Restoring Trust A Must

Copied below is the submitted version of my article published in The Global Analyst, November 2019.

M G Warrier             


PMC Bank aftermath
Restoring Trust A Must

M G Warrier


They say, “Well begun is half done!” What has happened to planning in India?
In the initial days of post-independence governance, planning was a word woven into the fabric of every economic development activity in this country. At various stages we heard about Five Year Plans at national level and state level, Planning Commission, Community Development Blocks, All India Rural Credit Survey, Rural Credit Review, Agricultural Credit Review Committee, different committees on financial sector reforms, Lead Bank Scheme and so on. I had concluded my article on Dr Raghuram Rajan in this magazine (TGA, September 2013 issue) with the following observations:
“As observed in the earlier part of this article, Rajan is a fast learner. One hopes, during his OSD (Officer on Special Duty) days in RBI from the second week of August, 2013, he had occasion to glance the following books:
1.     History of the Reserve Bank of India Vol I
2.    All India Rural Credit Survey
3.    Review of the Indian Monetary System(Sukhmoy Chakrabarty)
4.    Report of the Committee on Financial Sector Reforms(Narasimham Committee-II)
These will give Dr Rajan a feel of the role played by RBI since its inception in the evolution of the financial system to meet the country-specific needs. A reading of these books will also tell one why the cut and paste FSLRC report is not finding favor inside RBI. To conclude, I must say, the appointment of Dr Rajan has raised huge expectations. Can the new RBI Governor help the economy, besieged by a plethora of challenges including a weakening currency, burgeoning deficits, sluggish growth, runaway inflation, rising interest costs etc., regain momentum?
Well, only time will tell.”
This quote is here to recall that we continue to face the same problems we faced during pre-Modi 1.0 days and for solutions, ironically, we may have to search out the same old time-tested prescriptions by experts who made diagnosis after feeling the pulse of the Indian context.
On August 15, 2014 in his maiden Independence Day speech from the ramparts of Red Fort, Prime Minister Narendra Modi announced that our Planning Commission was a house in disrepair beyond renovation and he intended to dismantle it and rebuild a new structure (see Box for excerpts). In reality, as on that day, the spirit of his message was applicable to the entire institutional structure supporting governance. Courts had accumulated pendency of over 30 million cases across the country at different levels, a report had been put together (Financial Sector Legislative Reforms Commission) for reforming the financial sector and the federal structure itself was showing signs of weaknesses for reasons including the pulls and pushes of the multi-party coalition politics that had become the order of the day.
During the four decades that followed independence, India had correctly understood the role of public sector organizations and the financial sector in economic development.
Excerpt from Prime Minister Narendra Modi’s Independence Day Speech, 2014
India's federal structure is more important today than in the last 60 years. To strengthen our federal structure, to make our federal structure vibrant, to take our federal structure as a heritage of development, a team of Chief Ministers and Prime Minister should be there, a joint team of the Centre and the states should move forward, then to do this job, we will have to think about giving the Planning Commission a look. So, I am saying from the rampart of the Red Fort that it is a very old system and it will have to be rejuvenated, it will have to be changed a lot. Sometimes it costs more to repair the old house, but, it gives us no satisfaction. Thereafter, we have a feeling that it would be better to construct a new house altogether and therefore within a short period, we will replace the planning commission with a new institution having a new design and structure, a new body, a new soul, a new thinking, a new direction, a new faith towards forging a new direction to lead the country based on creative thinking, public-private partnership, optimum utilization of resources, utilization of youth power of the nation, to promote the aspirations of state governments seeking development, to empower the state governments and to empower the federal structure. Very shortly, we are about to move in a direction when this institute would be functioning in place of Planning Commission.


Recently, former CAG Vinod Rai has published his second book post-retirement, titled “Rethinking Good Governance: Holding to Account India’s Public Institutions”. Referring to the onslaught suffered by several constitutional bodies and statutory institutions in the recent past, Rai observed that ‘it goes to the credit of these robust institutions that they have managed to survive this onslaught. In the Epilogue to the book written after the 2019 Parliament Elections, referring to the public criticism of institutions like Election Commission of India, CAG, RBI and the Supreme Court, he observed:
“*** It has become the done thing to attack institutions simply for performing their duty!
But it goes to the credit of these robust institutions that they have managed to survive the onslaught. It needs to be recognized by politicians, as well as citizens, that governance is best served by allowing institutions the autonomy and independence mandated for them. It also needs to be recognized by the political executive  that these institutions have been created by them, and the autonomy vested in them is by the legislature itself.
The tendency of any government that comes to power is to appoint its so-called ‘confidants’ to  head the institutions, in the anticipation that they will toe the government’s line. However the experience has been thahe t once in the chair, the appointees have invariably maintained the sanctity of  the institution, displaying the professional integrity required of them. In fact, repeated attempts to cramp their functioning have met with a push-back.”

Last week, my friend Shri C V Subbaraman, a former central banker made the following observations about the current controversies on economic slowdown in a private email. I quote with his permission:

“All celebrated economists are good theorists. They can win many laurels, international rewards and recognitions for their "knowledge in the field of economy", even Nobel Prize. I understand that Nobel prize has never been missed in any year  by economists from the start of Nobel Prize! Yet, with economists pedagoguing across the world with their often "I told you so" statements, the economy of the world has not found permanent solutions for many of the basic problems faced by humanity during the recent decades. There is an army of economists world over, who keep giving fortuitous advice or indulge in opportunistic criticism of the handling of the economy by the powers that be. Here at home, every one blames two factors for all ills in the system: Demonetization and "hasty" implementation of GST. Both the measures needed institutional and government support at the stage of implementation which was not forthcoming in adequate measure for reasons attributable to political views and lobbying by vested interests. True, regulatory measures to channelize financial transactions transparently and bring accountability in funds flow and management of resources affected “the informal economy”. What is informal economy? It is the unregulated and unprotected employment and production sectors. Those who criticize demonetization and GST need to come forward with their position on black money and tax evasion.
Of late, there is a tendency on the part of senior bureaucrats and celebrity economists who occupy top positions in government and institutions in India to do what they want to do while in service and criticize the very organizations they served, once they retire.”
Subbaraman’s above observation was also in response to the observations like the following made by Maitreesh Ghatak in a recent article:
“This (slowdown in the economic growth) is largely due to self-inflicted blows. The misguided shock therapy of demonetization delivered a massive shock and little therapy. In principle, the GST was a good idea, but it was implemented in a hasty, chaotic, and ham-handed way, like surgery without anesthetic. All this was done with the deeply misguided vision of converting a largely informal economy to a formal one overnight through diktat. All it did was simply dry up the informal sector, where nearly 80 per cent of the population is engaged, leading to massive losses in employment and income not fully captured by the GDP.”
Agreed, we cannot brush aside concerns about economic growth slowdown. Rising consumption rates, falling household savings rate and high unemployment rate are all health issues affecting the Indian economy today. Comparisons with worse off nations or our own historic data do not comfort us. Those who are in charge of policy formulation are aware of the seriousness of the situation. RBI governor Shaktikanta Das went on record saying that “the weakening of private consumption, which for long has been the bedrock of aggregate demand, in particular, is a matter of concern. Private investment has also lost traction, with the corporate sector reluctant to make fresh investments” at the October 2019 Monetary Policy Committee meeting. He didn’t conceal his concern and said:
“Economic activity has weakened further since the last MPC meeting in August 2019 with growth for Q1:2019-20 turning out to be 5 per cent. Various high frequency indicators show that economic activity remained weak in Q2. Inflation has evolved broadly along the projected lines and remains benign; while food inflation has edged up further in the last two months reflecting the sharper than expected increase in food prices, CPI inflation excluding food and fuel has moderated consistent with the slowing down of the economy.”
Subbaraman’s observations become relevant in the context of economists, analysts and those responsible for policy formulation and policy implementation at various levels in the hierarchy of governance searching for solutions for 21st Century problems using 20th Century tools. What is missing is a realistic assessment of India’s own country-specific strengths, weaknesses, opportunities and threats.
Our strengths include:
·       A strong democratic system of governance which is capable of absorbing occasional internal and external shocks. Whatever be the criticism, for India, change in governments has never affected continuity in governance.
·       An asset-base accumulated from the past prudence and planning waiting to be mainstreamed and exploited. This include domestic savings idling in household lockers as jewellery and gold, temple/religious institutions’ treasures, unutilized real estate properties, underutilized production capacities and uncultivated land.
·       Under-utilized talent and skill which also migrate to other countries for want of domestic opportunities.
If allowed to function within the existing mandates, we have a well-developed institutional system which can exploit the above strengths to reverse the temporary economic slowdown fast. What is lacking is the political will to guide the governmental machinery including legislatures and the institutions including judiciary, statutory bodies and the organizations/establishments in the  public and private sector sectors to their optimum level of efficiency.
Unless trust is restored in the government and its various limbs, productivity of all resources including human resources will get affected and all talks of slowdown and revival will remain on paper.
A case study in restoring trust
The recent failure of the Punjab Maharashtra Cooperative Bank (PMC Bank) is an example of inefficient functioning of institutional system resulting in delayed administration of justice.
The depositor of the PMC Bank and common man in his capacity as a saver who deposits money in any bank in India may be concerned with the following issues:
·       There is a Deposit Insurance and Credit Guarantee Corporation(DICGC) providing an insurance cover of upto Rs one lakh per account-holder. It didn’t provide any support when account-holders who had balances in current and savings accounts with PMC Bank were told that their deposits were frozen for six months and the maximum amount that can be withdrawn during the next six months was Rs1000/- (In subsequent days, in stages this limit is being revised upwards).
·       What is the role the Registrar of Cooperative Societies as the authority having control over administrative matters of the bank will play in such situations?
·       To what extent the stipulations and monitoring of maintenance of cash reserves (under RBI Act or BR Act) and Statutory   Liquidity Reserves (under B R Act) will safeguard the interests of stakeholders in such situations?
There are no ready answers to such questions. But, one feels uncomfortable, when none of the safeguards and safety-valves work in an emergency. No, we cannot just blame the judiciary, statutory bodies or institutions for the chaos and forget this till next calamity happens. Somewhere a beginning has to be made. Let it be from PMC Bank experience.
PMC Bank has over 10,000 crore collected as deposits from thousands of depositors spread in 6 or 7 states. GOI, RBI and representatives of some state governments should sit together and analyze what went wrong in this case. If necessary, new laws should be enacted. If amendments will take care, they should be carried out. The purpose should be to make adequate recoveries to pay the depositors in full. After that, let the PMC Bank start afresh, if it wants to continue in business. Restoring trust will be an uphill task.

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