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Arun Jaitley back to business, and his task is cut out

Other than convincing the RBI and bankers to back the road projects, Jaitley will also have to work with the central bank to develop financial institutions.

twitter-logoAnilesh S Mahajan | September 6, 2018 | Updated 19:30 IST
Arun Jaitley back to business, and his task is cut out

Last week, country got their regular Finance Minister Arun Jaitley is back in the ministry's North Block, after recovering from a kidney transplant. And his task is cut out. Jaitley requires to bring Reserve Bank of India and officials of his own ministry on the same page.

In last six months, as RBI turned the taps on bad debts, his colleagues  Nitin Gadkari, Minister for Road Transport & Highways, Piyush Goyal, Railways Minister, Suresh Prabhu, Minister of Commerce & Industry and Civil Aviation, and RK Singh, Power Minister are finding it difficult to find their way out.

The paramount, however, is Jaitley's own ministry. RBI and finance ministry are at loggerheads on the treatment of non-performing assets (NPAs) and ways to improve the credit off-take among the corporate and other entrepreneurs. The Allahabad High Court, while dealing with the petition of the power plant owners, suggested that the government (finance ministry) to use a special dispensation that has never been used before to give directions to the central bank.

There is no doubt that the NPAs are to be dealt with the iron fist, but both Jaitley and Urjit Patel, governor, RBI need to understand it should not squeeze Indian entrepreneurs' appetite for credit. The recent report of the parliamentary committee under M Veerappa Moily indicated that the country has a low credit-to-GDP ratio at 54.5 per cent (December 2017). To put it in context, the similar ratio is 208.7 per cent in China, 170.5 per cent in the UK & 152.2 per cent in the USA. The biggest loser in Indian context continues to be the small and medium entrepreneurs.

Earlier this month, S Gurumurthy, an economist and Satish Marathe, a champion of co-operative movements, were appointed as non-executive directors on the board of RBI. Their appointment is seen as a push to make RBI more sensitive towards need and requirements of small entrepreneurs. Till now, RBI was seen as a constant opponent to government's push for MUDRA refinance plan.

Meanwhile, in the last six months, RBI is seemingly in defiance to take directions from the various ministries, which irritated the respective ministers, including Nitin Gadkari, Piyush Goyal, Suresh Prabhu and RK Singh.

It will be a test for Jaitley to develop consensus on dealing with the crisis in the power sector. Nodal ministers in the power ministry said RBI's circular to end Special drawing rights (SDR) mid way was arbitrary and have only created more problems for the sector. On top of it, power Ministry joined the promoters in moving High Court as Singh believes the 180-day ultimatum given by RBI in its February 12 circular to move bankruptcy tribunal is impractical.

The assets of companies including KSK Energy, Avantha Group, GMR Energy and Jaiprakash Power Ventures are on the chopping board, and the promoters of companies with healthier balance-sheets like Tata Power, JSW Energy, Resurgent Power and Edleweiss ARC are sitting at the fence to bid for these assets. These companies expect a massive haircut from lenders and the asset price might go down to 50 per cent of the project cost. The RBI's deadline is over. Now, Finance Minister Jaitley has 15-day time to look for a win-win situation.

It is equally worrying for Nitin Gadkari. After a series of meetings with the RBI officials and top leadership of country's commercial banks, he has not been able to convince them to fund via debt the new road projects in the 'risk free' hybrid annuity model, or HAM. The bankers complain that there are three big challenges: a) the IRR committed for these projects is less than 10 per cent and is too low, b) the many of the road construction companies are new & c) in certain cases, many construction companies have taken too much on their plate. In absence of the debt from commercial banks, he can't push NHAI to raise bonds for these projects. The government-backed LIC has already subscribed to Rs 4200 crore worth of bond and may buy another set of similar amount. The insurance behemoth can't put much money in one basket, it also has commitment to invest Rs 26,500 crore in the Indian Railway Finance Corporation, or IRFC and remain part of government's strategy of disinvestment of PSUs. The result is 56 projects of NHAI allocated to the entrepreneurs are stuck because of no-financial closure.

Three years ago, Gadkari brought in HAM, as risk-free model for road construction to replace BOT. In this model, the concessionaire gets 40 per cent of the total project cost in five trenches (on pre-fixed milestones) and balance 60 per cent are to be arranged by the developer. HAM expects banks to fund 35-40 per cent of project cost as against 60-80 per cent in the previous BOT model, and there is no risk of traffic and of seeking permissions from departments and regulators.

Other than convincing the RBI and bankers to back the road projects, Jaitley will also have to work with the central bank to develop financial institutions. India has already created National Infrastructure Investment Fund, or NIIF for equity finance, which is getting a moderate response, but the debt for infrastructure projects remain a challenge. The country has seen IDBI and ICICI bank, which started as development financial institutions (DFIs), but later turned into regular commercial banks. The ministers still believe that the RBI's monetary committee was not benign enough to reduce the vital rates and is too much obsessed with the inflation numbers. They believe there are certain segments of economy, which are set for a take-off, and require cheaper access to capital. Solution for them may lie in the DFIs.

Life of finance minister in India is never easy, but the confrontation with the central bank only makes things murkier. Whosoever blinks first, country must stand victorious at the end.

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