A panel of eminent minds held a discussion on ‘How banks can help India achieve 10 per centGDP growth’. The panelists were Dr C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, Naveen Jindal, MP and industrialist, Ashok Chawla, chairman of the Competition Commission, K R Kamath, chairman of Punjab National Bank, Diwakar Gupta, managing director and CFO of State Bank of India, Dr Rana Kapoor, managing director of YES Bank, BibekDebroy, professor at the Centre for Policy Research, and Rajiv Kumar, secretary-general of FICCI.The discussion was moderated by Shankkar Aiyar, senior journalist and TNIE columnist.
Shankkar Aiyar: The theory of economic growth says that virtuous growth requires savings, investment, the employment thus generated creates consumption and thus savings and so on. India is growing at far below its potential trajectory. I’ll open this discussion with two questions: One, why we are growing slowly, and two, what
can be done?
Rajiv Kumar: Let me confine myself to the banking sector. India is an underbanked economy; its credit-to-GDP growth ratio is far below other emerging or advanced economies.India’s banking sector is extremely fragmented and we need to consolidate and rationalise that. We must innovate. I think the Indian banking sector could do much more to raise the level of capital formation by, say, going out to the Small and Medium Enterprises sector.
K R Kamath: We are really growing slow today but in comparison to what? A decade back we were very happy with 2-3 per cent. Let us remember that we cannot be out of what is happening across the globe. We can definitely improve but the question is that we cannot remain insulated or isolated. Our effort should be to make growth becomes inclusive and well diversified.
Naveen Jindal: I agree we are growing very slowly. I see no reason why India should not have a double digit growth rate. I think it is achievable. We are on the right track and but we need to speed up because no one else is waiting for us.
Ashok Chawla: It would seem that the financial architecture is not responding to today’s needs. That’s clearly and evidently not the case. The problems in terms of growth— why it’s not 9 or 10 per cent—is more because the real sector is not operating to its full potential and the reasons are well known. There are issues of the response from the farm sector, there are issues in terms of energy constraints, and there are supply side constraints. While we continue to talk of developed economies not growing at the kind of rates that they should be achieving, but our problems essentially, substantially are domestic.
Rana Kapoor: I think Dr Rangarajan has made a fabulous beginning to this debate. We have to recognize that the last 10 years have been very good for India. Our economy has quadrupled. But today we are facing macroeconomic challenges, and a global crisis. It’s a very good report card, so we must not curse ourselves. I think there are five major hurdles. One, agriculture. From almost 24.5 per cent of GDP, agriculture has dipped to about 14 per cent. So when you see Gujarat, you see Maharashtra at 11 per cent, 10.5 per cent agricultural growth, they produce very good GDPs. Rs 55,000 crore worth of agricultural produce is wasted every year; we have a wasted opportunity there. The inefficiencies of supply chain, the lack of agri-infrastructure, including agri-logistics, is a very significant impediment. We need to make quantum leaps there because whichever state is doing a good job is outperforming the Centre on growth. Two, roads and infrastructure. Infrastructure
has grossly underperformed in the last 10 years. Credit growth to infrastructure has declined sharply. So the risk for infrastructure finance is a very significant impediment.Third, what needs to be done. The 2.6 crore Micro SME units account for 45 per cent of manufacturing output, 40 per cent of exports and have 6 crore employees, but 95 per cent of them don’t have proper credit access. This sector is an economic and energy booster. Four, given our 125 crore people, emphasis has to be on formation of skill sets. That means vocational institutes have to rise to the occasion. Five, urban inclusion. There are 30 crore urban Indians, 7 crore of whom are very poor. Building mechanisms of urban inclusion is one of the keys to GDP growth.
Diwakar Gupta: Indian philosophy says that if you need to grow, you must look at the strengths of the other person and your own weaknesses. We are an emerging economy. We are an emerging society. I think greater congruence between the political economy and the financial economy will lead us to growing better. The second point I wanted to make was that there needs to be better accountability. At the end of the day, governance is the framework on which any policy or strategy will deliver.
Bibek Debroy: You began by saying this was a bite round but we converted it into a bark round. So I will combine the two. My diagnosis is somewhat at variance with what people have said. Before I walked in, someone asked me: ‘How is your wife?’ My response was: ‘Compared to whose wife?’ And I think that benchmark is important,
because when we are talking about 10 per cent, I suspect that to most people in this room the benchmark that we have is 6.5 per cent of the last financial year and the 6.7 per cent that Dr Rangarajan has promised us this year. I don’t think that’s the benchmark. I think the benchmark is 5.3 per cent in Q4 of last year and around 5 percent that we will see around August 31. The second point is decision making. We need to ask is why everything has worsened in the last four years. The answer is that there has been, in the last four years, a complete collapse of decision making at the ministerial level, and at the bureaucratic level. What I’m flagging
is that the insulation of the bureaucracy, thanks to the ministers, is completely collapsing. It has also collapsed at the ministerial level. This has nothing to do with coalition dharma; this is an executive problem. That’s what policy paralysis is. Unless we rectify governance, forget 10 per cent growth.
Shankkar Aiyar: Now I want to take a quick round on what bankers can do.
Rajiv Kumar: I’ll go on to the larger issue. I would encourage banks to be greater risk takers. Bankers and the public sector especially are unable to take risks they could be, and should be, normally taking in the interest of SMEs. In 1994, when I was in the government, the hope was that the entry of new banks will change market behaviour. Public sector banks have continued to be extraordinarily risk-averse and that has permeated down to the whole sector. This has to change. What we need to do today or what bankers can do is go out and meet the people who are going to be creators of values and generators of employment. And I think the government must permit them to do so and to make some losses as long as their capital adequacy is good. I heard Dr Rangarajan say they would need Rs 1.5 to Rs 1.7 lakh crore by 2015 to capitalise public sector banks. I think that’s impossible. I would strongly urge the amendment of the Act that specifies public sector government equity cannot fall below 51 per cent. I would recommend that government equity in public sector banks be brought down to no more than 26 per cent, if not less.
Shankkar Aiyar: You want banks to be more daring, more courageous, more encouraging of risks and take more risk. You also suggested in not so many words that the government should allow disinvestment.
Rajiv: Absolutely.
Shankkar Aiyar: Mr Kamath, why is lending comingdown, and why is credit growth down?
K R Kamath: When GDP grew at 9 per cent, nobody gave credit to the bankers. But when the growth is low, everybody is saying that bankers are not doing their role. Let me take to 2008 when the crisis hit. There was a need for the banks to stand by their customers. Who stood by? People have forgotten what the public sector banks did. We have played a very important role in this country in making what it is today. We don’t compare growth rate with Western countries but we compare interest rates. We talk about the growth rate in this country by the interest rate on lending and not by interest rate on deposits. Who takes care of the depositors? We can
bring down the interest rate but there will not be a depositor and there will not be money to lend. SLR should not be held against the bankers. Where we lend money, you say clearances have not happened, the projects are stuck. Bankers do not have unlimited capacity to absorb all shocks We need to look at all that is happening around. Let me assure you that if there is a viable proposal and if it is prudent lending, bankers will not be hesitating to dilute that 28 per cent SLR and lend.
Shankkar Aiyar: Naveen, we have in our country a large number of steel plants that don’t get iron ore, large number of power plants that don’t get coal, telecom companies who invested and suddenly are walking on thin air with no space to run. These issues have accumulated over the last few years. Each has a solution but no owner or champion to take the solution forward. What’s happening?
Naveen Jindal: First I’d like to say that Indian financial institutions and banks are not just fair weather friends. So I fully agree that Indian banks have played a very important role. But the focus now is on more lending to SMEs, study loans, etc. Coming back to your question, there are no easy answers
to all these projects not really taking off fully We have suffered greatly because of delays. I think our government is aware of it, and is trying to work things out.
Shankkar Aiyar: P V Narasimha Rao once said not taking a decision is also a decision. Do you think the Indian system is afflicted by that now?
Ashok Chawla: That I’ll leave to Dr Rangarajan to answer, but there are two or three points to be made quickly. Within all the constraints which have been mentioned, here is still scope for little more efficient financial improvement. Second, we are forgetting that there is too much fragmentation within public sector banks.
Neither the bankers nor policy makers talk of consolidation or mergers but I think both issues need to be looked at eventually to get to a stage where banking system is more efficient. Third, innovation is very important, like concentrating on people outside the margins Shankkar Aiyar: I wonder if consolidation is in the ambit of the Competition Commission. Is that possible?
Ashok Chawla: That’s something which has to come from the decision makers and owners. I don’t think initiative can come from our side.
Shankkar Aiyar: Rana Kapoor, how do bankers spur growth in such an environment?
Rana Kapoor: I must first acknowledge that the bastion of the Indian economy has been the public sector. But ‘the art of banking is the management of risk.’ You run a risk to do something but you run a bigger risk if you don’t do anything. So the bigger risk is not doing enough. Banks, irrespective of macroeconomic and socio political issues, have to take the high road and really concentrate on what we aspire to. Agriculture is a fantastic opportunity. Hire agriculturists, train them and put them in the branches to really get the agri-GDP from 14 per cent to something like 24-25 per cent. I think the opportunity is fantastic in the micro-enterprise sector. There we need a lot of financial literacy. We need a lot of communication. A lot of us have to become micro managers to really build and unfold the opportunities in adversity our country promises. Then, highlevel government solutions are required in infrastructure. We must do more micro financing; we must not hurt industry.
Diwakar Gupta: Sixty-five per cent of the population is contributing only 15 per cent of GDP, and that is growing at a CAGR of 2 per cent, so financial inclusion is a no-brainer. Barely 40 per cent of the population has bank accounts, forget about credit, 1 per cent have credit, 1.5 per cent have credit cards. It’s an opportunity waiting to be tapped. I think where banks need to get their model right is that if you do incremental things you get incremental results. The MFI problem is a great blessing because very early we have tapped into the problems. We need MFIs and the banking sector to be integrated so that MFI does what he is best at. Core competence, last mile connect, delivery at the grassroot while the banks take care of the platform of account of all the housekeeping in the backend. I think that is one model. In 6 lakh villages, 30,000 have brick and mortar bank branches. It is simply not possible to have critical mass in the remaining. You have to have a different delivery model and it has to be much more intensive. I couldn’t agree more with Rana Kapoor on skill development. But I think there is even a bigger opportunity waiting to be tapped. As the government withdraws from managing into policy, you will have a lot of backhand agriculture coming up. On the three Cs, where personal goals and organisational goals don’t converge, personal goals are likely to take precedence. In the public sector, a banker who may be completely honest, the last thing he wants is to be questioned after retirement and that is what impedes quick and risk-taking decision making.
Shankkar Aiyar: Bibek, do you think an expansion of banking and looking into these needbased demand areas like skill training, education, micro-enterprises can nudge up growth? Are these opportunities? Bibek Debroy: There’s very little the banking sector can do. I do have what I one may call banking points. First, the Bank Nationalization Act, which says that even if the government has a minority stake, it’ll continue to exercise control over the banks. The second problem I have is with the mindset that we must in some sense control the rate of interest. I don’t understand this why we try to control this. The third thing that I have a problem is you talk about financial inclusion. If I’m poor, I don’t need only credit. I need insurance, I need rest of financial products and where are those products? The fourth problem I have is microfinance because it seems to me to be a very paternalistic kind of mindset to have. It’s okay if you’re looking at it as a means to an end but the eventual end should be that someone who is poor should be treated by a bank as no different from someone else. The next problem I have is expecting that financial inclusion will happen if the rest of the inclusion is not happening. The last point I want to make on the 1.25 lakh-odd villages with populations of less than 500. I’ll never be able to get any kind of inclusion there. The answer is to integrate them.
Shankkar Aiyar: Let’s wrap with a quick round on the three things the government needs to do to spur growth.
Rajiv Kumar: Fiscal prudence must come back, bankers must get more autonomy, and the government must reduce the fragmentation.
K R Kamath: I’d say there should be a demand for credit coming in from viable units.
Naveen Jindal: In India, there is no welcome or thank you to investors. Our governments needs to be more responsive.
Ashok Chawla: I agree with Rajiv when he says that government needs to live within its means because that’s the cause of a lot of ill health in other macro-economic parameters. Second, improve investor sentiment because that seems to have really become a casualty. Third, energy issues are very crucial.
Rana Kapoor: We must focus on building agriculture with a very clear vision and very clear strategies. The second point is that we must also invest in building skill-sets. The third point I want to reinforce over and over again is that the heartthrob, the nerve centre of our economy, are micro SMEs. We need cascading forces, middle down and bottom up.
Diwakar Gupta: The government needs to get out of sitting subsidies and into value-creating subsidies. The second point is that there are many sectors the government could exit today. The third is to promote a culture where decisionmaking becomes faster.
Bibek Debroy: One, let’s have the FRBM Act and delink monetary policy. Second, free the RBI board and public sector bank boards from irrelevant and unnecessary government interventions. And three, please do not undermine existing institutions. I am specifically referring to the CAG and EC.