Union budget must promote rural industry, restore confidence in banks & LIC

It was in 2017 that the Government introduced the FRDI Bill (Financial Restructuring and Deposit Insurance Bill). It was withdrawn the next year amidst a public furore over the bail-in clause which provided that if a bank failed, it would be rescued by using depositors’ money, forcing them to either forfeit a part of their deposits over and above the insured amount or turning the deposits into shares of the bank.

Currently deposits up to one lakh Rupees in banks are insured. The FRDI Bill, the Government sources indicated, would raise the ceiling. The bail-in clause was meant to foreclose the bail-out, that is rescue of the failed bank by the Government. The argument was that bail-out was unfair to the tax payers.

While withdrawing the FRDI Bill, the Government had indicated that it would bring it back with modifications. There is, therefore, a renewed buzz that the Bill will be part of the budget this time with the bail-in clause cloaked in a different language (internal restructuring).

While bail-out was done in the Euro-Zone when Greek banks failed, bail-in was tried out in Cyprus. The argument against bail-in is that at the first sign of trouble, the bigger depositors would take flight, leaving the smaller depositors to bear the brunt of rescuing the failed bank.

Luckily, no bank has failed in India so far, with the Reserve Bank of India stepping in each time to resolve issues related to stressed assets. But withdrawal limits that the RBI set in the case of PMC Cooperative bank in 2019 has added to the nervousness of depositors.

This year’s budget provides an opportunity for the Government to set doubts at rest. An assurance that the Government is not planning tointroduce the bail-in clause will go a long way to restore people’s wavering confidence in the banking system. It has been an article of faith with the people that their money is safe in banks. Nothing should be done to shake this confidence.

Depositors should not be made to pay for poor management or shenanigans of bankers or big business; nor should they be made victims of misfortunes to which they did not contribute.

Another public institution, Life Insurance Corporation, was arm-twisted by the Government to take over ownership of an ailing IDBI Bank. LIC is also an institution in which ordinary Indians repose their faith. And in no case should this confidence be shaken.

A section of business and bureaucrats have often hinted that interest earned by people on their bank deposits is not ‘deserved’ because they are not subjected to any risk. Which explains why the RBI merrily lowers the interest rate to help lending, without taking the depositors’ interest into account.

But this is a false narrative. Interest is the compensation for postponing consumption and it should be attractive enough to induce one to postpone consumption and from the perspective of national economy, should be attractive enough to push up the domestic savings rate to about 33%.

In the absence of a universal social security system, the aged, the infirm, widows, job-losers etc all depend on the interest income from their past savings. This should be kept in mind while presenting the budget and the Finance Minister must shore up confidence in the banking sector and the LIC.

At the same time, there is a clear direction that the Government needs to take towards giving a fillip to rural industries or even relocating small and medium scale industries in the countryside.

Indeed, there are four clear trends that ought to guide future economic policies.

• Globalisation is getting weaker
• Large, capital-intensive industry no longer generate enough
• employment and are giving way to smaller, more automated units
• Connectivity in the country and rural roads have improved
• Internet and broadband connectivity now make it possible to do business or set up industry even in rural areas.

Notwithstanding all the tall talk and rhetoric, India’s per capita GDP is about half the world’s average and ranks 126 th globally. Clearly, poverty alleviation must remain a primary goal of our budgeting exercise.

With 55% of Indians still depending on agriculture for their livelihood and the average income of these people being less than 15% of the average income of an Indian engaged in non-agricultural sectors, the goal is clear.

It is difficult to increase farmers’income substantially or double their income by 2022 as promised by the BJP Government. But while it has been known for a long time that the solution lay in luring people away from agriculture, the migration to urban centres for menial jobs has given rise to both ghettos and stress. But now that connectivity has improved and rural roads are better than ever before, it is possible to set up industries there.

Again, these attempts were made earlier and incentives were given to set up small scale industrial units in backward areas and loans provided at lower rates. But neither broadband connectivity was there before UPA 2 took up the project on a war-footing—nor were rural roads good and extensive enough to encourage entrepreneurs.

But now with conditions more favourable, the Government, rather than providing interest subsidies, may provide part of the equity with the proviso that Industries may buy back the share of the Government at face value within 10 years or so.

Capital can be raised by the Government issuing tax-free bonds for 20-25 years. Getting qualified personnel or training the workers also would be relatively easier now.