NEW DELHI: Chief economic adviser Krishnamurthy Subramanian has said there is a need to closely monitor the asset-liability mismatch in the financial sector and called for an improvement in the disclosure framework for defaults, as embattled non-banking financial companies (NBFCs) face a liquidity squeeze and rating downgrades.
In a wide-ranging interaction at the ET office, Subramanian termed the Insolvency and Bankruptcy Code (IBC) a big change, and said the economy had done well by growing at an average 7.5% over the past five years even though there has been a slowdown in the last two quarters. “We all know that the effect of investment on growth is felt with a lag. And we have had a significant slowdown in capital formation since 2014. So the effects of some of that on growth will show up, and with a lag,” he said.
The CEA said there was need to incentivise young businesses as opposed to small businesses, as these were the ones that create more jobs and deliver growth. “We basically support dwarfs. We should be supporting gazelles, those that actually grow up… if you are small for 40-50 years, it’s not about vulnerability, it’s the lack of ability,” he said.
He justified the Rs 6,000 annual transfer to farmers under the PM-KISAN scheme, saying it addressed the huge risks faced by peasants.
On the troubles plaguing the NBFC sector, Subramanian, who has a PhD from Chicago-Booth University, said “incentives and information asymmetry” are the two key problems that need to be solved in the financial markets to avoid stress.
Last week, a number of NBFCs were downgraded by ratings agencies and there are fears the problem could exacerbate.
“…Information on defaults also needs to be shared because if information doesn’t come, then ratings agencies don’t know. Only when the borrower defaults, we get to know,” he said.
Subramanian said that while mandating the disclosure of even a one-day default might be too harsh, one could have a system wherein information would have to be shared if a repayment is missed for seven days.
“Within a year, you could default three times, but you can’t keep defaulting. There has to be some market discipline, because this is critical information and it is a material event,” he said.
To a question on whether there should be a special liquidity window for NBFCs, Subramanian said this was “the territory of the RBI” and he would not want to comment. “This is a fundamental question, if in a capitalist economy one should be really intervening unless there is huge systemic risk and contagion effects that are being created… I worry about a situation where profits are private but losses are socialised,” he said.
On the debate over the jobs data, he said the earlier employment-unemployment survey and the present Periodic Labour Force Survey (PLFS) numbers were not comparable.
Subramanian traced the current slowdown in gross capital formation to the “dual balance sheet problem” and related aspects. “When dual balance sheet problem was getting created, there was huge expansion of capacity and over investments and good part of exuberance,” he said, and added that that the IBC had started making a positive change.
“Now banks have the stick to control, and corporates are seized of the fact. With threat of losing control, capital budgeting is now being done in a more controlled manner,” he said. “Its effect on demand side is that investments are coming in and capacity is being created. We are now at 75% capacity utilisation.”