Indian Financial Sector on the Edge of a Precipice

Yashwant Sinha

Excerpts from an interview with Sameer Kochhar, Editor-in-Chief, INCLUSION.

Question: What do you think of India’s financial sector performance?

Answer: We are really on the edge of a precipice in India as far as the financial sector is concerned. A declining, decelerating economy has created enormous problems for our public sector banks and all the lenders in our system, large NPAs are built up, they are being concealed by the banks, they are going bust. Every day in the newspapers I see two things. One, is government is recapitalizing the banks and two, banks selling their NPAs, stressed assets to the buyers at a reduced price. So for 4,500 you are getting 1,500 or whatever.

This is a sector, which is in the deepest distress at the moment. The financial sector is the lifeline. It really is the blood, which runs in the veins of the economic system, and we can’t allow it to go bust. Now, does the government have resources to recapitalize all the banks? Obviously not, you can’t have a large fiscal deficit and still recapitalize the banks. In my time we had three sick banks and I told the management of the three sick banks that I am not going to give you a single paise by way of recapitalization. You will have to improve your functioning. We changed the management, appointed people who could deliver. In all the three, we were able to turn the corner. So you will have to look at the management.

What happens is when you have financial indiscipline then it affects the bad, good and everything else. There is absolutely no accountability in a situation like this. So restore accountability of the bank management. Tell them you will have to look after yourself and deal with the NPAs which have built up in the last many years. We were talking about how we shore up the economy? Once the economy starts moving then clearly the banks’ NPAs will also be beneficially impacted upon. It is one of the most major problem areas to which the new government will have to attend without any loss of time.

Q: There is a perception that RBI is being Americanized. The Nachiket Mor Committee report just stops short of saying stop priority sector lending.

A: That will not be acceptable. That is where political acumen comes in. There are certain things, which you can do in this country; there are certain things, which you can’t do in this country, and certain things where you will have to move extremely cautiously. So therefore, there is no point in being adventurous. You have to be very pragmatic, see what you can do. You can’t have a parliament, which is not functioning because of some steps, which might have been taken.

Q: One of the things that have resulted in total loss of global confidence in India is this retrospective taxation issue. Then there is also ongoing transfer pricing issue. Would those be some of the first areas that you are likely to address?

A: When we bring in Direct Taxes Code Bill then these are the issues which we will have to tackle. Transfer pricing was introduced by me in one of my budgets, but it wasn’t meant to lead to the kind of litigation which it has led to. We have the highest number of litigations in India on transfer pricing. So, something must be wrong somewhere which has not been set right. Retroactive taxation is entirely avoidable. Without denying parliament its authority to legislate with retrospective effect the governments of the days must avoid retrograde steps of this kind. So this is something which can be attended to if we bring in the Direct Taxes Code Bill and deal with all these issues.

Q: What are your views on the Land Acquisition Act?

A: The Land Acquisition Act is indeed a time bomb. It has seriously affected the financial viability of new units. We will have to see how we can make the tenant happy without making the investor unhappy and it is possible to do this. A person like me believes and I am saying it genuinely, that if you are taking away a permanent asset like land from someone, then in return you must give him another permanent asset. It can’t be land because there is no land. So it can’t be land for land. There are various mining projects, coal mines particularly where you can say that I take the land on lease for 25 or 30 years and return it at the end of the lease period to the farmer in the same condition in which you had found it. So, that will be a reassurance to the farmer. Then giving them let’s say, equity for land in the company is something which will be a permanent asset with them. The tenant can always dispose off the land. So the holder of the equity also can dispose off the land. I know of many instances. I represented an area in Lok Sabha which was also a coal mining area and there were a number of irrigation projects also where farmers have lost their land. They have really become beggars because you get some cash compensation which is finished in no time and then you are left with nothing. So I have always believed that a permanent asset like land should be replaced by another permanent asset to the extent to which the new Land Acquisition Act contributes to that, it is fine, otherwise we will have to amend the Act and ensure that we have this kind of system of a permanent asset being replaced by another permanent asset.

Q: What role do you think states can play in this?

A: It should be left to the states. Ultimately the Land Acquisition Act is implemented by the state governments. I would say that we should also make a distinction between government of India projects and private sector projects. There are a number of private sector projects which have come up on the basis of private negotiations between the tenant and the investor. The government has not interfered. Now let’s encourage that. The government of India projects, especially the linear projects like railway line or national highway or like a transmission line, there we should have a different policy.

Q: Where do you think that we stand on federalism?

A: I think the National Development council will have to be energized. It should meet more frequently. Then in the constitution we have a provision of inter-state council. That has to be energized and brought to life. If you work under the spirit of cooperative federalism, the spirit under which we worked in Mr Atal Bihari Vajpayee’s time nobody told me that I should go ahead and create an empowered standing committee of state finance ministers. I did it on my own. The constitution did not provide for it and look at the role that the standing committee has played. So, you can establish cooperative federalism by taking the states into confidence, taking them on board and consulting them on all issues which affect the state government or the people of the state.

I will give another example. We have the foreign investment promotion board. I had set up in the ministry of industry a Foreign Investment Implementation board in which I said that apart from the line ministries of the government of India, the chief secretary of the state in which the investment is going to be made and the factory is going to come up, should be a member of the implementation board. You meet from time to time, discuss what are the difficulties because we talk of whether we will have FDI in multi-brand retail or not whether insurance cap will go up or not. My experience of dealing with foreign direct investment or foreign investments of all kinds both as a civil servant as well as a minister has been that the foreign investor is interested more in the ease of doing business than in these sectoral caps. He can live with 26%. He can live with no FDI in multi brand retail provided you tell him that we clear your project in three months’ time or 30 days’ time or in 15 days’ time and that will remove all the obstacles in the path of implementation. Give him that assurance, compete with Singapore on this.

Q: Do you think that Planning Commission in its current role has outlived its utility?

A: I think the Planning Commission needs to be reinvented. I think that there should be a statute of parliament governing the functioning of the Planning Commission. It should not be merely an executive order based body. It should become a statutory body. Planning Commission should give up doing day-today planning for the states. Planning Commission should give up micromanagement. Planning Commission should give up doling funds to the state governments. What the Planning Commission should do – we should have like we had in Pitambar Pant’s time a strong perspective plan division in the Planning Commission which will be acting like a very effective think-tank and look into the future, 20-25 years from now, prepare vision documents for the various sectors of the economy and give direction to the entire economic activity of the country.

Second, we should reduce the number of central schemes from 150 at the moment to something like 10 or 12. It should not exceed one dozen and these schemes should relate to the basic needs of the people like bijili, paani, sadak, education, health, agriculture, employment and things of that kind. Planning Commission, government of India should make funds available for it on a 100% basis. No contribution needed from the states. It should be need based. What is the need of Jharkhand, what is the need of Bihar, what is the need of Punjab and you make the allocation of funds accordingly. For the rest you can have the Gadgil-Mukherjee formula.

Then, you monitor these projects 100%. There is now an independent evaluation office. Strengthen the independent evaluation of it, make it an instrument of cooperative federalism. Give representation to the states . The governing body of this independent evaluation office and for all the ministries of the government of India and all the schemes that the government of India finances for the states let this independent evaluation office be the most cruelest evaluator of the functioning and make suggestions with regard to how we can improve.

Of course, there will be a plan for the government of India’s line ministries. The Planning Commission should make that and there the Planning Commission will continue to have a role to play.

Q: How would you make policy making participatory and what is the role of panchayats or the local bodies?

A: I am a great votary of the panchayati raj system and I am fully convinced that along with the resources all the intra-panchayat development work should be the responsibility of the panchayats. There is a 50-60 year old formula or a methodology which was adopted by South Korea called the Semalunda. It is a system of rewards and punishment for the village level development. When I am talking of basic needs I am talking of the village that you need all weather road like the Pradhan Mantri Gram Sadak Yojana, you need irrigation, you need drinking water, you need a school, you need health facilities including animal health facilities, you need employment generation in the village.

How will that happen? Employment can come from agriculture but less and less employment can come from industrialization. You can’t have a major industry in each village. You will have to promote small and cottage industries, so skill development in order to generate employment. You will have to prepare a comprehensive plan for village level development and also urbanization. Urbanization is taking place and we will have to look at urban slums, urban facilities and once you have tackled these issues then the rural urban shift which is taking place will also be stepped. If we have the educational facilities in the village, if you have employment in the village then why would people come to metros? So this rural urban drift also has to be prevented. That should be the objective of planning in our country and I am very keen on one thing and in fact it in 2001 budget I talked about it and that is a long-term national land use plan.

We don’t have the land use plan in this country. So for every inch of land which is in our jurisdiction called India we should have a long term and when I am talking of long-term I am talking of something like 60 - 100 years you have your land use policy. You say, where we will have forests, where we will have cities, where we will have industries and where we will have whatever you want to have. This ad hoc approach at the moment and you talked about land acquisition it is only because of the ad hoc approach that we faced this problem. Now you know that this is a coal bearing area and you want to exploit the coal. So in your land use plan you would say that this will become a mining area and this is the policy that will follow. In the absence of that the people there don’t have any assurance. So have a land use plan, I am a great believer in that.

Q: How do you manage expectations because that maybe your biggest challenge?

A: First, people will expect immediate delivery of results. They will not be prepared to wait. So 100 days, 200 days - that will be the kind of time lines in which we will have to start working. The second is, positive solid results. It can’t be that the government will act like a fly-by-night operator and show some results, visual results and then go out of it. It will have to be sustained. Whatever you do will have to be sustainable and sustainable over a period of time. Growth for instance, it can’t be a flash in the pan that in the next quarter or two quarters later you show some growth. It will have to be on a consistent basis. Similarly controlling inflation – it is not a one-off job, one time job. It is something which will have to be consistently done. Building infrastructure is something which can be started you can hit the ground running as far as the infrastructure is concerned but it will have to be sustainable. So we will have to look at a whole range of issues in order to not only make a very strong beginning but we will also have to ensure that the beginning that you make, the policies that you pronounce is sustainable in the medium and on the long term. That is the challenge.

(The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of INCLUSION. Comments are welcome at

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