PSU Banks in India have burnt over 3L Crores through bad
banking. None other than the RBI Governor has been so critical of the bad
practices of the Indian banking system. Please note we have not taken into
account the NPA levels of Private Sector Banks. Adding it will take the score
to more than 4.5L Cr.
Imagine we have half of this money available with us, we
need not discuss about fiscal deficit and how to raise resources to fund our
long term growth plan. Is it not a pain to sell our national assets to settle
our liabilities?
Velocity plays an important role in the growth of the
economy. Liquidity which is available in the banking system generates velocity
through the multiplier effect, leading to higher flow of money which can drive
the supply side expansion.
If banks burn the money with bad loans it impacts the
velocity leading to slow down of economy. This has been the case for our
economy in the last few years as the multiplier has lost its momentum leading
to inflationary conditions.
On the other side, with the policies of the government of
UPA favouring Consumption than Asset Creation, the composition of the
Expenditure also was more towards Revenue expenditure leading to weaker
multiplier effect. This again leads to lower velocity and thus lower expansion
of supply side leaving Inflationary conditions.
Nothing has changed as regards these two with new NDA
government though the first budget was sent out in a hurry in the month of
July.
We are identifying four critical factors which can determine
the growth of the economy.
· Maintaining Positive Real Interest Rate and Increase in Domestic Savings
· Shifting the Composition of Expenditure from Revenue to Capital
· Focus on reforms which can help addressing the Supply Side Expansion
· One Time Disinvestment Spree to generate at least 2L Crores
PSU banks need to be capitalized to bail them out but at the
same time they have to be made accountable for the NPA loss.
If FM can focus on the four above, the economy will pick up
pace in one year time and we can look for sustained growth of over 7% in the
medium to long term
.
Fiscal deficit can take a little lesser priority at this
point of time as we are moving towards a larger crisis of unemployment with
positive demographic profile. With manufacturing hitting the rock, bottom, and
more and more youth are passing out year on year, over dependence on service
sector to generate employment will be a larger peril.
For the money to flow into the system with a velocity which
can help expansion of supply side and creation of employment , the multiplier
has to be at more than 2 times and money
that serves on asset creation can be the only solution.
So the dilemma between Fiscal Deficit and Asset Creation
should be done away with firm allocation of resources towards asset creation
and backing up with a strong execution plan. RBI’s rider on fiscal control for further rate
cuts should be taken up bravely through strong and committed measures on
capital expenditure program which will help to keep the inflation under check.
Promoting savings and not a check on subsides will help to
keep control on demand side economics and thereby government can handle
inflation effectively.
Mr Jaitely will be looked upon with pride if he can pull out
a good fiscal policy; Iam sure with a much better aligned monetary policy the
country can go back to high growth trajectory.
T Margabandhu
