FM should nudge, not pressurize PSB chiefs

Finance Minister Nirmala Sitharaman will be reportedly meeting the chiefs of public sector banks (PSBs) on April 23. The objective is to assess the performance of state-run lenders especially regarding the schemes the government has launched to revive the pandemic-hit economy. While her interest in turbocharging growth is admirable, it should not become an obsession.

The Finance Minister wants to comprehensively review various government schemes including the Emergency Credit Line Guarantee Scheme (ECLGS), which was extended by a year till March 2023. The guarantee cover has also gone up by Rs 50,000 crore to Rs 5 lakh crore.

Apart from the ECLGS, there are production-linked incentives (PLIs). The latest Economic Survey, for 2021-22, talked about the "supply-side reforms which include deregulation of numerous sectors, simplification of processes, removal of legacy issues like 'retrospective tax,' privatization, production-linked incentives and so on."

Production-linked incentives are also good. If successful, they can lead to the strengthening of supply chains. It must be mentioned here that the use of the term 'supply chains' is somewhat misleading; it seems to suggest that something new is needed, whereas the fact is that here emphasis is on boosting manufacturing.

Unfortunately, manufacturing has been shrinking since 2011-12. Its share in the country's gross value added (GVA) has come down from 17.4 per cent in 2011-12 to 14.5 per cent in 2020-21. The Survey says, "In 2020-21, the share of manufacturing fell to 14.4 per cent but is expected to improve to 15.3 per cent in 2021-22."

The optimism may not be grounded in reality. The Survey said, "Among the top ten countries for import origin, China, UAE and USA were the top import sources for India in April-November 2021, with China's share reducing to 15.5 per cent from 17.7 per cent in corresponding period a year earlier - reflecting increased diversification of India's import sources."

The diversification may be true, and China's share in overall merchandise imports too may have declined, but imports from China are hovering around $100 billion for the first time in calendar year 2021; this was more than the pre-Covid level.

As mentioned earlier, the manufacturing sector, which is also a huge employer, is ailing. The result is not just sluggish growth but also poor employment generation.

Against this backdrop, Sitharaman's interaction with PSB chiefs is significant. Reserve Bank of India (RBI) Governor Shaktikanta Das has been quite accommodative of the government's concerns about growth; despite the rising inflation, he has refused to raise the key rates, though he has indicated a hawkish stance in the foreseeable future.

One hopes that, in a bid to incentivize investment, Finance Minister Sitharaman nudges rather than pressurizes bankers to lend to corporations. It is quite well known that when that happens, prudential norms are taken lightly, thus resulting in non-performing assets. Between 2016-17 and 2020-21 alone, the government had to shell out Rs 310,997 crore to recapitalize PSBs. All taxpayer money.

After incurring collective losses for five straight years between 2015 and 2020, PSBs earned a combined net profit of Rs 31,820 crore in 2020-21. Sitharaman must ensure that as a whole PSBs don't slip in the red again.