The Standing Committee of Finance asked for a white paper on debt and fiscal consolidation from the government on August 5. It also pushed for the Reserve Bank of India’s (RBI's) intervention in the functioning of the bad bank, which the regulator rejects.
The parliamentary panel observed that a clear and deep understanding of the debt and fiscal dynamics of the government is needed.
The panel said, “the Department of Economic Affairs should publish a white paper on fiscal dynamics and how much fiscal space is created. They should highlight the use of fiscal resources and impact on GDP.”
In response, the Finance Ministry told the committee that it expects to reach a fiscal deficit level below 4.5 percent by FY26 with a fairly steady decline over the period which should be achieved by increasing revenue buoyancy in taxes and asset monetisation.
In the panel’s view, the economic glide path can be smoother if proper debt and fiscal dynamics are in place as COVID-19 induced deterioration in growth and the fiscal could definitely increase the debt burden in the next few years. In such a scenario, it is essential to have modelling techniques to prepare beforehand for eventualities.
Moreover, the Standing Committee urged the RBI to intervene in the functioning of the ‘Bad Bank’ as it can play an instrumental role by “removing ambiguities and not leaving discretion to banks. However, the regulator has refused to play ball.
The Finance Ministry told the panel according to the RBI, the proposed structure announced by the government is a bank-led initiative with some support from the government. “It may not be desirable for RBI to venture into the operational, commercial aspects of such a venture,” the ministry said.
"RBI needs to demonstrate why loss transfer to ARC-AMC is the best approach. RBI intervention on 'Bad Bank' will bring administrative clarity and reduce hiccups," the panel said.
Meanwhile, the RBI said, “the regulatory framework for the functioning of ARCs is already prescribed and there are well-laid norms for transfer of stressed assets by banks to ARCs.”
However, the panel said if Asset Reconstruction Companies (ARCs) were sufficient, there would be no need for a 'Bad Bank', and that the central bank must clarify how the 'Bad Bank' will operate differently from existing ARCs.
(Edited by : Kanishka Sarkar)
First Published: IST