The Punjab National Bank-Nirav Modi scam has placed banks, regulators and the government in an embarrassing spot. How do you view the developments?
It is best for me to not respond to any specific instance, because all the information is not yet out. What is important to flag is that there is a public sector bank issue and it is no different from [any other] public sector enterprise. There have been attempts to reform them since the mid-80s, but nothing much has happened, because it has been impossible to improve the governance structures, to make them completely independent, insulate them from the ministries, as well as from the political classes. It is no different with banks.
Do you think the issue is a setback to the government, given its rhetoric on cleaning up the banking system?
No, I don’t think so. The finance minister and the finance ministry have been talking about what one needs to look at, and what needs to be done about the banks. All public sector banks are not the same, but there are some that one should do something about. In the governmental system, it is somewhat difficult to pin down responsibility. If A does something, it is difficult to say A is responsible here, and not collectively….It is the bane of all government-backed sectors. We know there have been instances of loans being granted, when they should not have been, without checking credit worthiness or collateral. It is a problem across all public sector banks. It is a systemic problem that may have come to the core because of these instances, but the problems remain.
Are the country’s current set of regulators to blame for this? Is there a need for a new independent regulator that will look specifically at corporate governance?
It is very easy to say there should be an independent regulator, but then we have plenty of regulators. There are questions about the regulators’ powers. There are questions about the regulators’ expertise, because even if hypothetically, regulators should be manned by people who come from outside the government, that often does not happen. And there are issues of regulators straddling different sectors. There is RBI, Sebi and there is the Serious Fraud Office (SFO). There could be a need for a regulator in the corporate governance segment, but you don’t create them without clearly demarcating responsibilities between them.
Do you think the current government is doing, or has done, enough to tackle the problem of banks’ NPAs
We have a stock of declared or existing NPAs. NPA is a quasi-legal term. There are assets that are stressed, but the term “stressed asset” is used vaguely, because there is no specific definition for it. There is an issue of what one should do about stressed assets, before they formally become NPAs. But both need to be addressed, and the government is looking at it.
Analysts have critiqued import duty hikes, stating it will affect manufacturing, and can also lead to trading partners retaliating against India’s exports. Your comments.
There are different ways to look at it, and all of them are sort of valid. One is, there is nothing legally wrong with doing it, because as you know, a country has bound-rate commitments. As long as you are below the bound rates, you can increase import duties
. Legally, there is no wrongdoing. But let us also recognise that the global world is not one where there is complete liberalisation. The developed countries are also rather protectionists. Let us also acknowledge that reciprocity is also a built-in part of bilateral and multi-lateral negotiations.
We are still in the midst of working out GST. Until you have that, you do not know what the complete indirect taxes that the domestic manufacturer pays. The imported products have to pay basic custom duties, and a countervailing duty, which is equivalent to indirect taxes that a domestic manufacturer pays. Until you have GST, you are not able to fully compensate through the countervailing duty system all the indirect taxes that the domestic manufacturers pay. There is a case for not reducing import duties necessarily, and perhaps, (even) hiking them a little bit, if the case so warrants that the countervailing duty does not cover all indirect taxes. Suppose, I am trying to ensure manufacturing in India. If I have low tax rates, people will prefer exporting goods to me. That is the cheaper option. If my intention is to push manufacturing domestically, to ensure (greater) FDI, then I don’t necessarily want low import duties.
Let me now add another point. Typically, a government reacts when the industry complains. Industry, generally, tends to complain when manufacturing isn’t doing all that well. Had it been doing well, there would have been a case for reducing import duties. When it isn’t doing all that well, I see no reason to not hike import duties, particularly, in a situation where you would want the rupee to depreciate. Depreciation helps exports, but it also makes imports expensive. But the rupee is not depreciating because of capital inflows. Therefore, the cushion that you get from exchange rate depreciation is also not available.
How do you look at a programme like Modicare announced in the 2018 Union Budget? Does it have the potential of developing into a universal health scheme?
That is being looked at by the Ministry of Health. So we need to wait and watch, particularly because there are similar schemes already in place in different states. There has been a reference to Socio-Economic Caste Census (SECC), and most of the time when people refer to it, they mean SECC Rural, although there is also an SECC Urban. SECC Rural is far more satisfactory than SECC Urban, and the two cannot be reconciled, as the questions asked are very different. There are some people who are going to be left out. At the end of it all, we have to decide who will be a beneficiary. We need to have a cut-off point. Whatever cut-off point you have, there will be problems, because the people who are left out, will certainly complain, and they will probably also complain about people who have been included.
You can also have a problem because you might end up implementing it in the rural areas, and the urban side is left out. What eventually happens, is that this might probably be the precursor to a universal kind of health scheme, where you weed out people who don’t want it, on the basis of self-selection. What do I mean by self-selection? We will have to work that out, but the elements might be you are eligible for the cashless or the reimbursement, if you go to a general ward, and not to a private ward for certain diseases, and not for some diseases. So there are ways of weeding out people who don’t need it and that might be from the implementation point of view. These are my thoughts, not the government’s view. Also, this is an insurance product. You need to work out the premium. This is not going to happen in one month.
There is a criticism that under the 15th Finance Commission, the decision to use Census 2011 is unfair on better-performing states. Your comments?
Every Finance Commission has a formula, and the formula is based on certain indicators. Traditionally, Finance Commissions have used population as an indicator. Earlier finance commissions had used the 1971 Census data. In this case, they have been asked to use the 2011 Census. But one should not immediately jump to any conclusion. Because how that population figure is going to be used, will be determined by the Finance Commission, and we don’t know yet, as it has just been set up.