World Bank Senior Country Economist, Mr. Frederico Gil Sander Visited IIM Ranchi On 26th August’16
Senior Country Economist of the World Bank, Mr. Frederico Gil Sander, addressed the students of IIM Ranchi on 26th August 2016. The topic of the lecture was “Financing Double Digit Growth: Current & Long Term Challenges of India’s Financial Sector”. In the lecture, Mr. Sander discussed about India’s current economic scenario and its projection for the next two years.
Addressing the audience, Mr. Sander said that currently Indian economy is doing well despite the stalling growth engines. According to him, urban consumers, low inflation and credit growth are the major growth drivers of the Indian economy. He said that surge in public investment by government in developing infrastructure, both at center and state level, has aided growth, though this public investment is too small to offset the weakness in the private sector. He pointed out that currently exports are weak due to weak global demand. For FY’17, it is important to ensure that these working engines don’t run out of fuel so that the economy can keep itself robust at the GDP of 7.6% even if any slowdown occurs.
Mr. Sander said that currently only 25% women are in the Indian labor force. In order to achieve double digit growth, we would require more women to join the labor force. We would also need to enhance productivity growth by enduring ease of doing business, simplifying the business environment and by diffusing better management practices in businesses. GST is a major tax reform that would remove trade barrier between states and would benefit the economy in the long run.
Explaining how financial sector can support growth, Mr. Sander said, credit and GDP go hand in hand. Efficient financial intermediaries allocate savings to the investments with highest returns, enhancing aggregate productivity. Slow credit growth is a matter of concern, he said. Credit growth from private sector banks has gone up but the growth is low for the public sector banks. One of the reason for such slow credit growth is the declining inflation. The public sector banks which correspond to about two third of the Indian financial institution are facing significant challenges due to increasing amount of non performing assets (NPAs). Another reason for slow credit growth is the muted transmission of the monetary policy.
There are several ways to accelerate this structural reform within the financial sector of India, he said. Though the high share of public sector banks would remain in India, there’s still room for more private banks. Increasing the number of private banks would create competitive market, making the rates competitive and leading to better transmission of monetary policies. Another way to accelerate credit growth would be to develop corporate bond market and non – bank finance, including increased participation of foreign investors in the same.
Answering the question, what should be done regarding the NPAs, Mr. Sander said that recapitalizing the PSBs through governance reforms should be managed through commercial goals as recommended in the Nayak Report, which talks about governance and separation of ownership and management of PSBs. Also full and timely recognition of losses is necessary. He mentioned that currently India takes about 4.5 years to resolve insolvency issues; the longer this time, the slower is the bank’s recovery process. New bankruptcy code will play an important role in this regards hence the sooner it is implemented, the better. Another way to cope with the NPAs would be to provide banks with tools to manage stress in their balance sheets while avoiding moral hazards.
Mr. Sander acknowledged that power transportation are the two sectors that comprise of higher NPAs. In Jharkhand alone the AT&C losses is about 42%. He mentioned that DISCOMS require to reduce AT&C losses and that UDAY Scheme if implemented well can help in this. Talking about transportation sector, he said that currently PSBs have been financing more than 80% debt to highways under PPP models, which is under much stress now. It is very important to manage this correctly by looking for deeper reforms and being more commercial oriented. With this Mr. Sander concluded his lecture, after which there was a question answer session with the audience.