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The Rediff Business Interview/S H Khan

'It's up to the financial institutions to ensure they fund only viable projects'

If we don't take the right decisions today, even if they are harsh ones, the consequences can be very serious," says S H Khan, analysing the Indian economy. The former chairman of Industrial Development Bank of India and financial expert feels India might roll back to the dismal 1990-91 position. But adds quickly: "Today we are in a much better position to manage ourselves."

He has heard of talk of political pressure being applied on financial institutions to fund unviable projects and the subsequent demands for autonomy for FIs in commercial decisions. As head of IDBI, Khan had experienced it all. In this pre-Budget interview, he recounts some of his experiences and impressions to Chris Ann Fichardo.

How important is the Union Budget of 1999-2000 in determining the future of the Indian economic reform programme ?

There are a lot of misgivings in the minds of the people whether this government is keen to push the reform process further. In fact, the government's intention to push the reform is not in doubt. What matters is the government's capacity to push forward the reform, given its composition, with its 17 allies pulling it in different directions.

This Budget is going to be very crucial from the point of view of the signals the government will give in terms of commitment to reforms, particularly to the insurance sector. Similarly, other important measures like amendments to the Companies Act, to the Patents Act and the FEMA and several other important statutes have to be effected.

For unless you reform the legal system, you cannot move ahead along the liberalised environment. So, the crucial factor in this year's Budget will be how effectively the government can implement these important pieces of legislation.

The finance minister hopes to decrease fiscal deficit to 5.6 per cent of the GDP in 1999-2000 from 6.1 per cent in 1998-99. Is this a realistic hope?

Fiscal deficit is going way beyond what the finance minister had targeted to achieve by the end of 1998-99. The government spending has not come down at all and the way the government is borrowing funds has increased at a very alarming rate.

A good part of the debt is going towards meeting the interest liability of the government's borrowings. So bringing down the fiscal deficit to 5.6 per cent of the GDP will be possible only if the government succeeds in cutting down its expenditure.

Subsidy cuts is a major area where the government can do that and so is privatisation of the public sector units. Similarly, disinvestment programme has also not taken off in a manner in which it should have. So much depends on how the government will tackle the subsidies and the disinvestment programme.

But cutting back on subsidies is a politically sensitive issue. The finance minister tried cutting back on subsidies in the last Budget and had to retract his move the next day due to political pressure.

The BJP-led alliance at the Centre is fragile. So do you think there is a political will for cutting back on subsidies?

Well, all parties should rise above politics and look at the national interest. The whole economy is sliding down. The GDP growth is down, industrial growth has come down significantly in the current year. Unless we take some harsh decisions, we will go nowhere. The finance minister himself has said that it is going to be a harsh Budget. So I am sure he will address some of these harsh issues in the Budget.

Is it true that the government manipulates financial institutions to extend massive loans for suspect projects, thus weakening its own financial structure?

I don't think this is correct. I have worked with IDBI for the last 32 years. It is not that people don't approach you -- but that does not mean they are pressurising you. There are occasions when somebody lobbies seriously. But if you explain to them that this project is not financially viable, they stop pressurising you.

No government will tell you to fund an unviable project. It's up to the institution to see that it funds projects which are viable and that they contribute to our national economy; it has to ensure that the decision is not based on any other considerations.

The recent controversy was about the Essar Group, how the FIs were asked to bail out the Ruias.

I don't want to discuss particular companies as such, but you must realise that when the steel and power sectors were liberalised and the private sector was allowed to enter, it was natural that only those entrepreneurs who were skilled and had resources with them would enter. When these projects were funded they were financially viable projects.

Even today they are viable projects. But two things have happened. These are large projects; they take at least 2-3 years to get completed. That means, they have to face a minimum of three Budgets, which throws their project costs haywire.

The international scenario too has changed. No one would have believed when these projects were launched that steel prices which were around $380 a tonne would come down to a little more than $200 a tonne.

This has two effects: one, these were operating companies so their own internal generation of funds got affected; two, those units that got completed and started producing found that they had to sell at below-cost prices. One has to really hold the hands of these companies a little longer till the market turns.

Do financial institutions need more autonomy in granting loans?

More than financial autonomy, financial institutions need administrative autonomy. Autonomy is important only from one angle: a lot of executives are spent on addressing the concerns that come to the government. When Parliament is in session, the amount of time spent answering Parliament questions is enormous. I think if they got out from the government, they will be free from this.

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