Finance Minister Arun Jaitley on Tuesday criticised the Reserve Bank of India for failing to check the “indiscriminate lending” between 2008 and 2014 that had led to the present bad loan crisis in the banking industry.
His remarks came amid reports of mounting tension between the Finance Ministry and the RBI after the central bank’s Deputy Governor Viral V. Acharya warned on Friday that undermining the RBI’s autonomy and independence could be “potentially catastrophic”.
This was seen as an indirect reference to the RBI pushing back against the government’s alleged pressure to relax its policies and reduce its powers.
“You see [between] 2008 and 2014, after the global economic crisis, to keep the economy artificially going, banks were told to open your doors and lend indiscriminately,” Jaitley said at the India Leadership Summit organised by the U.S.-India Strategic Partnership Forum. “The central bank looked the other way; there was indiscriminate lending,” he said.
The government of the day, he said, was pushing banks to lend, which resulted in credit growth in a year shooting up to 31% from the normal average of 14%. Banks went into projects of demerit which did not have the capacity to sustain the capital. “Total bank credit from ₹18 lakh crore in 2008 went up to ₹55 lakh crore by 2014. And this is something the banks couldn’t sustain, the borrowers couldn’t sustain and you had the NPA problem,” he said.
The non-performing assets or NPAs were put at 2.5 lakh crore during those times, but when an asset quality review was ordered by the new government in 2014, it emerged that bad loans were of the order of ₹8.5 lakh crore, he said.
Delivering the A.D. Shroff Memorial Lecture in Mumbai on Friday, Dr. Acharya called for greater powers for the RBI to regulate public sector banks as it was seeks to clean up the banking system. This independence, he said, was necessary to secure greater financial and macroeconomic stability.
Neither the Finance Ministry nor Jaitley has so far responded officially to the comments.
Jaitley, who had previously said politicians had to unfairly take the blame for any wrongdoing while supervisors got away, did not refer to Dr. Acharya’s speech or the reported tension between his Ministry and the RBI during his comments at the event Tuesday.
Sources in the Finance Ministry said the differences between the central bank and the Ministry were not new and several RBI Governors in the past had run-ins with the government over various issues.
Accepting this, former RBI Governor Y V Reddy in his autobiography has said the differences with the then Finance Minister P Chidambaram reached a level where he wanted to quit mid-way.
His successor D Subbarao also had his share of differences with the finance ministry. Not impressed with the monetary policy action of Subbarao in 2012, Chidambaram had said:“Growth is as much a challenge as inflation. If government has to walk alone to face the challenge of growth, then we will walk alone.” Difference with Raghuram Rajan and the present government is an open secret.
The sources, however, refused to say whether the Finance Ministry had taken cognizance of the issues raised by the RBI and if there would be any dialogue to resolve the differences.
In his speech, Jaitley said reforms undertaken by the government led to significant improvement in revenues. “My own estimation is that from 2014 to 2019, we will be almost very close to doubling our tax base,” he said. This was possible because of formalisation of the economy that demonetisation brought about, the new indirect tax structure (the GST) and improvement in indirect tax structure without raising rates. “This gave us the flexibility to take a departure from the past where there were only slogans,” he said. “Demonetisation [was a] difficult step but helped us make it clear that formalisation of the economy is our clear intent.”
India, he said, had 3.8 crore income tax filers when the BJP took office in 2014. “In four years, it has already moved up to about 6.8 crore. This year, I am sure it will be very close to 7.5-7.6 crore, which is almost double,” he said. The first year of the GST has raised the number of indirect tax assessees by 74%.
Recounting achievements of the government, Jaitley said all villages are close to being connected by roads, the target of houses for all is likely to be achieved by 2022 and all households will have electricity by year-end.
“I think the whole concept of governance has seen a sea change,” he said adding corporate leaders no longer visit corridors of power because approvals are available online and discretion in the allocation of natural resources like coal mines or spectrum has been eliminated.
This, he said, has eliminated corruption.
The finance minister said demonetisation ended anonymity of cash as depositing the junked old 500 and 1,000 rupee note in banks was the only option. While those who honestly paid taxes had nothing to worry, those who evaded “had to pay a heavy price” as notices were sent and they asked to deposit taxes on unaccounted cash, he said