by admin | May 25, 2021 | Corporate, Corporate finance, Interviews
Arvind Subramanian
New Delhi : In the midst of a government-Reserve Bank of India (RBI) tussle over utilisation of capital reserves of the central bank, former Chief Economic Advisor Arvind Subramanian strongly supports the government’s view, saying the RBI is holding excess capital between Rs 4.5 and Rs 7 lakh crore which should be used to recapitalise the banks.
However, he adds that deploying capital is a decision for the RBI to take which it must do “voluntarily and proactively without even the whiff of interference from outside”.
Subramanian says he realises that in making this suggestion he is up against all the eminent current and former RBI officials, who argue that the RBI actually needs all the capital it has, but they are wrong.
“These officials command the respect of the public, and for good reasons. I think they are wrong. As Margaret Thatcher used to say, ‘One man and the Truth is a majority’,” the noted economist says in his upcoming book “Of Counsel: The Challenges of the Modi-Jaitley Economy”, published by Penguin.
“It is almost certainly the case that more money will be needed to make banks healthy… It is possible that the government will need to provide anywhere between Rs 3-5 lakh crore — in addition to the amounts already spent — to restore the fundamentally viable public sector banks to health,” Subramanian says.
He adds that there is only one public-sector entity — RBI — that has a strong enough balance sheet to deploy this magnitude of resources.
“Conservative estimates (as well as cross-country comparisons) based on our internal analysis suggest that if the RBI were to adopt the practices of most major central banks around the world in deciding how much capital is necessary, it would find that it has about Rs 3-4 lakh crore of excess government capital, some of which it could deploy for the clean-up,” he says.
Subramanian adds that RBI is an outlier among major central banks, holding about 28 per cent in capital, which is the fifth-largest amongst all major central banks, with two of the four above India in this ranking being oil exporters, which are special cases being highly vulnerable to the swings in the price of petroleum.
He says the RBI calculates risk based on a sample that almost no other central bank does and has set for itself a risk tolerance that is “ultra, ultra conservative, almost bordering on paranoia”.
“Whereas other central banks want to cushion against events with one per cent probability of occurring, the RBI wants to cushion against events that can occur with .001 per cent probability.”
“…Prima facie, then, it seems that the RBI is holding too much capital… Our estimate is that the RBI is holding excess capital between Rs 4.5-7 lakh crore… This excess capital should be redeployed, shifted from where it is not needed and put instead where it is needed urgently, namely, in public-sector banks,” he says.
However, he warns that any redeployment of RBI capital must be seen not as a government demand but as a voluntary commitment of the RBI for the greater good, and should be done only after extensive consultation.
“If there is one strong balance sheet and one weak, there is no good reason the former should not come to the rescue of the latter. We build up strength in balance sheets not for strength’s sake but to use that strength. Savings are meant for rainy days and when rainy days come, savings should be run down.
“During and after the global financial crisis, major central banks across the world have lent the heft of their balance sheets to pull economies out of dire economic circumstances,” the former CEA says.
He adds the legitimacy of central banks is enhanced when they take actions to address serious problems. “When reputations and strong balance sheets are put on the frontline in service of the economy, these assets, far from getting depleted, are actually replenished.”
—IANS
by admin | May 25, 2021 | News, Politics
New Delhi : The Chief Economic Advisor (CEA), Arvind Subramanian’s term would not be extended any further as he wants to go back to the US due to family commitments, Finance Minister Arun Jaitley said in a Facebook post on Wednesday.
Subramanian had joined as the CEA on October 16, 2014 for a period of three years.
“Few days ago Chief Economic Advisor Arvind Subramanian met me over video conferencing. He informed me that he would like to go back to the United States on account of pressing family commitments,” Jaitley said, adding that his reasons were “personal but extremely important” to him.
“He left me with no option but to agree with him.”
On the expiry of the three year term also Jaitley had requested the CEA to continue for some more time, he said, adding: “Even at that stage he told me that he was torn between family commitment and his current job which he considered the best and most fulfilling he has ever done.”
—IANS
by admin | May 25, 2021 | Opinions
By Amit Kapoor,
The usual brouhaha around the Budget strips the Economic Survey of the attention it deserves. The Survey document, especially since Arvind Subramanian has taken over as the Chief Economic Advisor, has consistently pushed the envelope on economic thinking, providing exciting new insights for the Indian economy. The latest one, released three days before the Budget, introduced a new phrase into economic jargon: The “late convergence stall”. It is a phenomenon that the Survey fears might affect the growth process of the developing world.
The basic argument is this. Economic convergence, which is the process of low-income countries catching up with richer ones in standards of living, has been taking place over the last few decades at an accelerated pace; something which economists like to call “convergence with a vengeance”. To be precise, countries were on a divergence path before 1997, a period of convergence from 1998 till the financial crisis in 2008 and an era of accelerated convergence post-crisis.
However, with changing global economic scenarios, it might be more and more difficult for developing countries to narrow the gap. In other words, the economies that have been rapidly climbing up the economic ladder might face a “late convergence stall”.
The threat of a convergence stall might result from the development of four challenges that were non-existent during the formative stages of the developed world. The first and the most crucial one is the end of rapid globalisation that benefitted the East Asian economies and even China. High levels of export growth rates of these countries have been drivers of their economic growth stories.
Developing nations that are late to the global scene cannot expect to achieve such export levels in the current inward-looking shifts in trade policy, especially across the developed world.
Subramanian always remains careful in stating that it is the era of “hyper-globalisation” (or rapid globalisation) which has come to an end, and not globalisation per se. However, globalisation, if defined as a period when trade among nations is growing faster than the global GDP growth, can be seen to be growing rapidly from 1950 till a few years after the economic crisis of 2008. During this period, growth in trade was close to five per cent while growth in world GDP was close to four per cent.
After 2010, growth in world trade levels has fallen below GDP growth, marking an era of de-globalisation (3.5 per cent economic growth against global trade growth of 2 per cent). Therefore, even though the Survey takes a conservative approach in claiming that globalisation has come to an end, the data shows that the world is, in fact, de-globalising.
It can be the case such low levels of trade might not hold once the world economic growth is running in full throttle, but the fact of the matter remains that the developing world cannot reap the same gains that were received in the later part of the 20th century. This could bring about the historical divergence that world economies had experienced throughout much of modern economic history. This trend was famously evidenced by Harvard’s Lant Pritchett in his paper “Divergence, Big Time” in which he showed that between 1870 and 1990, the richest and poorest countries have shown considerable divergence between their per capita incomes. Therefore, the convergence has only been a recent phenomenon. It would not be a surprise if it returned.
To make matters worse, other avenues of economic development that had been open earlier are also closing down. While industrial expansion was the most effective means of achieving economic successes for poor economies in the past, high productivity has implied that economies in current times reach the pinnacle of industrial employment much earlier on their growth path.
Turkish economist Dani Rodrik, also from Harvard, calls this “premature deindustrialisation” and shows how most of the developing world is affected by it. Therefore, resources which earlier used to shift from the low-productivity informal sector to high-productivity jobs, now usually shift to sectors that are only marginally more productive. The economic gains from a shift of labour across sectors are thus not derived to an extent that was true for the countries that are now high up on the income spectrum.
The case for a slowing down of convergence or divergence is, therefore, quite strong. The developing world needs to be prepared for any such restoration of the past economic trend. The advent of automation and similar technological innovations will further accentuate the problem because the richer countries will be more capable of deploying them for production on a mass scale. It is comforting to realise that the Indian government is well aware of the threat in advance, but it remains to be seen if this awareness is followed up with appropriate policy action.
The Economic Survey gets it right in recommending rapid improvements in human capital to sustain growth at current levels, but takes a defeatist approach in suggesting that India can do very little about diminishing globalisation. On the contrary, there remains immense scope for the country to play an enabling role in further integration of the global economic order. If the US is currently a lost cause, there remain other large markets like the EU and East Asia where India can further the cause of higher trade openness.
(Amit Kapoor is chair, Institute for Competitiveness, India. The views expressed are personal. He can be contacted at amit.kapoor@competitiveness.in and tweets @kautiliya. Chirag Yadav, researcher at Institute for Competitiveness has contributed to the article)
—IANS
