Keep the money moving

Two, more transparency on reserves. RBI intervention and revaluation data should be published weekly along with the data for value for reserves. When the dollar, euro or yen rate changes, it leads to changes in the value of India’s reserves that are held in dollars and euros and yens, or revaluation. When the weekly data for reserves is published, there is a huge amount of guess work on the extent of RBI intervention and revaluation. If the market does not know what part of the decline in reserves is due to revaluation, there is a perception that all of it is due to RBI intervention. This leads to two fears: that the RBI is sucking rupees out of the market and soon liquidity will tighten again, and so banks cannot reduce lending rates; and that if reserves continue to decline at the rate of $10-15 billion a week, then in less than six months we could be hitting the bottom of the barrel. Publishing weekly data on revaluation and intervention will reduce misperceptions about the RBI’s actions.

Three, open credit channels. For the problem of ensuring that the money market — that is, the market for short-dated bonds — works well, or for the problem of enabling PPP infrastructure projects, a critical bottleneck is a properly functioning bond market. The path to make the bond market come about has been mapped out by the Patil, Mistry and Rajan reports. This requires implementation within weeks and not months. The problems that we have seen with mutual funds, the money market, NBFCs and real estate companies are closely related to issues of financial sector regulation. When external shocks were juxtaposed with segmentation in Indian finance, this led to an acute crisis. In coming months, all firms, small and large, are going to face adverse shocks. A well-functioning financial sector is critically required, for providing the better firms with equity, debt and financial engineering through which they can ride through the crisis. It is important to remove the regulatory hurdles that prevent credit from flowing smoothly.

Four, limited scope and capacity for fiscal expansion. Chinese-style plans for vast infrastructure expenditure are inappropriate for India. The fiscal space is lacking, and there are multi-year delays from thought to execution. However, increasing infrastructure expenditure is feasible and desirable for ongoing projects. In areas like the NHDP or the Bombay-Delhi freight corridor, where mature institutional structures are in place, existing expenditure programmes can be accelerated. Policy-makers need to work on ensuring that these programmes work well in the sense of using money efficiently and increasing the pace at which projects are executed.

Five, improve the bankruptcy code. In a downturn, some firms could die. While these are unpleasant events, interfering with the processes of firm death may not only be beyond the capacity of the government, it would not be desirable. The focus of the government should be on dealing with the consequences of firms going under rather than on trying to sustain them. We have seen in the past that sick mills that were taken over by the government in periods of distress never recovered and remained liabilities for decades. The bankruptcy code recommended by the Rajan committee should be put in place. Banks and creditors should be able to recover dues rapidly and not be stuck in court for endless years.

Six, monitor banks continuously. One clear area that requires focus is the transmission of firm failure into bank fragility. A special push is required on monitoring weak banks and rapidly addressing them. Banking supervisors can miss out crucial weaknesses in banks when the supervision takes place at long intervals. In a rapidly changing environment, supervisors needs to work overtime.

Six, ensure the National Rural Employment Guarantee Scheme works efficiently. When layoffs take place, labour market conditions will become soft. Even though NREGS is limited to rural India, and setting up an urban NREGS in a hurry may not be feasible; since a large section of workers are migrants and continue to have rural links, the NREGS is now particularly important. It can both help individuals who are experiencing bad times and generate counter-cyclical expenditures. At the same time, new work should be initiated on improving the efficiency of implementation of the NREGS. The government should make sure that there is a timely release of adequate funds for the programme.

Seven, the government should not interfere with market prices. Companies in distress will lobby for government support. Big companies will lobby more effectively than small companies. It is particularly important for the government to stay focused on systemic issues, and not implement policies that help one group but could hurt another. The pricing of commodities like steel, which are finished products for some but raw materials for others, should not be interfered with through tariffs or other means. Government interference would normally lead to policies in favour of large vocal firms and against small and more numerous companies.

The writer is senior fellow at the National Institute of Public Finance and Policy, Delhi

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