10% Indian growth only if financial services expand: British group
June 20th, 2008 - 7:14 pm ICT by IANS -
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By Dipankar De Sarkar
London, June 20 (IANS) The current rate of economic growth in India - approaching 10 percent - can be sustained only if the financial services sector is allowed to expand to keep pace with overall growth, a key British financial group said Friday. The International Financial Services London (IFSL) - the only sector-wide representative body in Britain - has made the comment in its published reaction to the draft report of the Indian Committee on Financial Sector Reforms, or the Rajan Report.
The IFSL released its comments to a group of top London bankers and financial services executives in the city at a meeting called Friday to discuss opportunities and risks offered by the Indian economy and to better coordinate British investors’ approaches to India.
The meeting was chaired by Standard Chartered chairman Sir Thomas Harris.
The report, written by Raghuram Rajan of the Chicago Business School and commissioned by Planning Commission deputy chairman Montek Singh Ahluwalia, is not being taken in the city as a long-term strategy.
Rather, it is being seen as a strategy intended for the next government in New Delhi.
In its comments, the IFSL welcomed the Rajan Report and said its timing was “propitious.”
“At a moment when the current global economic environment has acted as a trigger to global protectionist sentiments, a liberal market framework offers the best insurance against a rapid worsening of economic conditions.”
The view that any economy can successfully isolate itself was “misguided,” it added.
The IFSL’s comments on strategies to sustain the Indian growth rate come after ICICI chief K.V. Kamath told a meeting of British and Indian businesspeople Thursday that a 10 percent growth rate could be achieved and kept up even if the services and manufacturing sectors continued to grow at their current rates.
The IFSL welcomed the Rajan Report’s emphasis on expansion of financial services and its view that the existence of underdeveloped areas and restrictions on participation in Indian financial markets is a source of financial risk rather than a contribution to stability or robustness against global economic forces.
At the same time, Friday’s meeting in London - as also the IFSL comment - stressed the importance to enhance inclusion, growth and stability, with bankers expressing concern at the growing rich-poor divide in India.
It said foreign-owned banks and other financial intermediaries could play a role in enabling financial inclusion in India.
“There is a common misperception that foreign financial services providers from developed markets have no experience of financial inclusion. That is not so,” the IFSL said.
It said British providers have “plentiful experience” of catering for financial inclusion in Britain and in Europe and “they are already developing a track record of doing so in India.”
The IFSL called for a timetable of when and in what order the Rajan Committee recommendations should be implemented and, “possibly, guidelines on accountability for implementation.”
“It would also fit well with the (Report’s) ‘hundred small steps’ approach to indicate which require primary legislation and which can be implemented through administrative actions. This would add clarity and reduce any risk that key recommendations and proposals are not identified for action,” the IFSL said.
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August 4th, 2008 at 12:24 am
RBI is distracting the Indian economy
Syed Zahid Ahmad
The present trend of recession in US and prevailed uncertainty in petroleum nations had provided an opportunity for India to pull capital resources from US and Gulf countries, but the practical approach of RBI has converted the opportunities into challenges as the liquidity and inflation is certainly not under control of the RBI who is attempting to freeze the liquidity by increasing the interest rate and cost of credits. Interest is a factor for liquidity and credit, but all cares should be taken up while we handle this instrument because if liquidity and credits influences inflation, are also necessary for growth and development. Increased cost of credits not only increases the cost of output, but also creates shortage of supply. This increases the prices levels further up. However the depositor gets higher rate of interest over their deposits and this inflates their purchasing power, thus boosts inflation. FICCI and the corporate sector have already disagreed with RBI recent announcement to increase the rate of interest.
With recent trend of increased capital inflow into India the aggregate deposits by Scheduled Commercial Banks (SCBs) has increased from 80.7% in 2005-06 (Rs. 21,09,049 crores) to 102% (Rs. 31,96,939 crores) of GDP at factor cost by 2007-08. With increased deposits, the bank credits has also increased from Rs. 15,07,077 crores in 2005-06 to Rs. 23,61,914 crores by 2007-08 reflecting 75.6% of GDP at factor cost in 2007-08 as credit against 57.7% in 2005-06. This indeed is a situation, where our economists, financial sector regulators and bankers need to review the policy and practices adopted by RBI as we take interest as a major tool to control liquidity but we hardly evaluate the far reaching consequences of interest in our economic process.
Our real term GDP growth rate (= GDP growth rate at factor cost – rate of inflation) has considerably declined from 5.2% in 2005-06 to 2.9% by 2006-07 and fell down to1.6% by 2007-08. As the interest increases the cost of credit and output, even the GDP value is inflated through interest. Thus the higher GDP growth rate like 9% just reflects 1.6% real term GDP growth rate if inflation rate is 7.4%. The liquidity theory of J. M. Keynes is failed here to guide RBI optimize these opportunities. The practical approach of RBI to curb the rate of inflation by increasing the rate of interest may not control inflation and might lead towards stagflation as the prices are continue to increase along with purchasing power of the depositors, but the expenditure, investment and net GDP growth rate is falling due to costlier credit and interest based deposit schemes.
By increasing the rate of interest, liquidity might be controlled for shorter period, but with increased cost of credit, the GDP value will increase that leads to inflation. Interestingly the interest income to SCBs was Rs. 1,85,384.9 crores in 2005-06 which increased to Rs. 2,37,271.14 crores by 2006-07. It means by 2006-07 total interest income to SCBs was 7.1% of GDP at factor cost. It simply means that the interest income to SCBs has inflated the value of GDP at factor cost by 7.1%.
With increase in rate of interest, the aggregate deposits might increase and SCBs may need to pays more interest over increased deposits. Total Interest expended by SCBs over deposits was Rs. 89,742 crores in 2005-06 which increased to Rs. 1,20,261.08 crores by 2006-07 showing a net annual increase of 34%. This growth is inflationary as it increases the buying capacity of the depositors. By 2006-07, the interest expended over deposits was around 4.20% of GDP at factor cost.
If we add the interest income of SCBs to interest expended over deposits, it stands for around 12.5% of GDP at factor cost and 8.6% of GDP at market prices in 2006-07. Considering the impact of interest on inflation, we may need to add interest income of SCBs through investments / commercial credits with interest expended by SCBs over deposits. This amounts to approximately 9% of GDP at factor cost and 5% of GDP at market prices in the year 2006-07 while annual rate of inflation was 6.7%. It reflects that basically inflation is a result of interest charged on credits expanded by SCBs and interest expended over deposits. The interest charged by SCBs increases the cost of GDP and the price levels, while the interest paid by SCBs over deposits increases the purchasing power of the depositors. Both ways the interest is increasing the price level and causing inflation. Since RBI regulates the banking business in India, by increasing rate of interest it is increasing the inflation and decreasing the real term growth rates.
Further to note that RBI is increasing the rate of interest for over one year to control the inflation which ultimately increasing the cost of GDP showing higher GDP value and increasing inflation instead of controlling it. Our total final consumption expenditure as % of GDP at market prices is already declining from 67.8% in 2005-06 to 65.5% by 2007-08. This decline along with inflation cannot be controlled by increase in interest rate. This economic tendency may leads to stagflation which is more dangerous for economic stability and growth. RBI should review its policies and practices to monitor liquidity, credit and inflation, if we have to combat inflation and attain desirable growth rate.
It is often argued that inflation deteriorates the money value and inflation compensates this devaluation of money value. It should be now clear that inflation itself is a problem caused due to interest and its side effects cannot be removed by interest itself. To control inflation and devaluation of money value, we need stable monetary system with fair fiscal policies. Islamic economic ethics suggests mechanisms for stable and anti inflationary monetary system which should be adopted by RBI to make our monetary system more stable and anti inflationary. Hope the RBI will consider these ethics as measure to combat inflation and stagflation. Islamic Banking principles and practices will not only increase the equity deposits and finances but also promote capitalization and investments. It will help increase employment and business opportunities which are must for inclusive and foster growth of India at a time when world is eying upon Indian economy for making more investments. Otherwise consistent approach of RBI to control inflation through interest rate may let the UPA government face cruel failures in capitalizing the investment and growth opportunities with worst off inflation and stagflation.
Wish all the best for Indian economy, the general Indians, RBI and the UPA government.