New Delhi: Reserve Bank of India governor Raghuram Rajan on Saturday backed the government’s fiscal management, bankruptcy reforms and rural job creation efforts but cautioned that sending investigative agencies behind businessmen who took risks during the boom years of the economy could be counterproductive if their payment defaults were not because of malfeasance.

Speaking at the Ramnath Goyenka lecture on ‘India in the Global economy’ organized by the Express Group in New Delhi, Rajan said there are a variety of reasons for defaults other than wrongdoing. Rajan said that authorities have to draw a delicate line between dealing with genuine risk-taking behaviour and wrongdoing. The central bank governor made the comment in response to a question, without referring to UB Group chairman Vijay Mallya who is facing court proceedings for defaulting on loans of over ₹ 9,000 crore.

“A lot of entrepreneurs buoyed by the euphoria of 8-9% economic growth before the global economic crisis (of 2008) and the success their projects with very less equity delivered, structured new businesses in a very optimistic way," Rajan said, adding that treating every default as malfeasance without clear evidence would be counterproductive to the spirit of entrepreneurship. Rajan endorsed the government’s bankruptcy reforms, saying the central bank’s intent is to have clean and fully provisioned bank balance sheets by March 2017.

Experts said legitimizing business failure was key to making bankruptcy reforms a success. “If stigma is attached to failure, entrepreneurs would not be forthcoming in resolving insolvency. Legitimising business failure is essential for encouraging entrepreneurial risk-taking," said Sumant Batra, lawyer and former president of Insol International, a global body of bankruptcy judges and corporate turnaround experts.

Rajan said the government’s economic management of keeping fiscal deficit under check, taking measures to improve business confidence and to create rural jobs, was in the right direction. He said that ensuring macroeconomic stability was the key to tackling “manic depressive investors" and to boost economic growth rate.

“The recent central budget emphasized fiscal prudence and adhered to past commitments, even while allocating resources towards capital spending and focusing on structural reforms, especially in agriculture," said Rajan. He also welcomed the government’s decision to set up a monetary policy committee. While the RBI governor will no longer be able to set monetary policy unilaterally, shifting the decision to a committee is in the economy’s interest.

“Not only will a committee aggregate multiple views better than an individual can, it will offer more continuity, and be less subject to undue pressure," he said.

Rajan said that weakening the rupee was not the ideal way of boosting exports as it would make imported raw materials costlier. “How should we export more? The answer is simple—improve productivity by building infrastructure and enhance human capital with better schools, colleges, vocational and on-the-job training. Business regulation and taxation should be simplified and access to capital should be improved. Fortunately, all this is what the government is focused on," said Rajan.

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