The challenge of organising nationwide vaccination against Covid-19, as also fortifying the nation’s healthcare infrastructure, is an opportunity for growth-boosting investment. Strengthening rural health centres with cold storage facilities, even if that is just an ordinary refrigerator, which is adequate for the Oxford-AstraZeneca vaccine that will be mass produced and supplied by Pune-based Serum Institute of India, will create additional demand in the economy, as would the procurement of disposable syringes, cotton swabs and cleaning spirit for administering around 1.6 billion doses of the vaccine (2 doses for around 60% of India’s 1.34 billion population).
But that would be relatively small, compared with the investment that is required to impart growth momentum to the economy. Fortunately, all that needed investment need not come from the exchequer, although the investment would need to be induced by policy. Much of the needed funds can be drawn from the giant pools of footloose capital scouring the world in desperate search of decent returns, in the background of policy rates dipping to near zero or even below zero in the developed world. The government would need to offer some kind of guaranteed rate of return in dollar terms.
“An important objective will be to provide relief to those hit by the economic downturn. FM also has to begin the process of fiscal correction, to rein in the fiscal deficit that went out of”
But this is the easy part of reviving investment. The tough part is fixing the broken system of mediating savings to investment in the economy. Banks are the primary route for channelling household savings to investment: people put their money in bank deposits, the banks lend the funds to industry. Banks, however, have turned reluctant lenders, given their pile of bad loans.
Right now, thanks to loan restructuring, the ratio of bad loans to the total loan book is better than the double-digit level the RBI had estimated it would be in its earlier reports. However, once the restructured loans fall due for servicing/repayment, many so-called standard loans would suddenly turn non-performing. For the banks to start lending again, they would need to be relieved of a fair share of their bad loans and be provided with additional capital.
The most practical way to relieve the banks of their bad loan burden is for banks to come together and create a bad bank they jointly own, and transfer their bad loans to the bad bank. The government could provide a part of the equity of the bad bank, along with the banks. Third-party valuers can be roped in to determine the value at which the bad loans are to be transferred to the bad bank. That way, bank managers would not be accused of selling off assets cheap. Further, when the bad bank, which buys the bad loans for cash upfront, resolves these assets and turns in a profit, it would accrue to the bad bank’s owners, the banks and the government.
Provided the resolution of distressed assets with the bad bank is done with some integrity and the transparency that ensures integrity, the ultimate value of the loan write-offs entailed can be minimised.
But banks would not, and should not, lend to infrastructure projects again. Infrastructure projects cost a lot and no one undertakes them without making sure of their inherent feasibility. However, in a country like India, there could be many teething troubles that halt a project in a totally unforeseen fashion: for example, after a change of government, a perfectly viable Amaravati township project in Andhra Pradesh became a high-risk venture. Ideally, infrastructure projects in India should be kicked off under government ownership and stewardship and once they have safely got underway, they can be sold off to private investors. Once the risk has been mitigated, infrastructure projects do not require much risk capital, that is, equity. They should be funded, primarily, by debt. And that debt should be raised from the capital market. Hence the next priority of the budget — creating a vibrant market for corporate debt.
Last year, the FM announced the creation of a Credit Guarantee Enhancement Corporation. It has yet to take off. Funding it should be a priority, for it to play its intended role as an enabler of the debt market. The government should knock off the transaction taxes on derivative trades, as finely priced derivatives are at the heart of mitigating risk — credit, interest rate and currency — on debt.
Since the world is awash with capital in search of decent returns, the government should find a way to offer it decent — to be negotiated — returns shorn of currency risk, and draw in large amounts to fund infrastructure. Established projects, such as toll roads and ports, can fetch the capitalised value of their future earnings from global investors, for the proceeds to be ploughed into fresh infrastructure. This would add contingent liability to the government’s books, a fraction of which would reflect in the fiscal deficit.
Growth is the magic elixir that alone can ward off a fresh banking crisis, further collapse in employment and greater distress. And growth calls for investment — triggering it should be the focus of Budget 2021.