Shunning Jugaad to change the environment

IF we look around the world today, it does not present a pretty picture. Industrial countries are still struggling, with a few exceptions, to grow. All our fellow BRICS have deep problems. But India appears to be an island of relative calm in an ocean of turmoil. What is different and how can we be assured that it will continue?

 

Growth has to be obtained in the right way. It is possible to grow too fast with substantial stimulus, as we did in 2010 and 2011, only to pay the price in higher inflation, higher deficits, and lower growth in the next two years. India is not in the same situation today but must  work hard to strengthen recovery and put it on a more sustainable footing. 

 

For the RBI, the key tasks are to keep inflation low well into the future to get moderate nominal interest rates that satisfy the vocal borrowers and the silent savers. We have to clean up the banking system of distressed assets to fund growth again. In order to get sustained growth, we need more competition. After a decade, we will see two new private banks this year, and a large number of payment banks and small finance banks next year. Licensing is likely to go on tap.

 

It is good regulators are conservative or else there would be no speed breakers in the economy to slow its propensity to get into trouble. But we should not block innovation. 

 

As India grows, financial sector participants will grow beyond the insiders. Start first with access. The Jan Dhan Yojana has created accounts for much of the excluded population. The Government has taken the next step of attaching a variety of financial services. The clean-up in methods of allocating resources like mines and spectrum and the attempts to improve the speed of bureaucratic and judicial decision making are all much needed to increase participation. Any reforms have to be institutionalised, so that they outlive the reformer’s passing.

 

Finally, newcomers and outsiders need protection against unfair practices. After the Charter of Consumer Rights has been in operation for some time, RBI will take a view on best practices and regulation, if any. 

The Finance Ministry intends to bring a bankruptcy code to give creditors the ability to resolve distress and help strengthen the corporate bond market, which is so essential to infrastructure financing.

 

In the meantime, we have to deal with the distress in the banking system. RBI has ended the forbearance to restructured loans. Henceforth, restructured loans will be classified as non-performing loans. We have also introduced flexibility for those who recognise and deal with stressed assets early. In the same way as firms have core competencies, do countries have core competencies?

 

Perhaps they do. But it is very hard for public authorities to determine what they are. If we say we want to focus on national core competencies, every industry will try to show why it thoroughly fits the bill. 

 

There are no easy paths to the top. Jugaad or “working around” difficulties by hook or by crook is a thoroughly Indian way of coping but it is predicated on a difficult or impossible business environment. And it encourages an attitude of short cuts and evasions, none of which helps final product quality or sustainable economic growth. While we should respect entrepreneurial abilities in difficult environments, it is better to change the environment for the better.

 

That is  what we are trying to do.

 

All this requires patience. The current difficulties of emerging markets stem from a complicated set of reasons, but an important one is impatience to regain growth by overemphasising old and ineffective methods of stimulus.  

 

We are doing quite well in comparison. We cannot compensate entirely for what is happening across our borders, else we will risk acquiring the problems our fellow emerging markets have. We have to have the discipline to stick to our strategy of building the necessary institutions and creating a new path of sustainable growth where Jugaad is no longer needed. For this, we need the understanding and cooperation of business, not impatience and pressure for quick impossible fixes. Only then can we realise our true potential as a nation.