Banks’ ‘worst’ phase under Manmohan Singh-Raghuram Rajan, says FM

New Delhi: Finance Minister Nirmala Sitharaman has turned the tables on her macroeconomics opponents by pointing at a massive amount of bad loans in state-run banks when the United Progressive Alliance (UPA) was in power. She held “the combination” of former Prime Minister Manmohan Singh and former Reserve Bank of India Governor Raghuram Rajan responsible for putting public sector banks (PSBs) through the “worst phase”.

“I have no reason to doubt that Rajan feels for every word of what he is saying. And I’m here today, giving him his due respect, but also placing the fact before you that Indian public sector banks did not have a worst phase than when the combination of Singh and Rajan, as Prime Minister and the Governor of Reserve Bank, had. At that time, none of us knew about it,” the Finance Minister said at the Columbia University’s School of International and Public Affairs on Tuesday.

Bad loans of PSBs rose over 50 per cent from Rs. 9,190 crore in 2011-2012 to Rs. 2.16 lakh crore in 2013-2014, according to the RBI. The National Democratic Alliance (NDA) government came to power in May 2014.

Sitharaman has been firefighting criticisms over a slowdown in the economy that threatens to burn key sectors from manufacturing to finance. She announced a corporate tax cut in September aimed at boosting the economy at risk of widening India’s fiscal deficit, or a shortfall in the government’s income compared with its spending.

Both the former Prime Minister and the RBI Governor are fierce critics of the Modi government’s economic policies, including the overnight notes ban in November 2016 that they say broke the back of the cash-dependent informal economy.

“…I do respect Raghuram Rajan as a great scholar who chose to be in the central bank in India at a time when the Indian economy was all buoyant,” Sitharaman said at the lecture at the university in New York City, organised by the Deepak and Neera Raj Centre on Indian Economic Policies.

She was responding to a question from the audience about Rajan’s recent comment seen to be directed at PM Modi that only “internal cohesion and economic growth” and not “majoritarianism” will help strengthen India’s national security. “In the long run, it seems to me that internal cohesion and economic growth rather than divisive, populist majoritarianism will be India’s root to national security. So all this sort of majoritarianism may certainly for a while win elections, but it is taking India down a dark and uncertain path,” Rajan said at the OP Jindal lecture at Watson Institute, Brown University, on October 9.

Sitharaman took a leaf out of the BJP’s attacking set pieces, often used in election speeches, to criticise the two economists. “It was in Rajan’s time as Governor of the Reserve Bank that loans were given just based on phone calls from crony leaders, and public sector banks in India till today are depending on the government’s equity infusion to get out of that mire,” she said, drawing laughter from the audience.

“Dr Singh was the Prime Minister and I’m sure Dr Rajan will agree that Dr Singh would have had a consistent articulated vision for India,” the Finance Minister said, adding, however, that she wants to thank the former RBI Governor for ordering an asset quality review of PSBs.

To a question whether leadership has been centralised now, Sitharaman said, “I’d like to say that very democratised leadership led to a whole lot of corruption. Very democratised leadership. The Prime Minister, after all is the first among equals in any cabinet… You need to have a country as diverse as India with an effective leadership. A rather too democratic leadership, which probably will have the approval of quite a lot of liberals, I’m afraid, left behind such a nasty stink of corruption, which we are cleaning up even today,” she added.