Arvind Subramanian Backs Bad Bank; Says Time Is Not Right For Universal Basic Income
Funds to resolve the bad loan problem could be raised from the markets, the government or by dipping into the RBI’s capital
The Economic Survey 2016-17 has suggested the creation of a ‘bad bank’ as a solution to the problem of stressed loans that plagues the Indian financial sector. The survey, released on Tuesday, suggested that a centralised Public Sector Asset Rehabilitation Agency (PARA) could be established. The PARA would essentially take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt.
Speaking to BloombergQuint, Arvind Subramanian, chief economic adviser to the government and the author of the economic survey, said that none of the existing solutions to the bad loan mess appear to be working. As such, it is essential to come up with a centralised solution which can help resolve this issue without prolonging the damage to the economy.
Here we have a very difficult problem. It’s been there for a very long time and all the existing attempts to resolve the problem have not been very successful. So you have to try something new and different. Then the question is what should that new solution be. If you hone in on what is the heart of the problem, the heart of the problem is about resolving company debt. It’s not just about banks. The biggest amount of stressed loans are with the big companies. We may need to write down debt. It’s not a morality play, it’s an economic decision. And it will be politically very difficult to write down these debts. So instead of doing this in the current decentralised uncoordinated fashion, we may need to replace it with something more centralised, something with more political cover.Arvind Subramanian, Chief Economic Adviser
Bad loans on the books of Indian banks are already above 9 percent of total loans and may cross 10 percent by March 2018, according to the Reserve Bank of India’s Financial Stability Report released in December. While bad loans have soared, banks do not have adequate capital to provision against these loans. The government’s allocation of Rs 70,000 crore in capital to state-owned banks over a four-year period has been seen as grossly inadequate by rating agencies.
While the creation of a bad bank may shift the burden of bad loans away from bank balance sheets, the government would still need to find funds to capitalise the bad bank. Subramanian, however, said that he doesn’t foresee capital being a constraint in the setting up of a bad bank.
Capital could be raised from the markets or the government or by dipping into the RBI’s capital, said the Economic Survey. The last of those suggestions is a contentious one and was opposed by former governor Raghuram Rajan, who argued that this will only restrict the RBI’s ability to buy government bonds.
The argument that the RBI needs all this capital for prudential and insurance reasons doesn’t hold. If you look at the cross-country comparison, we are just way over the top in terms of how much government capital there is with the central bank. The second point is that do we need all this capital to buy bonds, I think if you look at the numbers, that doesn’t seem to be the case. I think there is enough capital for the RBI to be able to buy government bonds.Arvind Subramanian, Chief Economic Adviser
Subramanian, however, added that this would have to be done in consultation with the RBI and the idea is not to “raid” the central bank’s balance sheet.
Universal Basic Income: An Idea Whose Time Has Not Come
The Economic Survey has also officially started the debate around a universal basic income (UBI) for India. The Survey, however, acknowledged that implementing such a scheme would need resources that the government currently does not have. One calculation put out by the survey suggests that a basic income program, which covers only 75 percent of the population, could cost 4.9 percent of GDP. Even doing away with existing subsidies, which account for 3 percent of GDP, would not make enough room for a UBI.
Subramanian acknowledged this and said the time is not right to implement UBI even though its usefulness should be debated.
The time is not right for implementation because we also have to work through a number of implementation challenges. One of them is the fact that you have to create fiscal room. This is simply not affordable if it becomes another add-on program. It will have to replace existing programs. Then you have to see if there is a political appetite to phase out existing programs. The other challenge is how do you actually design this? On the one hand, universality is an appeal of the idea. On the other hand, I don’t think the Maahol as it were is ready to accept this.Arvind Subramanian, Chief Economic Adviser