SOS to govt: Stop meddling in PSUs, start helping economy!

Since the economy is going nowhere and the government is just twiddling its thumbs on the issue of economic reforms, it seems to have decided it needs a new hobby. And that hobby seems to be harassing public-sector entities at every turn.

In its latest display of hobby enthusiasm, the government has ordered state-run banks to lower lending rates after the Reserve Bank of India (RBI) cut its policy rate - the repo rate - by 50 basis points on Tuesday, according to The Economic Times.

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While on paper it might seem like the government is doing a good deed by forcing banks to cut rates, in reality, the government would have done a far greater deed if it had just left the matter for banks to decide.

Over the past year, banks have suffered both in terms of deposits and advances as the economy slowed. Their cost of funds has climbed as they competed to attract depositors, who, put off by soaring inflation, decided to park some of their savings in real assets like gold. Cooling demand for credit also hindered banks from passing on those higher costs to borrowers. As a result, margins have come under pressure.

In addition, the threat of bad loans, or non-performing loans, caused by clients defaulting on their loan repayments continues to rise. In the case of state-run banks, downgrades are becoming more widespread.

Yet the government wants them to slash lending rates, which will only further dent profitability if they don’t cut deposit rates. It’s not that banks don’t want to cut rates, just that they should be the ones deciding when they can do so.

The government, however, doesn’t see it that way. It has decided a diktat is enough to bring lending rates down and start firing up investment activity. Given its dominatrix attitude, maybe the government should just crack a whip and growl “Move!” to get the economy roaring back at 8 percent. Seriously.

It would be nice if the government could apply the same speed it did issuing a diktat to banks to get cracking on fixing the economy’s long-standing supply issues. Of course, that would mean hard work. And this government has shown that it clearly prefers quick fixes over sustainable solutions. So far, it has done precious little to pump up growth, leaving the RBI do all the grunt work.

Even in the Union Budget, which offered the best platform to show its intent of boosting growth, what did the government do? It raised service and excise taxes, increased taxes on gold and sneaked in proposals that now threaten to drive out foreign investment from the country. There was no sincere attempt at fiscal consolidation either.

Worse, it just doesn’t seem to care what consequences such actions might have.

It’s the same high-handed, I-don’t-care attitude that prompts it to remorselessly interfere in Coal India, forcing it to sell coal to power producers at prices that are 70 percent lower than international prices.

It’s the same attitude that made it prod fully-owned Life Insurance Corporation(LIC) to hoover up ONGC’s shares in a stake sale auction that would, otherwise, have fallen flat on its face.

It’s the same attitude that has made a mess of oil marketing companies and ONGC, who, were it not for an incredibly skewed energy policy that only a government can dream up, would be making profits.

It’s the same attitude that has brought Air India to the brink of bankruptcy.

It’s the same attitude that has caused state electricity boards to accumulate losses worth a whopping Rs 1 lakh crore.

It’s the same attitude that makes it direct PSUs to announce dividends so that it (government) can benefit as majority shareholder.

It’s the same attitude that refuses to understand that constant government meddling in the day-to-day operations of PSUs could put off investors from participating in future PSU stake sale plans. Oh wait. There’s always LIC for that - it can be forced to pick up the leftovers.

It’s the same attitude that makes it think it can arm-twist Vodafone to cough up billions of rupees in tax, even after the Supreme Court said there was no legal case to do so, by introducing a retrospective taxation proposal, blithely ignoring the harmful effect that this could have on foreign investments long after this government is gone.

Having given up all hope of managing the economy, the government has now decided that it is better off micromanaging state-run companies.