Apex bank needs to focus on infrastructure financing

Ananth Narayan : BL :Oct 28,2012

Directed lending to the core sector will help boost growth and control supply-side inflation

Central bankers have had plenty to worry about, especially over the last five years.

In the case of the Reserve Bank of India, the worry list is pretty long and includes the following:

Inflation continues to be high.

Fiscal deficit remains elevated.

High and inelastic trade and current account deficits persist.

Growth has slowed, so also has infrastructure investments.

Financial health of banks and their clients a concern.

Global scene — in Europe, commodity prices, and so on — is still murky.

Naturally, all these crease points — domestic and external — are interrelated.

Listing out problems is the easy part. Deciding on suitable course of action is tricky.

Limited tools

After all, unlike the Government, a central banker’s tools are limited. After poring over huge amounts of data, listening to the views of stakeholders in the economy, and consulting myriad learned advisors, the buck on monetary policy stops with the office of the RBI Governor.

In the past, in a different context, the RBI has targeted one single data point, inflation, seen as the epicentre of a bulk of the economy’s issues.

The prognosis today would be different. The focus should be investments in infrastructure — roads, power projects, ports, education, freight corridors, et al — to build a sustainable India growth story.

This can, in turn, best address bulk of the aforementioned worries. Investments and capacity creation can help control supply-side inflation. And growth can address our fiscal issues, by increasing revenues.

A credible and sustainable growth story can attract long term capital flows and tackle the balance of payments problem too. And, of course, the Indian banking system is fervently hoping for relief to the stressed infrastructure space.

Now, what can the RBI do for infrastructure? Isn’t this issue for the Government to address? Well, the RBI can do its bit. Just as it allows refinance to export sector loans, it can allow refinance for infrastructure lending by banks as well.

While banks find it absurd to have tight systemic liquidity when stressed assets are at all-time highs, monetary policy experts say it is irresponsible on the part of banks to want liquidity when inflation is high and sticky. Perhaps, the via media is to have directed liquidity — towards infrastructure, rather than for consumption.

More than a rate cut, therefore, directed liquidity into infrastructure should be the way forward.

(The author is MD and Global Co-head, Wholesale Banking, Standard Chartered.)