China Research

India is a promising emerging market for the world today. The world output is expected to grow at around 3.5% in 2012 where the major contributors are likely to be emerging economies like India and China. Indian and Chinese economic growth rates in the past five years inspired investor’s world over to consider them as the next investment destination. Despite, the low growth rates of 6.5% last year in India and lower growth rate projection of 5.5% in 2012 in India and about 8% in China, the future seems to be hopeful yet challenging for both these countries.

India is a young nation that promises much more than what is evident in the through international lens of statistical barometers. It is presently going through the legislative reform process for making it a more accountable and transparent nation to its people through introduction of several pending bills. Adaptive to the global developments, the country has advanced its governance structure in a reformative manner that is approachable by the common man by means of e-governance.

The right to information act has empowered the common man. Further, the introduction of Value Added Tax, Direct Tax Code and e-filing has enhanced the transparency into the system, bringing it closer to the international standards. The government incentives like the NREGA scheme and national policy for manufacturing or schemes for social sector development and infrastructure development schemes is likely to give boost to the economic growth. Fiscal measures taken by the government are made keeping in mind their commitment to the fiscal responsibility and management bill.

Serious credit crunch
India despite such fiscal measures is unable to achieve its potential levels of growth in industry, agriculture and services sector. They need the necessary credit impetus to grow. Credit flows are needed in each sector to enhance the investment multiplier promising higher growth rates. Indian banks have been resilient to the global financial crisis but today face serious liquidity crunch. The central bank of India while reviewing the third quarter’s economic situation has identified that inflation rates are high for the given low economic growth rates, high current account deficits and high fiscal deficits. Given the challenges the bank has decided to keep the CRR (Cash Reserve Ratio) to 4.75% and SLR (Statutory Liquidity Ratio) to 23% so as to induct liquidity in the Indian market.

Lately, the chairman of one of the largest PSU banks in India, SBI, has demanded that CRR requirement may be scraped providing greater liquidity to the banks. It is difficult to believe that such a demand could be made by the country’s largest public sector undertaking (PSU) bank. CRR is an essential liquidity maintained by the central bank that acts as a bulwark for the financial system. Removing the CRR requirement would put the banking sector into great danger. Banks need to monitor their investment and act in a more socially responsible manner especially the PSU banks. There is a need for the banks to participate in the economic development process by initiating and encouraging investment in areas with long gestation periods or less than market benchmark returns.

The Reserve Bank of India alone cannot do much to improve the situation. The banks need to adopt a socially responsible role by making credit available at low cost. The agriculture, industry and services sector is unable to achieve its full potential due to lack of low cost credit. The actions of the Reserve Bank of India with respect to CRR and SLR are less likely to yield results given the deregulated state of banking in India. Banking priorities presently are not aligned with the economic development priorities especially when PSU banks take pride in declaring their profits over their declaring their contribution to the economic growth through credit disbursal. Unfortunately, the government units are not defining their performance through their contribution to the social benefits which is an area less researched in the world.

Disinvestment and deregulation are good for a country as long the directed flows do not cause market imperfections or inefficiencies of oligopoly or monopoly causing a dead weight loss to the economy. It is a myth to believe that monopoly and inefficiencies only arise in government sector. They may develop well in private markets as well, to reduce such inefficiencies it is needed that government may introduce competitive market structures and monitor them carefully.

Regulations in the Indian banking sector were dropped primarily with the belief that the competition in the sector would enhance the consumer’s position. However, despite the deregulations and entry of new players, the market continues to be supply driven rather than being demand driven. Banks have become large conglomerates with forward and backward linkages. Banking is the need for all economic transactions today but has the country provided for a sufficient competitive market structures that that support credit growth.

Necessary policy improvements
India is one country that has a large set up of informal financial markets that still continues to support the economy. To achieve a higher growth potential it is needed that markets may be made more competitive, regulations more stringent, contracts enforceable and government set ups more accountable. To aid this it is needed that there is consolidated effort of fiscal and monetary policies to support economic events. Political and economic will to align sectorial growth rates with economic development priorities.

How do we do it all? The government needs to bring back its disinvestment agenda to reduce its fiscal deficits with proposed conversions of retained earnings into equity shares. Plug all leakages of savings that go into unproductive investments like speculative investment in real estate or investment in gold or foreign currency. Tap the flow of income even the smallest by making banking a habit.

Demonitise the economy, it will reduce black money and ills of the parallel economy! Make transactions accountable by necessitating the use of income tax number known as the PAN number even in the smallest transaction! Direct the flow of saving to banking channels by removing the KYC norm on small balance account holders with low or no banking transactions!

A mere deregulation in diesel prices or reduction in subsidies would not help much in the fiscal position of the government. It would be better to concentrate on the economic issues rather than industry specific issue or specific transfer payments. Tax evasions need to be controlled. Tax incentives to motivate investments need to be given. Government needs to control cost and time overruns in infrastructure and other projects that increase government expenditure and inflation. Banks need to be reminded of their main business of lending and must not play with the public money by investing or speculating in the stock market. Legal systems need to promise foreign and domestic investors protection for their investment and manpower. Imports of unproductive resources like gold need to be reduced or curtailed. Make governance more easy and accessible through e-grievance addressal cells.

The potential
India with its young population size, highly qualified manpower, rich political base, progressive outlook and rich natural resources needs more unity and coherence in its economic growth and development story. One sector alone cannot push the growth rates. Agriculture needs another green revolution. Industry needs a fresh line of credit and services needs newer and higher grounds of performances to develop. Further, a future recovery in the world economy will bring greater hope for India as trade and investment ties would improve.

 

 

 

 

Yamini Agarwal
Professor and Vice Chairman (Academics)
Indian Institute of Finance (IIF), Delhi

 

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