Rajan’s 5 points to FM prior to the Union Budget

From Business Today

As the day for presentation of the Union Budget 2016-17 nears, RBI Governor Raghuram Rajan had some advice on the economy for the government and Finance Minister Arun Jaitley to ponder upon.

  • Fiscal deficit: The RBI governor advised against generating economic growth through additional debt saying that any deviation from the fiscal consolidation path will hurt stability of the economy. The NDA government had last year deviated from the fiscal consolidation path, postponing reduction in fiscal deficit target by a year. Originally, the target was to bring down fiscal deficit to 3.6 per cent of the GDP in 2015-16 but it has been postponed by a year. Now, government is targeting 3.9 per cent in the current fiscal.
  • Inflation: The government and RBI should continue to bring down inflation, Rajan said.
  • Bad loans: Asserting that some stressed loans have to be written down to improve the health of PSU banks, Rajan said it will pave the way for mergers and help optimise their resources. “In some cases, the reality is that existing loans will have to be written down significantly because of the changed circumstances since they were sanctioned (which includes extensive project delays, cost overruns, global overcapacity, and overoptimistic demand projections),” he said. Almost surely, some banks will have to merge to optimise their use of resources, he said.
  • Decentralise public sector bank Boards: “In order to get sustained growth, we need more competition, especially from new entrants who are in a better position to reach hitherto excluded parts of our economy,” he said. “For instance, should boards not determine strategy as well as the appointment or renewal of their chief executive? What about their executive directors? Can bank boards have more freedom in choosing these?  Can boards be given the freedom to set compensation structures and performance measures for their senior executives, including long term stock options?,” he said.
  • Against raising tariffs on imports: Rajan cautioned the government against raising the import tariffs in order to protect certain domestic industries in trouble. He said increase in import tariffs will lead to unhappy domestic businessmen whose costs will also rise by the very same tariffs, along with unhappy consumers.

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