Growth should not suffer due to credit crunch, says Arun Jaitley

Two days before a crucial meeting of the Reserve Bank's central board, Finance Minister Arun Jaitley said here Saturday that growth must not be throttled by limiting credit availability and liquidity.

It is necessary that the growth process does not suffer due to the cleaning up of the banking system from the "collectively committed sins" during 2008-14 when the regulatory mechanisms also overlooked high debt accumulation, he said.

"This will have to be done in a manner in which you restore the health of the banks, you restore the discipline as far as the banking system is concerned and at the same time, we don't end up throttling growth by throttling credit and liquidity in the market. That is a key issue," Jaitley said, speaking at the annual Economic Times awards here.

He also added that "we will be looking for the wrong solutions to a problem where easier solutions are available" in the process.

The remarks come ahead of the RBI meet on Monday, where the government, through its nominees, is likely to press for growth-supporting measures including creation of a special liquidity window for the troubled non-bank lending sector, liberalising of the prompt corrective action that restricts normal lending and easier credit supply for small businesses.

The RBI has made clear its reluctance to yield to these demands.

The government has also initiated consultations under the never-used Section 7 of the RBI Act through which it can direct policy moves to be undertaken by the RBI in public interest.

Deputy Governor Viral Acharya had made a strong pitch for preserving the central bank's autonomy in a speech last month, warning that the failure to do leads to wrath of the markets.

"If we are to improve (growth rate), we need certain level of credit as far as entrepreneurs are concerned, (and it is necessary that) liquidity is maintained," Jaitley said.

He reiterated that much of the troubles faced by the banking system, which is saddled with non performing assets (NPAs) of over Rs 10 lakh crore, are owed to the "collectively committed sin" of unquestioned lending between 2008-14.

He alleged that all "checking mechanisms", including regulatory mechanisms were not working during this phase.

NPAs of the banks stood at Rs 2.5 lakh crore when the NDA government came to power in 2014, and an exhaustive asset quality review revealed that much of the dud assets were hidden under the carpet, Jaitley said.

"With 2014 as the cut-off line, we got into an an age of prudent banking. We have to restore the health of the banks," he said.

The FM said an increase in non-oil tax to GDP ratio can help contain oil prices by reducing taxes and duties on fuels.

He added that in the last four years, there has been one percentage point increase in this ratio, due to measures such as expansion of tax base.

He also requested media not to go hysterical every time there is oil price hike, stating that not doing the price correction as per the international market realities can lead to both fiscal deficit and current account deficit widening and a rise in inflation.

Jaitley also quipped that the volatility in the oil market makes him go to astrologers rather than oil analysts or sector watchers to predict future prices.

The economy is well anchored for maintaining the present level of growth, he said.

The challenges before the economy include oil prices, hardening of yields in the US, domestic concerns on the banking system clean-up, political stability and quality of discourse on economic issues, he said.