Raghuram Rajan’s 10 Solutions to Get Economy Going Again

Summary: This one is for all of you, where are the solutions wallahs. Of course, I have offered many of the solutions that Rajan has offered in a column, but never put them together in one place.

One of the perils of writing on the Indian economy in the last six years has been the repeated comment from a few, don’t tell us about the problems, but give us the solutions. I mean how do you discuss solutions without highlighting problems. How do you come up with a prognosis without coming up with a diagnosis in the first place?

It’s not that one hasn’t highlighted solutions in what one has written over the years, but it’s just that where are the solutions wallahs, don’t seem to notice them. This belief that economics has solutions to everything (particularly among the non-economists, which means most of us), is very strong.

Over the years, I have come to believe that this is primarily because almost all of us are brought up writing exams where every question has an answer and every problem (in the mathematical sense of the term) has a solution. Life and economics don’t work like that. If everything had a solution, the word problem wouldn’t exist in the first place.

Nevertheless, this piece is all about solutions; things that the central government can do right now (and should have been doing by now) to get the economy going again. I have just finished reading Dr Raghuram Rajan’s piece on the Indian GDP (Gross Domestic Product) collapse. GDP is a measure of the economic size of a country.

Dr Rajan, who was the governor of the Reserve Bank of India (RBI), has offered many solutions. These are things that the government can do to get the economy going again. I have offered many of these solutions in my writing as well, though never gotten around to writing about all the solutions together at one place.

Let’s take a look at these solutions, one by one.

1) The government needs to expand its resource envelope in every way possible, Rajan writes. At the cost sounding like a broken record, it needs to sell its stakes in many public sector enterprises (how many times have I said this). In fact, in a sense it has already missed out on the current buoyant state of the stock market. The total amount of money collected through the disinvestment route during this financial year, remains close to zero.

Rajan also suggests that the government should be ready for on tap sale of its stakes in public sector enterprises, to take advantage of every period of market buoyancy.

2) Many public sector enterprises own land, in prime areas of India’s cities. And this land needs to be sold (Again, how many times have I suggested this). In fact, in a city like Ranchi, where I come from, the Heavy Engineering Corporation (a public sector enterprise) sits on acres and acres of government land. All this land across all these companies needs to be sold and money be raised. Of course, this isn’t going to happen overnight.

But that’s not the point here. If the government shows serious intent on this front by announcing a time-table to do this, as well as making preparations for the sale, this is something that the bond market will notice and be happy about.

3) Why is it important to keep the bond market happy? With tax collections collapsing by 30%, between April and July 2020 in comparison to the same period in 2019, it is but natural that the government will end up borrowing more. This is likely to push up the return (or the yield) that the market demands on the government borrowings, given that there is only so much financial savings going around. Other factors that will give confidence to the bond market is the publishing of the correct fiscal deficit numbers unlike the massaged numbers that are currently declared (well, well, well, I have been saying this for a couple of years now). Fiscal deficit is the difference between what a government earns and what it spends.

Another important reform suggested by Rajan is the setting up of an independent fiscal council, which can keep an eye on the deficit numbers (This is something that the former deputy governor of the RBI, Viral Acharya, has also been suggesting).

All in all, the government should seem like making serious moves towards restoring fiscal stability, which is currently lacking.

4) The world will recover faster than India, given that the covid-curve has been flattened across large parts of the world. Given this, economic demand in many of India’s bigger trading partners will recover faster than in India (Again, a point I made in a piece I wrote for the Mint on September 7, 2020). This means that faster exports growth can be a way for India to recover, suggests Rajan. But the trouble is that we are looking at import substitution as a policy more and more and imposing tariffs on imports. This raises the cost of inputs that go into goods that are ultimately exported.

Of course, the intermediary goods that go into the making of goods that are exported, can be produced in India, but this will happen at a higher price. Hence, this makes us uncompetitive at the global level (A point I made in a piece I wrote for the Mint in February). Also, reversing the entire import substitution bogey will mean going against the current atmanirbharta campaign, a very successful perception management campaign. (In economics, just because something sounds good, doesn’t mean it is necessarily good). Economics is not the only thing that any government is bothered about.

5) Rajan suggests that the focus on Mahamta Gandhi National Rural Employment Guarantee Scheme (MGNREGS) as a way of putting money directly into the hands of the poorest, should continue. If this means spending more money under the scheme, then so be it. (Okay, I had suggested this as far back as March in a piece I wrote for the Mint, even before the government had taken this route.)

6) While, MGNREGS takes care of the lack of economic activity in rural areas, the urban areas get left out under the scheme. Hence, the government should be making more efforts to put money into the hands of the urban poor, suggests Rajan.
One of the things that the government has done is to put Rs 1,500 over a period three months into female Jan Dhan accounts. This cost the government around Rs 31,000 crore. I think it is time to put money into male Jan Dhan accounts as well (Again, I have been saying this for months now). This will take care of the urban poor to some extent. I know this isn’t the perfect solution because proper targeting will continue to remain a problem, but it is better than doing nothing.

7) Rajan further suggests that the government and public sector enterprises should clear their dues as fast as possible. This will put more money into the economy and particularly into the hands of corporations and help them survive. (Something I had said in March). A newsreport in The Financial Express today points out that the total amount of money owed by the central government and the public sector enterprises, amounts to Rs 9.5 lakh crore, or a little under a third of the Rs 30.4 lakh crore that the central government plans to spend this year. Of the Rs 9.5 lakh crore, Rs 2.5 lakh crore is owed to the Food Corporation of India (FCI). The remaining Rs 7 lakh crore is a large amount on its own. Even if a portion of this is cleared, the economy will get some sort of a stimulus.

As far as a real stimulus goes, focusing on physical infrastructure is the need of the hour, leading to creation of demand for everything from steel to cement. One area that can really get the Indian economy going again is real estate. I have discussed this so many times before. But for that to happen, so many other things need to happen, including many of the current real estate firms going bust and banks losing a lot of money. Creative destruction needs to be unleashed. Of course, the deep state of Indian real estate is not ready for something like this and will not let it happen.

8) Rajan also suggests that firms below a certain size could be rebated the income tax and the goods and services tax, they paid last year (if not the whole amount, but at least a part of it). This could be an easy and direct way of helping smaller businesses, which have faced the brunt of the pandemic all across the world. (Okay, I haven’t suggested anything like this anywhere, from what I remember).

9) Rajan recommends that public sector banks need to be properly recapitalised as the extent of losses due to covid are recognised. I feel that if the government doesn’t have the money to do so, then it needs to let these banks raise money from the market and in the process, the government should be okay with the idea of diluting its stake. (I have written a book on this )

10) And finally, as the moratorium on repaying loans taken from banks and non-banking finance companies has come to an end, there are bound to be defaults. Here, the government should have a variety of structures in place to deal with the emanating problems, and not have a one size fits all approach. Also, in my opinion, dilution of the entire insolvency and the bankruptcy process, is really not the right way to go forward.

So, to all the where are the solutions wallahs, these were 10 solutions that Dr Raghuram Rajan has offered to the government (Actually, there are more solutions in the piece he has written, but I have stopped at ten. Some of these solutions are about land reforms, labour reforms, genuine ease of doing business reforms, etc., to improve India’s competitiveness, which keep getting made endlessly over and over again). Rajan has also said that the time to do these things is now and not wait for things to get worse.

In my writing over the last few months, I have recommended eight or nine of these solutions as well, though never put all these solutions at one place. One important solution that I think needs to be quickly implemented, is a reduction of the goods and services tax on two-wheelers.

The trouble is that most of these solutions need money to start with. And for that the government needs to come out of its comfort zone and start raising money in ways that it has never done before (like selling land). Also, all reforms need intent and communication clarity to be able to explain these things to the junta at large. Plus, they may not lead to electoral gains immediately, something like a focus on an actor’s suicide may.

You see the government just doesn’t have the incentives to do the right things.

PS: I sincerely hope this should satisfy the appetite of all the where are the solutions wallahs, out there.

India’s Rs 1,66,276 Crore Problem

One of the major points that we talk about in India’s Big Government is the fact that the Indian state is overambitious. The government wants to do too many things at the same time, and ends up making a mishmash of everything.

One of the areas where the governments (both central as well as state governments) devote a lot of their time and attention are public sector enterprises. In the past columns, we have discussed many cases of central public-sector enterprises continuing to bleed and the government continuing to bail them out, year on year. This includes loss makers like Air India and Hindustan Photo Films Manufacturing Corporation, which have been losing money for many years.

In fact, very recently, the government revealed the losses of the perennially loss-making Air India, in the Lok Sabha. For 2016-2017, the government owned airline made losses of Rs 5,765 crore. Despite all the government spin around the airline working in a much better way, than it was in the past, the losses increased by 50%. In 2015-2016, the losses of the airline were at Rs 3,837 crore. With these numbers, it is surprising that a few media houses chose to report the fact that the operating profit of Air India, had improved year on year. But how does that matter, when the losses have gone up by 50%?

The airline has lost a total of Rs 41,657 crore, between 2010-2011 and 2016-2017. It continues to function on back of the government investing money in it, every year. Between 2011-2012 and 2017-2018, the government has invested a total of Rs 26,545 crore, into the airline. Of course, as we keep saying, every extra rupee invested in this airline, is a rupee taken away from more important areas like defence, education, health, agriculture etc.

Over and above this, the banks give the airline working capital loans. These loans as of March 31, 2017, amounted to Rs 31,088 crore. The question is why do banks give an airline which has accumulated losses of greater than Rs 41,000 crore, more loans? The answer lies in the fact that Air India is ultimately owned by the Indian government. No private sector airline in a similar situation, will get bank loans.

And lending to Air India is essentially lending to the government. Any default on loan repayment by Air India will be seen as a default by the Indian government. Hence, the assumption is that such a default is never going to happen. Given this, banks are happy to keep giving loans.

The point in throwing all these numbers at you, dear reader, is to show you, that it takes a lot of money to keep a “dead elephant” like Air India, alive. It is beyond the government babus who run this airline, to breathe life into it. With every new appointment at the top, we are told this gentleman will now revive the airline. But that hasn’t happened in years.

Meanwhile, the government continues to invest money in the airline. At the same time, the accumulated debt of the airline stands at Rs 48,447 crore (this includes aircraft loans over and above, the working capital loans). The good part is that the total debt is down from Rs 52,817 crore as of March 31, 2016. This is ultimately, the liability of the government of India, which actually does not show on its books.

In the recent past, there has been some talk about selling the airline, lock, stock and barrel. But then, until things really happen, talk is just talk. In fact, the government has been talking about selling the airline since June 2017. The proof of the pudding, as they say, is in the eating.

Air India, over the years, has become a poster boy of the government owning and continuing to run, loss making enterprises. This problem is well known at the central level. In 2015-2016 (the latest set of agglomerated numbers which are currently available) 78 out of the 244 central public sector enterprises, were loss making. Of these nearly half of the companies had made losses three years in a row. Further, between 2006-2007 and 2015-2016, a period of a decade, the net profit to capital employed ratio, of the central public sector enterprises has fallen from 12.27% to 5.97%. This tells us how well the government’s capital (or in other words the taxpayer’s capital) is being put to use.

The story of central public sector enterprises not doing well has been well highlighted over the years. But the same cannot be said for public sector enterprises owned by the state governments. Economist Vijay Joshi in a recent lecture pointed out: “In addition to Central PSEs, there are around 1000-odd State PSEs, of which two-thirds make losses, including notably the zombie electricity distribution companies. The aggregate losses of all PSEs, central and state, amount to about one per cent of GDP annually.”

One percent of  the GDP is not a small amount. The GDP (gross domestic product) at current prices for 2017-2018 is projected to be at Rs 16,627,585 crore. One percent of this works out to around Rs 1,66,276 crore. This is a large amount of money.

Of course, a lot of this amount, the government is not currently paying for directly. Many public sector enterprises borrow from banks, in order to make up for their losses. The banks lend them money simply because these companies are ultimately owned by the central and the state governments.

Hence, the total liabilities of the government keep increasing day by day and will have to be paid for one day, simply because a government cannot default.
Rs 1,66,276 crore are just the projected losses of India’s public sector companies, for this year. Imagine, the kind of losses that have been accumulated over the years. Now imagine the kind of money that has been borrowed by these companies to keep running.

And now imagine, the kind of money that the government of India will have to provide in the years to come, to keep repaying these loans.

It’s a very scary proposition. And since, in the end, we are always asked, but what is the solution, let’s provide a solution, at least this time around. As Joshi said in his speech: “So far, successive Indian governments have been stuck with the fetish of 51 per cent ownership and have only flirted with the idea of privatization…It is high time the government grasped the nettle of mounting a substantial programme of privatization, at least of those PSEs that make losses or meagre profits… This gain could be used by the government to invest in socially beneficial activities that the private sector would normally avoid, such as rural roads and irrigation.”

But this is what we call an impossible solution. Joshi is not the first economist to have recommended the sale of public sector enterprises and the investment of the money thus generated into public goods. The government(s) have been in the know of this solution for a very long time, and have chosen to do nothing about it, up until now. And there is no reason for them to change that.

The column originally appeared in Equitymaster as on February 15, 2018.

India’s Crony Socialism and Why Congress Mukt Bharat Will Remain a Dream


The prime minister Narendra Modi in a recent interview to the Wall Street Journal said: “Actually, in any developing country in the world, both the public sector and the private sector have a very important role to play. You can’t suddenly get rid of the public sector, nor should you. “

In this column we will concentrate on the second sentence i.e. you can’t suddenly get rid of the public sector.

Let’s look at the losses of the loss making public sector units over the last twenty years. As can be seen, the losses have gone up from Rs 5,188 crore per year to Rs 27,360 crore per year. While the number of loss-making public sector enterprises came down over the years, it has started to go up again. Also, it needs to be stated here that I stopped in 1995-1996 because I couldn’t find data before that.

YearTotal losses of loss making PSEs (in Rs crore)Number of loss making  PSEs
Source: Public Sector Enterprises Surveys


The public sector enterprises have lost a total of Rs 2,72,512 crore over the last twenty years. Of course, this calculation has got very little meaning given that it does not take inflation into account. If inflation were to be taken into account, we would be expressing the losses of 1995-1996, 1996-1997 and so on, by adjusting them for inflation. This would be a horribly big number.

The broader point here is that public sector enterprises have been losing money for many years now. This is a problem that has been left unaddressed by a series of governments. So, when Modi says that you cannot suddenly get rid of the public sector, what he is not taking into account is the fact that these companies have been bleeding for many many years.

In many cases, the government makes up for these losses, once the networth (i.e. assets minus liabilities) of the company has been eroded. And this money can easily be used somewhere else.

Up until, May 2014, India had an era of coalition governments. And this limited the ability of the government to do anything about these loss making companies. Each loss-making public sector enterprise comes under a ministry and what is a ministry without a few public sector enterprises under it. The current Modi government has no pressures of a coalition government.

Further, most political parties have trade unions affiliated to them and no government likes to take them on. Hence, shutting down a public sector enterprise remains difficult.

As of 2013-2014, a total of 2.5 lakh people worked for sick public sector enterprises. A public sector enterprise is considered sick if its accumulated losses at the end of a given financial year are equal to more than 50% of its average networth in the four preceding years. Of course, the number of people working for loss making public sector enterprises would be more than 2.5 lakh. But it still forms an insignificant portion of the population.

The question is why is the whole county subsidising these 2.5 lakh people? Or is this another version of sabka saath sabka vikas? The general impression is that such a waste of money, hurts only the income tax payers, who form an insignificant portion of the population and hence, the government does not bother about them.

This is incorrect. While everyone doesn’t pay income tax, people do pay indirect taxes. And by subsidizing these sick and loss making public sector enterprises, the government is essentially wasting this money. In fact, the government seems to have the same view as well.


As the Economic Survey of 2015-2016 points out: “Those paying the costs could well be the poor. They pay taxes, even if only indirect ones. And they may also have to bear the burden of paying higher prices while getting substandard goods and services from inefficient firms which should have exited, but haven’t.”
Other than this, subsidizing these losses means that the government has lesser money to spend on other things, given that it has only so much money to spend. Let’s take the case of money that the government spends on elementary education (classes I to VIII). The following table shows the money spent on elementary education between 1997-198 and 2014-2015.


YearMoney spent on elementary education (in Rs crore)Total losses of loss making PSEs in Rs crore)
Note: The numbers from 2008-2009 onwards are actual numbers. The numbers before that are revised estimates
Source: Indiabudget.nic.in


If one looks at the numbers between 1997-1998 and 2004-2005, the losses of public sector enterprises were much more than India’s elementary education budget. After that, the allocation to elementary education has gone up. Nevertheless, the losses of public sector enterprises continue to remain huge. And this isn’t good.

What is more necessary, subsidizing people who work for loss making public sector enterprises or educating India’s children? Of course, educating India’s children. So, why is so much money being wasted then on loss-making public sector enterprises?

Also, it needs to be stated here that simply spending more money is not a solution to the problem. The money needs to be well spent as well. In fact, since the Right to Education became a reality in April 2010, the learning levels of India’s school children have actually gone down. (This remains another topic to be discussed on another day).

The crony socialism of continuing to run loss making public sector enterprises which was initiated by the Congress party, continues to survive. Prime minister Modi told that Wall Street Journal that public sector enterprises couldn’t be done away with suddenly.

Actually, there is nothing sudden about the entire problem. These companies have been losing money for many years. And some of them should have been shut down a long-time back. But they haven’t been. And from what he said, it is unlikely that Modi will shut them down as well.

This means that the crony socialism of the Congress will continue to thrive. Politically, Congress mukt Bharat, might become a reality, but when it comes to economics, the more things change, the more they remain the same.

At least, in India.

The column originally appeared in the Vivek Kaul Diary on June 1, 2016.

Why Public Sector Companies Have Made Losses of More Than Rs 1 Lakh Crore


Buried in the inside pages of the Economic Survey of 2015-2016 released on February 26, 2016, is a very interesting data point.

The accumulated losses of sick public sector enterprises as of March 31, 2014, stood at Rs 1.04 lakh crore. This essentially means that the government of India has pumped a lot of money into these companies over the years to keep them going.

The Survey does not point out whether the accumulated loss number of Rs 1.04 lakh crore takes the time value of money into account. What is the time value of money? Let’s say 10 years back the public sector enterprises made a loss of Rs 2,000 crore. The government took on this loss and compensated them for it. The value of the Rs 2000 crore the government handed over to these loss making enterprises, ten years later, would be much greater than Rs 2,000 crore. (This example is for illustrative purpose only).

My guess is that the loss number of Rs 1.04 lakh crore does not take the time value of money into account. If it had, the loss number would have been much higher. The question is why have the public sector enterprises lost so much money over the years?

Charles Wheelan has the answer in Naked Economics—Undressing the Dismal Science. He gives the example of Hindustan Fertilizer Corporation. As he writes: “By 1991, the Hindustan Fertilizer Corporation had been up and running for twelve years. Every day, twelve hundred employees reported to work with the avowed goal of producing fertilizer. There was just one small complication. The plant had never actually produced any saleable fertilizer. None. Government bureaucrats ran the plant using public funds; the machinery that was installed never worked properly.”

Further, the workers came in every day and the government kept paying their salaries. As Wheelan writes: “The entire enterprise was an industrial charade. It limped along because there was no mechanism to force it to shut down. When the government is bankrolling the business, there is no need to produce something and then sell it for more than what it cost to make.

If the government keeps making up for the losses of any company, what incentive do the management and the employees have to turn it around? None. A  good comparison here are the public sector banks, in which the government has infused Rs 1.02 lakh crore of capital between 2009 and September 2015.

There is another point that needs to be made here. Up until the 1990s when the government ran most businesses in the country, the smartest lot either left the country or worked for the government.

As the economy opened up 1991 onwards, people started looking at other options as the number of jobs offered by the private sector in sectors as diverse as banking to telecom, exploded. The private sector also offered extra incentives to their best performers. The government meanwhile continued follow a uniform pay scale.

As Wheelan writes: “This uniform pay scale creates a set of incentives the economists refer to as adverse selection.” What does the term mean in this context? The most talented professionals who earlier worked for the government now had the option for working for the private sector where there pay was closely linked to their productivity unlike the government.

On the flip side, as Wheelan puts it “for the least talented, the incentives are just the opposite.” They know that working for the government would mean a fixed salary and regular increments over the years, which will not ‘really’ depend on their performance. Hence, those who have ended up working for the government over the last couple of decades where definitely not the best of the lot.

The fact that the government has been ready to bailout the loss making public sector enterprises and the best people don’t work for it anymore, has led to a situation where the losses have just kept piling up.

In sectors where the private sector has been allowed entry it has flourished and the government companies have had to take a backseat. As the Economic Survey points out: “The Indian aviation and telecommunication sectors of today are unrecognizably different from what they were 20 years ago, with enormous benefits for the citizens. Public sector companies now account for a small share of the overall size of these sectors.”

Despite, the public sector enterprises being a small insignificant part of many sectors and with many of these companies making losses, the government continues to operate them and take on their losses. A major reason remains the fear of taking on the trade unions.

In fact, many of these loss making companies own large tracts of land and can be a huge revenue spinner for the government. As the Economic Survey points out: “Most public sector firms occupy relatively large tracts of land in desirable locations. Parts of this land can be converted into land banks and made into vehicles for promoting the ‘Make in India’ and Smart City campaigns. If the land is in dense urban areas, it could be used to develop eco-systems to nurture start-ups and if located in smaller towns and cities, it could be used to develop sites for industrial clusters.”

I hope the government shuts down these loss making companies and starts selling the large tracts of land that they own.

Postscript: In a major embarrassment to the Modi government, the opposition parties got an amendment passed to the President’s most recent address to the Parliament. How is this significant? In yesterday’s column I had discussed how the Modi government continues to be precariously placed in the Rajya Sabha. And given this I don’t see it getting the Goods and Services Tax Bill passed through the Rajya Sabha.

Morgan Stanley in a recent research note had claimed otherwise. They had said by July 2016, the BJP led NDA government should be in a position to get the GST Bill passed. Nevertheless, the point is that if the government cannot get even the President’s address passed through the Rajya Sabha without an amendment, where is the question of it getting the GST Bill passed? Maybe Morgan Stanley can possibly explain that to us.

The column originally appeared in the Vivek Kaul Diary on March 10, 2016