The combination of an impending general election and a fragile global economy forebode trouble in India. In 2009, a week after the interim budget,finance minister Pranab Mukherjee unveiled the third economic stimulus package in as many months, which was supposed to revive investment. The subsequent story is well known.
Now, P Chidambaram is trying a version of an undesirable stimulus by linking additional capital support for public sector banks to cheaper loans for people wanting to buy consumer durables and two-wheelers. Bad loans in the banking system, particularly public sector banks, have acted as a drag on the economy. It is difficult to shake off the notion that the finance ministry has played a role in the extent of bad loans in public sector banks by using its majority shareholding and say in the appointment process of bank chiefs to direct money to handpicked areas. For instance, an RBI deputy governor recently characterised public sector banks' appraisal of infrastructure loans as "impressionistic rather than information-based". Barring differences in ownership, there's no reason why only some bankers in India fail to show a semblance of professionalism in some cases.
In this context, it is difficult to justify Chidambaram's renewed attempt at directed lending to two sectors where loans have been growing faster than aggregate bank credit. RBI data shows annual growth in loans to consumer durables and vehicles for the week ended July 26 was 33.8% and 23.4% respectively. In comparison, the aggregate loan book of banks grew 14.6%. Directed lending through priority sector norms in India is a public policy intervention since late 1960s to push credit towards people who lack access or sectors with high employment potential. Using public money to push cheap loans to fuel middle-class consumption is a bad policy option.
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