|‘Political cover needed for PARA, NPAs are biting’|
|Friday, 10 February 2017 04:08|
Two-thirds of bad debt is with 24 firms — if big investors of the past are in trouble, yes, NPAs are hitting investment
After reiterating the Economic Survey’s position on the need for a Public Sector Asset Rehabilitation Agency (PARA) to resolve the dodgy loan crisis, chief economic adviser Arvind Subramanian told FE’s Prasanta Sahu and Banikinkar Pattanayak the fact that just 24 companies accounted for two-thirds of the dodgy debt with banks made it clear that rapidly rising non-performing asset (NPAs) were largely responsible for today’s poor investment growth. These were, he said, the big investors during the boom years but had no money to invest now. Edited excerpts from the interview:
How do you conclusively prove NPAs are holding back investment?
If two-thirds of dodgy loans are with 24 firms who were also the big investors of the boom years, it is clear this is the major reason. After all, if these NPAs have left the banks with less to lend, they have also left these firms with no ability to invest. And you’re right, the RBI (Reserve Bank of India) echoed the survey in the need to resolve this twin balance sheet problem.
If a PARA is set up since no other solution to contain NPAs has worked, will the haircut be at the level of the banks or PARA?
PSU banks can’t possibly take the kind of haircuts we need — we’ve tried all kinds of solutions, but the fear of the CBI/CVC/CAG doesn’t allow them to. So PARA will have to buy the loan at book value minus the provisions already made, and PARA will have to take the haircut while selling the loan.
How does a publicly-owned PARA do that?
It will be 49% government-owned to give it the operational freedom it needs; there could be another 10-11% LIC-type of holding to give it the government character and the rest could be private. Since it will be staffed by top-notch professionals, they will take decisions on haircuts.
Why will a private investor come in if PARA takes the haircut?
We’ll have to design an upside for the private investor.
You spoke of PARA being politically-driven. Why is that important?
There has to be serious political cover if you’re writing off 50-70% of debt. And this is still OK if you’re removing the promoter, but in many cases you will have to retain the promoter. This can be done only when the government is backing it all the way since all manner of allegations will be made.
How will you fund PARA? The costs are huge.
We’re paying the costs anyway in the form of the NPAs with banks, they’re just not so explicit. My broad estimate of the costs is around Rs 2-4 lakh crore. Let’s say NPAs in PSBs (public sector banks) are Rs 7-8 lakh crore, of which half can be recovered, and the banks have already provisioned for Rs 1-1.5 lakh crore. We could get some part of this from the RBI’s balance sheet.
Raghuram Rajan said this would hurt the RBI when you suggested it earlier. Is Urjit Patel on board?
Both Urjit Patel and Viral Acharya are open to the idea of a bad bank but we will have to talk about the RBI contribution. But even if the RBI doesn’t contribute, the central government can pay… It will issue bonds. Remember, there is no option, the NPAs just cannot be contained in a business-as-usual scenario.
The aim of demonetisation is to make the informal sector more formal, pay taxes, etc. Won’t that make it less competitive?
The benefits in terms of taxes will be large and the informal sector will benefit from, say, getting cheaper credit once it is formalised… But yes, there will be costs.
Is the goods and services tax worth it at the current high rates of taxation?
It isn’t frozen yet but if the 28% tax slab has more than 6-7% of the base, it would be disappointing and it will be a high-rate GST. Also, if real estate and power are brought into the GST, it will change things in a big way.
But if you bring in real estate, states will object to their stamp duty being taken away.
We are not touching this, the GST will only substitute for the service tax on works contracts. But the collections could be quite large though there will be an immediate loss in revenues (maybe around Rs 6,000 crore for both land and electricity).
Is the economy mature enough for UBI (universal basic income)?
A: You’re right in that while an under-developed country needs UBI more, its administrative ability is limited. But, as the FM has put it so nicely, do we have the political maturity to do it? UBI has to replace existing subsidies which have huge leakages — so we need to have the ability to shut existing schemes. That’s why, if some pilot projects on this can take off, that would be fantastic.
One way forward is to make it choice-based. For instance, people can be given a choice to have either the UBI or something like MGNREGA or any other programme. Another way could be to offer it to only women.
Why hasn’t the Budget factored in the gains from demonetisation in terms of higher taxes?
Most taxes are falling as a share of GDP for obvious reasons — in excise, there is the issue of rising oil prices, for instance. The only tax which is rising is personal taxation, so there has been some element of the demonetisation impact which has been factored in.