ISBInsight: The research done at ISB’s Centre for Analytical Finance has been widely cited in the Economic Survey 2018-19. What do you think are some possibilities and also some limitations of such a policy-theory interface for Finance researchers?
Prasanna Tantri: Our current Chief Economic Advisor was part of ISB faculty and recognises the value of research. Reaching policy makers is sometimes the limitation for academics. Dissemination is another challenge. On the positive side, once policy makers see that our research is based on hard data, academic research starts getting cited and acted upon.
For example, we presented our research on the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) to the Cabinet Secretariat before the economic survey exercise began. Similarly, we have presented our work on the Digital Identity Research Initiative (DIRI) to the Aadhaar authorities. We haven’t seen much in terms of implementation yet, but there is some promise in terms of providing data and of positive reception.
Is a five trillion USD economy in five years a lofty goal or an achievable target for India?
The reason behind it being termed ‘lofty’ is that the number sounds large. However, consider the fact that India is already at USD three trillion. We would require a growth rate of 11% for the path to a five trillion economy, which would be consistent with what we have experienced in the recent past. Maybe it would be 4.8 instead of five- but as per our analysis, we should get close to the five trillion goal by the end of 2024 barring extreme factors such as a global slowdown.
Are we reaching the end of the road for bad loans and Non-Performing Assets (NPAs) in Indian banking?
In the same report you see that the NPA rate fell from 11.5 to 9.3. So, I think the direction is good. Recently, Punjab National Bank (PNB) reported a surprise profit. Nobody expected that after the Nirav Modi incident. After the fraud at PNB, its provision went down by 65 percent. Sometimes the problem with India is after a crisis an attempt is made to resolve the crisis and things start looking good. But then midway, people forget the lessons learnt and they get back to their old habits. It would be important to track how PNB’s performance pans out.
I am reasonably confident that NPAs will come back to 4-5% or less in some time. Once that happens, the question will be whether we can stay on this course of disciplined lending, or will we get back to the old habits of evergreening or renewing old loans. By staying on the path of discipline as we are seeing now, we can truly resolve the NPA issue. The crucial factor is governance. It is not enough to just give money to public sector banks. It should be coupled with changes in governance.
How do you perceive government measures toward financial inclusion, such as the next stage suggested by the Reserve Bank of India (RBI) of bridging insurance and pension coverage gaps along with traditional banking services?
I am hopeful that given the positive impact with bank accounts, pensions, social security (with unorganised sector and now retail traders), the same will be done with insurance as well.
The first stage has gone really well. There were initially many critics of the Pradhan Mantri Jan Dhan Yojana (PMJDY), but the total balance in PMJDY accounts has now reached INR one lakh crores or USD 15 billion. That’s not a small number. And it is growing. It is adding 1000 crores (10 billion) INR every week. Now with the Krishi Samman Nidhi Yojana launched in February 2019, I will not be surprised if it touches three or four lakh crore INR (30-40 million INR) in the next four to five years. In this way, banks will actually start making a lot of money through PMJDY.
The only difference between PMJDY and insurance is that with a savings account, you don’t have too much risk. Not much can go wrong even if you give a savings account to the wrong person. But with insurance, there are morals. If you systematically insure all people, the worst part is that the benefits would come first, and costs would come later. As long as costs are taken care of, there should be focus on insurance. This thought is picking up now.
There is a paper by a Professor at Harvard where he says that even if you sell insurance for free or at very low prices, people do not buy it. People associate insurance with a negative effect. They think if you take insurance, something bad will happen. So, no government can bring about that attitudinal change. This is an interesting subject matter of research. It’s just not about supply, but about demand as well.
In term of pensions, the Indian government has launched one for the unorganised sector’s employees. 40 lakh (four million) people are enrolled already in it. The 2019 budget had a pension scheme proposal for traders. The current government has been successful in the past few years in implementing schemes quickly and on a large scale. I think these are good steps in the right direction.
About the Interviewers:
Debdatta Chakraborty is Research Editor and Yogini Joglekar is Managing Editor at ISBInsight, the flagship research periodical of the Indian School of Business.