2 RBI governors PM Modi must urgently pay attention to! - The 5 Minute WrapUp by Equitymaster
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2 RBI governors PM Modi must urgently pay attention to!

Feb 21, 2015

In this issue:
» Are we moving from License Raj to Appellate Raj?
» Why companies should be careful in over paying for resources
» PSU banks' consolidation in the offing?
» ...and more!

It is not just because these men have the indisputable reputation of being the most proactive central bankers globally. But the governors at RBI have, from time to time, proven their ability to point out the exact faults with India's economic system. Therefore, their recommendations, however painful, must carry some weight in the government's decision making process, we believe.

At a time when India has a rare opportunity to race past its peers with some structural reforms, two RBI governors have offered some pertinent advice. Ones that PM Modi and the Finance Ministry must urgently pay attention to.

Dr Bimal Jalan, the ex RBI governor who led the central bank in the most trying times, has urged for some flexibility in fiscal planning. No doubt high fiscal deficit has been the bone of contention for India over the past few years. It also got India very close to a sovereign 'junk' rating. And therefore Finance Minister Jaitley seems to be determined to stick to his fiscal deficit targets. Now, curtailing India's subsidy spend to keep fiscal deficit in check is certainly necessary. But according to Dr Jalan, at a time when the economy needs urgent capital spending to revive growth, fiscal deficit control cannot be the government's top target. With corporate spending, exports, rural demand etc showing no signs of recovery, the government must move fast to stimulate GDP growth. And to do this it cannot have fiscal deficit targets cast in stone. Now we know this is going to be a tough balancing act for the Finance Minister. But he should be looking at what would be in the long term interest of the economy, rather than what would earn him immediate brownie points.

On the other hand, current RBI governor, Dr Raghuram Rajan has appealed to the government to stay away from what he calls an 'Appellate Raj'. Rajan has reminded the government that the efforts of 1991 to get away from the 'License Raj' may be undone if it gets into 'Appellate Raj'. What the central banker is referring to is policy paralysis and undue delay in government decision making. In a recent speech, he asked the government to resist bringing in too many layers of checks and balances that hinder the state's normal functions. Giving enough independence to regulators and putting in systems to ensure transparency in allocation of public resources can go a long way in speeding up government decisions. And the governor's warning that the 'Appellate Raj' may get India back to the pre 1991 era should serve as a strong warning to the government.

We do believe that these suggestions, if implemented in the right spirit, can go a firmly ensure India's long term economic prosperity. However, as an investor, you would do well, to not build in unrealistic expectations for economic or stock market performance for your portfolio.

Do you think the government should pay attention to the reform suggestions offered by the RBI governors? Let us know your comments or share your views in the Equitymaster Club.

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  Chart of the day
As we speak about why India cannot afford to lose this rare opportunity to revive the economic cycle, allow us to put things in perspective. Today's chart points at how the economies of India and China which are very similar in terms of demographic profile performed across economic cycles and economic crisis since 1991. Important to point out that India economic liberalization started much later than China. China had been opening its economy since the 1970s and accelerated its efforts in the 1990s. The country's reforms were successful for nearly three decades; except for a brief period in 1999. And all this while, the Chinese economy consistently outperformed India. However, the signs of stress are easily visible in the Chinese economy in recent years with bad lending and realty bubble threatening to paralyze the growth. And recent GDP growth statistics point clearly in that direction.

India and China at crossroads in terms of GDP growth

Coal availability has remained a bit of a headache for Indian companies. Coal India despite being a monopoly in this space has been unable to meet its production targets on a consistent basis in the past. The mining ban on account of the illegal allocation of coal blocks had also hit India Inc. hard. And this has compelled most players from the metals and power space to import coal from abroad. But too much dependence on imports would mean facing the risk of increased volatility in not only prices but also currency movements. Thus, many of the companies, especially those in the metals space, are looking to have their own captive mines. For instance, Hindalco has won two small mines Kathautia in Jharkhand and Gare Palma IV-5 in Chattisgarh. The question though is whether it has paid a high price for the same. For Kathautia, it has paid a price quite close to the landed cost. Although this price is still expected to be at a 20-30% discount to imported coal. But this does not necessarily mean that the company has not overpaid for the mine.

Acquiring resources in some sense is akin to making an acquisition. The price paid for the target has to be right as overpaying for the same would mean that the payback period gets lengthened. This then puts a strain on the business and hurts profitability. Thus, time will tell whether metals companies in India have paid the right price for these captive coal blocks.

We know that some of the biggest financial crisis finds roots in governments either ignoring inefficient operations of the financial institutions, or supporting them for the threat of their failure and the consequent ripple effect. The attitude has bred inefficiencies and risky practices, leading the Governments to infuse more capital to support operations. This has not forestalled, but only prolonged and complicated the crisis further. In this context, the decision of Indian government to give capital support only to those public sectors banks that qualify on certain performance parameters is a breath of fresh air.

As we all know, measures like corporate debt restructuring have only artificially lowered NPAs. While nothing noteworthy has been done by banks on the risk management front, such mechanisms have been misused to avoid the accounting scare.

As regulatory forbearance comes to an end in 2015, with higher provision requirements, one may cringe over huge NPAs reported. However, this purgatory exercise is a must we believe for laying strong fundamentals for the economy. The move is likely to discipline banks with regards to their lending and recovery operations. And may over a period of time result in consolidation in the industry.

Positive signals from developed economies propped up world markets in the week gone by. The major global stock markets witnessed gains during the week. After various discussions, the Eurozone Finance ministers approved a four-month extension on Greece's bailout on Friday. Though the extension will not be final until Greece government makes some submissions. This deal is expected to eliminate the immediate risk of Greece economy running out of money.

The stock markets in US were up by 0.7% during the week, and ended at record highs on Friday. Lifted by depreciating yen, the Japan markets (up 2.3%) surged to 15-year high levels. After witnessing some rally, the oil prices tumbled during the week on the back of higher supply from US. Back home, the Indian stock markets ended the week on a positive note. While the Indian indices continued to surge during the week, Friday witnessed selling activity, weighed down by oil and gas stocks.

Performance during the week ended February 20, 2015
Source: Yahoo Finance

 Weekend investing mantra
"In one important respect we have made practically no progress at all, and that is in human nature." - Benjamin Graham

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee.

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10 Responses to "2 RBI governors PM Modi must urgently pay attention to!"

Sai K S R S T

Feb 27, 2015

Yes. PM should pay attention to the two RBI governors.



Feb 23, 2015

I disagree

RBI Governor is acting like a PM.

He is not ding his jb f controlling banks .NPAs are bloating...

He is a stooge of UPA out to damage BJP.


yogendra pal singh

Feb 21, 2015

well covered.


ramesh chander sharma

Feb 21, 2015

I agree that views of all intellectuals must be kept in mind while formulating the Financial policies for the country.
But considering the current resources and expected resources, it must be left to the Government to take appropriate decisions keeping in view the economic situation of masses. Hence, along with long term policies, the short (immediate) term policies are must to be considered and implemented to take care of the economic plight of the citizens.


Ajay [Howrah-WB]

Feb 21, 2015

Even Finance Minister has in mind that very seniors of RBI are directly involved in scams in nature of misappropriation of public money to a tune of nearly Rs. 80 crores viz. Ramkrishnapur Cooperative Bank in Howrah WB perpetrated between 1995 and 2010 naturally for smaller private gains and others including the successive Chairmans are tight lipped. They wo'nt answer why Mr Chiranjib Pattanayak - a DGM in Kolkata Office at material time was called for interrogation by Howrah City Police on 02/07/2014. How can RBI expect more from the government


Pravin Navsariwala

Feb 21, 2015

I am of the firm belief that decision making within the policies (framed by Govt) should be decentralized and left to Sr Officers of the Govt Dept. Policy framing should be done by Cabinet. If any decision needs clarification it should be reverted back to PM. PM is the ultimate authority. Secondly decisions shall be on line and shall be transparent.


Maheshchandra Chourushi

Feb 21, 2015

Being financial supermen, they must be more trustworthy that their advice/suggestions are heeded.



Feb 21, 2015

India must forget Economists,RBI governor as saviours of nation.MMS,PC was failure.India needs technologists, inventors as wealth creators.Economist are post mortem doctor & can not predict future.Future is created by inventors..RBI governor are bank preservers(toxic financing hiders)-Governor is not for layman purchasing power but money power scams.1990s is toxic financing- that destroys weak consumers(nations).Let India help inventors, in 5 years let us see change.We need friendly economy stimulating governors. Sensex alone not enough.Technology can solve.



Feb 21, 2015

This is with reference to the advice given by Dr. Bimal Jalan about higher fiscal deficit may be appropriate in today's economic situation. However, the present government, while bringing the financial deficit down, is ACTUALLY not taking steps to structurally bring the fiscal deficit down. It is using the windfall due to lower oil prices and one-time sale of silverware (divestment) to achieve the fiscal deficit target. Once these avenues get closed, we will again be staring at higher fiscal deficit.
Dr. Jalan would have been right if the government had been taking structural steps to bring the fiscal deficit down for years to come.


Carlos de Souza

Feb 21, 2015

There is no question whatsoever in my mind that the Modi Govt should listen carefully to whatever Raghuram Rajan has to say and follow most, if not everything, religiously.

But, I very much fear, that this might not happen. Wait and see.

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