just short-term measures of saying that okay I have bank A which is weak, let us merge it with bank B which is very strong and on the whole on paper it looks good thing, I think that is what we have done for SBI but I think the SBI associates are definitely better placed in some of the weaker banks which we have in the public banking system.

I agree with you completely. It is easy for you and I to talk, it is very difficult to be in the hot seat and actually do things. But one last reaction from you to the WPI numbers which have come in even lower than the estimates. Are you little surprised that they have fallen so much or do you think that was par for the course?

No, I think we are very much surprised, the same thing happened even for the CPI, so I think almost all our econometric models which we draw for projecting inflation have gone for a toss this time. We have been terribly wrong both on CPI and WPI because we had a number of 3.1% but I think it is all because of the new base which has come in and is probably creating issues of wild swings. If we you go to the marketplace, I do not think I have seen food prices falling to such an extent. So it is probably in terms of what are the components of the index that are rising and coming down. I am quite sure it is going to be again the vegetables and pulses which have been responsible for this sharp decline in the WPI inflation numbers. But then I do not think that the WPI also matters too much from the point of view of policy perspective. The RBI is aware of the fact that the numbers are going to remain very much benign. Now it is a case of saying, that will the RBI also look at the growth syndrome and then say okay, growth is not picking up now let me change track and start lowering interest rates. And more importantly I do not know if lowering interest rates is kind of a panacea for us. We keep saying that interest rates should be lowered but we have seen the interest rates getting lowered in the last two years. May be not to the extent that what the corporate sector wanted but we have not seen growth take off. So I think it is just one small component of the overall growth problem which we have today. It is more on the demand side which has to be addressed by the government in a more proactive manner and we have to wait for private sector investment to acquire pace.

via Inflation: All our econometric models which we draw for projecting inflation have gone for a toss: Madan Sabnavis, Chief Economist, CARE Ratings.

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