New Delhi [India], May 18 : The government's call to adopt austerity measures in gold and fossil fuel would become important to manage demand-side pressures amid global uncertainties and possible supply shocks that could impact inflation, Former Secretary, Ministry of Skill Development and Entrepreneurship KP Krishnan said on Monday.
"Clearly you know what is happening in the globe will call for austerity because clearly there is going to be a supply shock, and if there is a supply shock, unless demand adjusts, we will have serious problems on the inflation front," Krishnan while responding to a query byon the sidelines of the ASREC India Limited logo launch event in the national capital.
He said India has maintained a strong record on inflation management since the Reserve Bank of India (RBI) adopted an inflation-targeting framework.
"Till now, we have had an excellent record on inflation after the Reserve Bank of India became an inflation-targeting central bank, we have had a splendid record. So in case we have to preserve that, we clearly need to do various measures on the demand side and I think this call for austerity will be an important part of managing the demand side," he said.
Krishnan, however, refrained from commenting directly on growth and inflation projections, including concerns over economic slowdown and elevated inflation levels, saying he would prefer to confine himself to the broader issue linked to stressed assets and financial stability.
"The moment you have a downturn, immediate consequence is performance of banking assets typically takes a dip. The role for asset reconstruction companies will increase in every downturn," he said.
He added that the present economic situation underlines the importance of government-backed asset reconstruction institutions such as ASREC India Limited.
Referring to the stressed asset landscape, Krishnan said stress in the Micro, Small and Medium Enterprises (MSME) sector was increasing and noted that ASREC's focus remains on resolution of MSME-linked stressed assets.
"So, in the MSME sector, stress is clearly increasing and our focus continues to be on the MSME sector where we see a larger role for ASREC," he said.
Krishnan also highlighted that smaller transport-sector and MSME assets are often more difficult to resolve because of higher transaction costs associated with individual assets such as tempos and small commercial vehicles.
He said institutions like ASREC possess specialised capabilities to resolve such assets efficiently at lower operational costs.
Echoing the same sentiments on the global turmoil and role of Asset Reconstruction Companies, VK Shunglu, Former Chairman ASREC said, "The more the global turmoil, the more the sick asset, the more the work for ASREC. So for us it's no disadvantage."
He said that the future of Indian banks is very healthy as they are not into the global financial markets.
"It is because we've really not participated in the global financial markets and rightly so. We have enough needs of our own," he said, adding that "Since we've largely stayed out of global financial market exposure, I don't think our banking system would at all be significantly affected by the global turmoil."
On inflation and banking profitability, he said, "Higher inflation generally leads to higher interest rates. And the moment the interest rates go up, deposits still have to catch up, the bank margins go up. So higher interest rates because of inflation may lead to better profitability for the banks."
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