The Hindu Business Line : `Reform process must focus on agriculture'

MR M. Narasimham, Member, Prime Minister's Economic Advisory Council and a staunch advocate of the reforms process, is credited with substantial contributions to the banking sector. A former Governor of the Reserve Bank of India and India's Executive Director to the World Bank, Mr Narasimham is currently the Chairman, Court of Governors, Administrative Staff College of India.

Mr Narasimham feels the major shortcoming of the ongoing reform process is the non-inclusion of the agriculture sector. However, confident about the future of the Indian economy, the former Finance Secretary dealt with various aspects of the financial reforms in a freewheeling interview to Business Line.

Excerpts from the interview:

How do you evaluate the decade of financial reforms?

Reforms are a process, not an event. To my mind the major event in this process is the improvement in our accounting standards. There is now a much clearer definition of income recognition and asset evaluation. We have also instituted a set of prudential norms about the various aspects of functioning of banks. We have certainly made some progress in the area of financial reforms after the committee's report on the financial sector in 1991.

To give an example, capital adequacy requirements have been enhanced, and attention is being given to the weights to be attached to the various assets. We are moving towards better-balanced, and better-matched assets and liability. You know the example of East Asian countries, where it was the asset-liability mismatch, both in terms of currency and maturity, which brought about the financial crisis. So, the RBI has instituted a system of measuring assets and liabilities to ensure there is no mismatch.

I am happy that steps are on to set up an asset reconstruction company. The importance of this cannot be minimised because while prudential norms and the like will help contain margins of new NPAs, we still have a heavy overhang of the old NPAs to be tackled. The idea of an asset exchange through the asset reconstruction company is to help banks address this heavy backlog of NPAs.

The first committee had suggested greatest scope for functional autonomy and operational flexibility for the banking system. The very fact that the second committee had to reiterate this shows that not much progress was made from that point. This is one area where we need to progress much more to give banks greater functional autonomy and operational flexibility to become truly board-managed. And this is also in keeping with modern ideas of corporate governance.

What are the major macro-economic issues today?

Most important is the need to revive public investments. The current downturn is also partly because investment has slowed. Once public investment revives, private investment will also revive, because the private sector depends, to a large extent, on government investment.

Now, will higher public investment increase the fiscal deficit? To my mind, we should not overemphasise fiscal deficit and treat it as an alibi for not raising investment. The fiscal deficit should certainly be controlled. But one way to revive investment without worsening the fiscal deficit is to convert the very heavy investment we have in huge inventories into real assets.

After all, we are talking in terms of 60 million tonnes of foodgrains. This occupies a very heavy investment, financed partly by the banking system. This heavy inventory investment should be converted into real assets. Food security does not require 60 million tonnes of buffer stocks. We ought to be able to sell some of this stock and convert the cash or resources for real investment.

Should we have investments in the form of grains rotting in the godowns or have a dam or a road in the rural areas which are more lasting? We are paying very heavily in terms of spoilage, high interest costs and so on. So, the key for the revival of investment is the conversion of heavy investment in foodgrains into real investment.

What do you think are the shortcomings in the reform process?

Reforms have been largely confined to industry and trade. And, to use jargon, they are concerned with the product market and not the factor market. But even among the product markets, the whole area of agriculture was outside the ambit of reforms. Now, any reform process will be incomplete if we do not bring agriculture fully into it. Having de-regulated industry, we should now de-regulate agriculture. For instance, a man producing an industrial item can sell it anywhere in the country but the same freedom is not given to the farmer. So, we should remove unnecessary restrictions — movement, stocking, and so on. Give the farmer a good, remunerative price, which is better than the various sops being offered.

Labour and small-scale industries have also not got the required focus.

We talk about competitiveness for the large-scale industry but not for small-scale units. They still have reservation, too much spoon-feeding, subsidy and protection. The same competitive spirit ushered into the large-scale sector should be brought into the small-scale sector.

We need a national consensus on the speed of reforms as far as economic and political dimensions are concerned. And I am glad that consensus is emerging. For instance, even those States ruled by other than the ruling party are now for reforms. A national consensus in favour of reforms is essential in a democratic, federal polity such as ours.

With the Government talking of lowering its stake in the public sector banks to 33 per cent, do you foresee the private sector taking over nationalised banks?

No, I do not. Participation, yes, but not necessarily takeover. The advantage of private sector participation — this applies even to foreign participation — in our banking system will lead to more transparency. And it is not just the Government, the board will be responsible for the shareholders in the market, leading to greater transparency in the banking system. So, I do not fear any takeover of public sector banks but certainly favour participation.

Indian banking will improve if we effect systematic reforms. Do we need so many banks in the public sector? We need to think in terms of fewer and stronger banks, and good relationships between the national, regional and local banks. There should be a synergetic relationship between the three levels of banking.

What do you think is the future of Indian banks?

Prudential regulation is a far better alternative to the detailed administrative control we had all these days. Indian banking is over-administered but under-regulated. Now, we are beginning to see greater reliance on prudential norms. The attitudinal change is very important.

How can Indian banks become more competitive?

Well, the first base for being more competitive is by strengthening the internal structure. Capital adequacy and lowering of transaction costs come next. Indian transaction costs are very high.

To bring them down will involve adoption of modern technology. The future structure for modern technology in terms of electronic funds transfer is being provided. The banks, on their part, have to respond by yielding to the modern technology to reduce costs and become competitive.

The RBI Deputy Governor, Dr Y. V. Reddy, is talking about having a holding firm for public sector banks. What is your opinion?

A banking department, in a way, is a holding company. The point here is in keeping with modern ideas of corporate governance. A holding firm is okay if it leads to greater transparency.

The board of directors of each bank anyhow will be responsible. There were scams in the banking sector because the system was not foolproof.

What is your advice for the banks to reduce their NPAs?

There are two issues here: Old and new NPAs. As for new NPAs, adherence to prudential norms in strengthening the structure, better appraisal methods, looking at concentration ratios, and so on, are needed.

As for old NPAs, we must devise some way in which they could be reduced. One option we suggested was asset exchange through an asset reconstruction firm or taking over the assets, securitising and correcting them.

There is also talk of a system of super-regulators for stock markets?

Each country must devise its own institutional structure suited to it. Whether we have one super authority or two or three regulators, such as the RBI, IRDA, etc., the key element is that they should work in coordination.

Don't we need changes in legislation in banking to facilitate technology introduction?

I am glad you raised the point. Any financial sector reform, or any reform cannot go ahead of legality. Legal reforms have to proceed alongside financial reforms.

What measures do you suggest to make banks more transparent?

First, accounting standards and, then, full disclosure. Transparency is the precursor to accountability.

What major challenges do you foresee for the economy in the new millennium?

The Indian economy is now part of the global economy. To pave our way in the globalised economy, we have to be competitive, productive and efficient.

Productivity is the key to be competitive. So the major challenges in the new millennium are how do we enhance productivity, the total factor productivity of the economy.

I am an optimist. We have the wherewithal to be productive. For instance, our agriculture is still competitive.

What do you envisage for the Indian economy as a whole in the near future?

We have a great advantage in our IT sector. The world is embarked on a knowledge revolution. India is very well placed to take advantage of the technological revolution.

We missed out on the industrial revolution two and a half centuries ago; we should not miss out on the knowledge revolution.

The very fact that our skills are being sought not only in IT but in other professions — medical, engineering and computers — proves that India can become the back-office of the world. This is where our competitive strength is.

We should not be afraid of our own shadows. For 50 years, we succumbed to export pessimism.

We missed out on the exponential expansion of the world trade. That is because we did not have enough confidence in ourselves. But Malaysia, Thailand, Indonesia jumped on the export bandwagon in the 1950s that we missed.

In 1950, we had 2 per cent of world trade, by 1960 it had come down to 1 per cent, and by 1980 it declined to half per cent. Now India is slowly moving to 0.6 per cent of the world trade.

Look at China. China's exports in 1980 were about 1.5 per cent. Today it is four times up. We must have confidence.

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