Subhash Chandra Garg, current economic affairs secretary, is a member of the 1983 batch of the Indian Administrative Service (IAS) from the Rajasthan cadre and served as executive director in the World Bank.
The high-profile bureaucrat had earlier served as director of the department of economic affairs (DEA) and joint secretary in the department of expenditure (DoE), under the ministry of finance and has 30 years of experience in administration, management, public policy, finance, agriculture, education, energy and rural development.
He said market is overreacting to rupee fall and oil prices by basing on temporary things rather than fundamentals. Reserve Bank of India's framework on Prompt Corrective Action (PCA) front is conservative and not in-line with international standards,
Garg said to CNBC-TV18. Edited excerpts:
A: You just mentioned very rightly, the crude is back to below $80 per bbl, much below $80 per bbl; somewhere near $76-77 per bbl. The rupee is also stabilising and it’s below the peak. So these factors, one month back, oil was a much bigger worry for everyone. We thought that once the Iranian question gets resolved more or less, then there would be more stability coming.
Q: The external issues seems little less of a worry at the moment, but the domestic debt market has kind of frozen up and there is a bit of illiquidity. Is the government worried about it? What is your assessment of the debt market? Now you find reports coming that by the time we come in January, there might be surplus in the oil market and that is probably what is driving.
So, what I wanted to say is that there are temporary problems, those should be seen in that context.
Q: A few days back, one of the builder companies was downgraded and that created a huge ripple. On Friday and Monday, we saw stocks and debt markets react very negatively to it. So that is why I am asking you, is that a concern? Are you thinking in terms of a line of credit to mutual funds, any such extraordinary short-term measures?
A: One or two companies can always be weak, but what worries me more is the overreaction, which comes up when some of these isolated events are happening. Our non-banking financial companies (NBFCs) or housing finance companies (HFC) are by and large very sound and most of them are in very good health. There would always be one or two companies, which will be relatively weak. In some cases, assets and their portfolio of loans are very sound, very good, the quality assets are there and that is when I think overreaction can create problem. If we have a mature reactions, then probably the things wouldn’t be as much of a problem.
A: That is what the problem is.
Q: It's the nature of the market to react the way they react? Even on rupee and oil, what we saw was more of an overreaction.
That is not – if we base ourselves on more of fundamentals rather than on temporary things, things would be much better. Here on the liquidity question which you had, State Bank of India (SBI) came up with that facility which works both ways very well. For SBI, you can pick up the good quality assets, for the company which is facing some liquidity problems, you can get the liquidity. Let us remember, fundamentally our savings and financialisation is secure. That has not gone away anywhere and therefore, money will keep on flowing into instruments maybe in place of X instrument, it will go to Y instrument.
Q: It's going now from debt funds to probably bank deposits.
A: Therefore, that realignment of assets and liabilities might take place.
Q: In the context of that one real estate, one builder downgrade, we had a lot of experts talking to us and they were worried about some Rs 50,000 crore of loans. The total exposure they said for under-construction is about Rs 5 lakh crore. Of that, they are worried about Rs 50,000 crore more immediately. Are there any numbers you are working with? Are these stressed assets if they default, then there is a contagion? They default and therefore, the housing finance or the NBFC defaults on its c ommercial papers (CP), this is not a scenario at all you think?
A: You have to be conscious of it. You cannot. If the NBFCs have redemptions coming up in their way until March of about Rs 2 lakh crore, those would need to be refinanced - likewise if some builders have – so one has to be cautious about it.
Q: CP or only NBFCs for October was about Rs 80,000 crore and for November, it's about Rs 77,000 crore, only commercial paper issued by NBFCs and HFCs. Now, SBI securitisation is good. But securitisation typically takes time so that is why I guess the market is worried.
A: It's not exactly securitisation, it's buying of loans. So, you are not showing securities and you are buying those assets. That is one way of giving your liquidity and making your asset liability management that can happen. So, if the NBFCs have the short-term exposure in the form of CPs or debentures, which are maturing, if they can be refinanced by way of longer-term and they have assets on the longer-term side, then it should be possible to make things match.
Q: Are you sure as lot of banks have hit their limit we were told. If you looked at the RBIs data on sectoral composition of bank loans, then almost from last April to this April, there has been a big jump, about 27 percent jump in loans to NBFCs. Thereafter, it has kind of plateaued and my sense is bankers say that many of them have hit limits and they are also worried that what is the quality of the loans they are buying. I am just asking you, if the government and the finance ministry worries, that there could be a contagion, a domino effect?
A: We are conscious of it, we are aware of it. I would not say whether we are worried, worry will not resolve the issues. We need to find solutions for that.
A: You heard the RBI is also coming out, relaxing single exposure on the NBFCs.
Q: Is there some plan b or something? The liquidity problems is temporary. I do not believe this is will last longer, it must be for few weeks at best.
There are ways in which those would be resolved and there are steps being taken.
Q: I believe that was a part of the discussion that you must have had with the RBI at the board meeting yesterday. Was there any list of steps?
A: I am not supposed to discuss what happened yesterday and what subject, but basically it was the board meeting.
Q: What about prompt corrective action (PCA) on banks? As we were told that the government would want some of those rules relaxed, whereas from the RBI the feeling was that those are banks, which still have very high non-performing assets (NPAs) and therefore they would not want them to buy assets of below a particular quality, even if it means a problem in the debt market. Is that something on which you have an idea?
A: The RBI has a certain framework about the PCA. That framework is not in-line with the international, it's more conservative than anywhere else. So, the point of discussion is whether that kind of rigorous or over rigorous framework is required or not. It's not a question of relaxation.
Q: What aspect of the structure?
A: I would not get into that specifically, but on broader principles issue, the issue is this. Government is not asking for any relaxation, but it's asking for discussion on an appropriate framework, which is in-line with global best practices.
Q: But global banks do not have 15-25 percent NPAs that we are currently faced with.
A: Global systems have the framework for PCA. When banks have a certain kind of capital problem and that is where ultimately everything boils down to. So, that is the trigger, benchmark and the norm, which is used internationally. We use many more. So, the additional things which are being used as a kind of framework here, it's not relaxation, it's appropriate. Over medication is also not great idea.
Q: There were three filters that the RBI had given. The CRAR (Capital to Risk weighted Assets Ratio) – as you said capital adequacy versus the risk weights of assets, the NPA threshold and then there was return on assets (RoA) – if they are negative for three years, then they go into PCA. Your point of discussion was the NPA filter should not be there?
A: I will not get into the specifics, but on the broader plane, this is what the point of discussion is.
Q: But what about capital, since capital is an obvious threshold, if the government was to capitalise, then automatically banks will start lending a little more. Is that being brought forward? The government has committed last year and we announced this program of Rs 2.11 lakh crore and every bank would have the normative capital, which is required and government is providing that.
Even the PCA banks today do not have lesser than what is required as the regulatory capital. So on the capital, there is no demand.
Q: It takes care of the risk weighted assets, but growth capital is not there. So if that can be advanced?
A: That is where we would like these banks also to lend and to provide them growth capital.
Q: For growth, for extra lending, they may need capital immediately. So is that coming, are you planning the capital infusion?
A: But they should be able to lend according to the framework. You need the growth capital when you are able to lend.
Q: Some of the bankers told me that they can lend a and above. It’s not that they are prevented from lending?
A: Again this is a matter of detail, but the broader question is this - you can provide growth capital if you are able to lend.
Q: So you want some of the filters of return on assets or something changed?
A: Let us see.
Q: You all could reach an agreement. Should we expect some announcement?
A: It's a matter of discussion.
Q: Any discussion on providing a line of credit to mutual funds. We had done that in 2013 and 2008. Is that also something...
A: We are under discussion on that.
Q: Speaking about rupee and crude oil, even if you take crude at $75 per barrel, even then the kerosene and LPG subsidies would still be higher than what was budgeted. So what is your deficit estimates? The expense is still on that count are high? For Kerosene, the demand itself is going down. It has become a very small item of our budget.
I don’t think it's even Rs 5,000 or 7,000 crore this year in aggregate. It's getting completely phased out.
Q: My broad point is even then fuel subsidies are higher than what it was when the budget was being estimated and then you have a shortfall on Goods and Services Tax (GST) even now. So, are you still confident of the deficit number?
A: There are always moving parts. Something will go up, something will come down. Not every expenditure as is budgeted takes place. So, there are some natural reductions. I have said this very clearly that there is no programme, no one has been asked to cut down on expenditure at all as we don’t see that necessity. But in its natural way in which it works, some of those items would require some more expenditure, but it's is not very large, all put together including the health protection plan or the Minimum Support Price (MSP) related things, which required some additional funding, but those have also been costed. So, roughly you can put it maybe we have about Rs 20,000-25,000 crore expenditure. But we might have similar savings elsewhere, so I don’t see at this moment any risk.
Q: The worry is only in terms of revenues from GST falling short as we are not even hitting Rs 1 lakh crore every month? We are doing much better on direct taxes, we are doing better on non-tax that is other than disinvestment. I think we will be able to make up.
Non-tax will do much better this. We have about Rs 250,000 crore of non-tax receipts.
Q: Of that Rs 80,000 crore is divestment?
A: No, that is separate. Over and above that.
Q: Small savings are coming to aid of the government. Now, you did one Switch as you should have given that money to those who are holding the bonds. But now they are extended to the sub sequential?
A: No, extra borrowing.
Q: It's a redemption you should have paid, but you are extending it for another year. I just wanted to know if they will be more.
A: In that sense it's reduction of...
Q: You don’t have to pay the redemption to that extend that your expenditure falls, that is what I meant?
A: It's a financing part. It's not expenditure.
Q: It's a financing part so should we expect more of that?
A: Switch is not any addition in borrowing program. Buyback is what we have reduced substantially. Buyback we don’t need. We have done that analysis and in the next three years, our repayment obligations are growing at normal rate. Only in 2021-2022, we have a bunching so that would require to be managed in a buyback program going forward. That is not now, that is 2-3 years away.
Q: Should we expect more Switches than? Is there an estimate that you can?
A: I think in budget we said about Rs 25,000 crore switches we will run.
Q: You will do only that much, Rs 10,000 was done?
A: It's opportunistic, it may happen that way, it may not happen that way.
Q: It won’t be more than that?
A: No, I don’t see any possibility.
Q: Are you comfortable with the currency? After all if crude can come to $75-74 per barrel, it can go to $84-85 per barrel again. So, is there still a plan B for the currency and at what point is that triggered? Is rupee at 74 per dollar or at 75 per dollar that you will? My sense is that Indian currency would appreciate from the levels which it's currently. Q: Why are you so confident?
A: Why should it be otherwise? Our growth is great and we invest in growth. Oil will at some point of time come down again. What we are hearing is that it would also impact our current account. So, I don’t see why there should be a pressure on rupee going forward. It may not happen in days, it might take some weeks, but I am pretty certain at some point of time this will come down to less than 70.
Q: You are working with that assumption for the current fiscal?
A: We are not working with any assumption that way. But the way the fundamentals move that is what my sense is.
Q: Are you so confident of growth as this NBFCs funding drying up takes its toll on consumption. Would you be that confident of growth in the second half?
A: We will wait for the second quarter number to come, which we hope to be better than quarter one and then the second half. What we are seeing in NBFCs are relatively small and it has not hit the consumption story very materially.
Q: It’s Rs 22 lakh crore industry.
A: It remains Rs 22 lakh crore. It's not going away.
Q: No, it's not. There are several NBFCs who are almost not going to grow their book in the second half?
A: What we will see is some slowdown or maturing of growth on the NBFCs, but we will see higher growth on the banking side coming. So, somewhere it gets compensated. In last two years, the NBFCs and those are holding up the growth consumption story. This year, it will be the other way. So, we need to see the holistic picture rather than any particular segment.
Q: You are confident of growth as there are some skeptics on NBFC developments?
A: There will always be some skeptics.
Q: I want to ask you about payments regulator. I am assuming that would have come up for discussion as the decent note was put up in the public domain. Is there any meeting ground, after all it was a draft? Will both sides agree on something? What we have put on the website of the union finance ministry is not a draft. It's the final recommendation or report of the group.
That report builds in the Reserve Bank of India’s viewpoint on what the regulators’ composition and who would head it. It's already there.
Q: But if you read the dissent note, it says that their position has not been entirely appreciated in what was put up?
A: All I would say that report is also been signed by the RBI.
Q: It’s signed with a dissent note. So they are disagreeing with the position.
A: The report, which has been signed has the dissent built in and built in report has been signed.
Q: I think the key demand was that it should be a part of the RBI…
A: Of course that is reflected and that is what the RBI was saying, which is reflected in the report.
Q: But it's an independent regulator. The governor is not head of that regulatory body? The RBI said that it should be under the apex bank and must be headed by the governor, is built into the report itself.
Though, the majority view is not in favour of that and therefore, the group has recommended.
Q: The point I am coming from is that therefore, will the government be willing to concede something to take in the minority view?
A: The way the government works, now that report would be examined by the department and if at any stage there is a proposal to bring this law, this would have formal consultations and in the formal consultations the RBI would again be consulted.
Q: So, it's not the last word. It's still evolving?
A: That’s the way the system works. There is a group. The group has been given a report and that has certain formulation. The government would consider these formulation and consult with all the stakeholders including the RBI.
Q: So chances are that it could revert closer to what the RBI has been asking.
A: I am not saying that.
Q: It can happen that the governor will chair the regulatory body? It could happen that way?
A: If the government decides, then it can happen that way.
Q: When would we come to know about that?
A: That is in consultation process. When would that happen would depend on the law is taken up for consideration by the government. At the moment, this is in the consultation phase.
Q: So, it’s not that the government’s position is sealed. It could evolve?
A: It’s a group which has made its recommendation about certain points. It’s not the government’s points.
Q: The Iranian oil agreement. I know at the moment it's not a hot topic, but has any progress been made in terms of a rupee payment and therefore, being able to import some oil from Iran? Iranian delegation is in town. We are discussing with them the modalities of rupee arrangement if it comes to be used for that.
A: I would at this moment say it’s under discussion.
Q: Are we close to striking a deal and will it be within the confines of what the US?