An important development in the last few years has been the increased focus on technology enablement in the banks in the form of digital banking.
The economic philosophy of India soon after it gained its Independence can be well captured in a quote by its former Prime Minister Jawaharlal Nehru who said, “The public sector (in India) must grow not only absolutely but also relatively to the private sector.” The reliance was on the public sector to build up the core sectors of the economy, as agreed upon by private sector leaders in the 1948 Bombay Plan.
However, the Indian economy has undergone transformative changes since 1991. Structural reforms in the economy—initiated post 1991—have continued albeit with different speeds under all governments, irrespective of political inclinations. Most of the reforms catered to the product and capital market liberalisation, i.e. delicensing the manufacturing sector, removal of restrictive trade acts, opening up of the sectors for foreign investment, deregulation of the currency market, etc. The structural reforms gained impetus post 2014. Focus on governance and administrative reforms led to more trust in the market. There has also been push on privatisation though increased private participation and push for neoliberal ideas. Goods and Services Tax, Insolvency and Bankruptcy Code, enactment and simplification of new Labour Code, investment in infrastructure to create more public goods, increased efficiency in the target-based welfare delivery system through direct benefit transfer have been some of the hallmarks of the reform process in the last nine years. The reforms addressed administrative bottlenecks as well as leakages.
No growth story in India is complete without discussing its fundamental institution i.e. the banks. The banking sector has seen a phenomenal reform in the last few decades. As it stands today, the total size of the assets of the Indian banks is around $2.3 trillion. This is 1.2 times of the country’s GDP. There has been a significant growth in private sector banks. As per the Financial Stability Report published by RBI in 2021, the incremental credit deposit ratio of private banks is about 67% in contrast to 32% of the public banks. The public sector banks are plagued with non-performing loans, which is currently 8.8% and low capital adequacy ratios of 14.4% in comparison to their private counterparts which were 4.6% and 18.7%, respectively. Despite these existing challenges in public sector banks, they dominate the market. State Bank of India is the leading Indian public sector bank based on market capitalization with nearly Rs 3.7 trillion as of October 2022. Number two and three on the list are Bank of Baroda and Canara Bank respectively, both again public sector banks.
While evaluating the economic performance of the government, we must keep two things in mind. Firstly, public sector banks have experienced an unprecedent scale of non-performing assets, a larger number of which originated in the period 2006-2008 when economic growth was strong. Banks extrapolated past growth and performance to the future and were open to accept higher leverage in projects and less promoter equity. The then Reserve Bank Governor, Dr Raghuram Rajan forced the PSBs to come clean on the NPAs and resist from doing the window dressing of the loan accounts.
Credit growth rate is a very important contributor for GDP growth. However, due to burgeoning NPAs, India experienced bank to industry credit growth at the rate of -1.7% from 2015-16 to 2018-19 and still experienced the GDP growth rate of 7%. Compare it to the other big economies such as China that requires a credit growth of almost 25% for registering a 7-8% growth rate, which means credit growth rate is almost three times the GDP growth rate. It must be noted that growing while deleveraging is a difficult proposition, but a highly desirable one in terms of the sustainability and quality of growth. Gross NPAs did decline significantly from FY 2019 to FY 2021. The NPA level in PSBs is markedly lower than that in PSBs in any year but still a looming concern for the country. Secondly, post 2019, the world has experienced one in a hundred pandemic event in the form Covid-19 infection. It is no less than a war like situation and under such circumstances, the parameters to gauge the economic performance shifts from economic growth to economic and financial stability. Government must be commended for resisting the temptation of going fiscally profligate and open the purse recklessly.
India has performed exceedingly well in maintaining financial stability by controlling inflation and maintaining fiscal and current account deficits under a reasonable range. As the world is coming out of the pandemic situation, most of the emerging economies are under huge pressure and many, including our neighbours, are just faltering. Even the macroeconomic condition of the advanced economies, partly worsened by the Russia-Ukraine crisis, is not looking good.
An important development in the last few years has been the increased focus on technology enablement in the banks in the form of digital banking. Technology integration in banking has led to significant growth in digital banking. 2022 witnessed almost 72 billion digital payments across India. The total value of digital payments included large-scale interbank payments, such as Real Time Gross Settlement (RTGS) or National Electronic Funds Transfer (NEFT), as well as payments used by individuals, such as credit and debit cards. India’s mobile payment system, Unified Payments Interface (UPI), recorded strong gains, both in numbers and in value, since 2015. Financial inclusion endeavours found impetus through Government of India’s Digital India movement and Pradhan Mantri Jan Dhan Yojana.
An independent study shows that deposits have grown in all the regions between 2018 and 2021. However, the year-on-year growth differs from region to region, reflecting the impact of the pandemic. The growth rate in 2020-21 has fallen sharply in the rural areas, dipped a little in semi-urban, marginally increased in the urban areas and substantially increased in the metros. RBI data shows that in FY 2020-21, transactions worth Rs 141,485,173 crore were done through 437,118 lakh transactions. The number of transactions has increased by a whopping 28%, indicating a fall of around 13% in value term.
Does this mean that there is no scope for further improvement in the economic performance of this government? Absolutely not. We need more action from the government in the supply side. All governments in the past have shied away from reforming the factor of production. Capital and labour were the two areas in which serious reforms were expected from this government. The Economic Survey points out that a 35% of total subsidy, which amounts to Rs 1.3 lakh crore, is cornered by the high-income middle class. These subsidies are mostly related to electricity, railways and artificially providing higher interest rate on small saving schemes. Apart from fuel, where the Finance Ministry deserves credit for its decision not to pass low oil prices to the consumers and use it for counter cyclical capital expenditure, there has been no intention from the government to roll back other subsidies, and invest that money in health and primary education. India also needs to expand its income-tax base by bringing rich farmers in its ambit. Though there has been much talk about unlocking the capital stuck in the inefficient public sector enterprises, but there has been hardly any concrete policy move in that direction.
However, the structural reforms must continue. The NPA problems in banks need to be addressed through changes in law and policy: stronger corporate governance in banks, swift restricting options with minimal court interference. The banks that are financial creditors have complained about large haircuts. There has to be better management of loan while the company is a going concern and a quick resolution for failing companies so that financial creditors that are mostly comprised of banks, don’t lose their money. Priority sector lending scheme should be rationalised and government should find ways and means to increase private bank participation in the economy.
The Prime Minister has expanded the base of his party and generated political capital, which is unprecedented in India’s political history. It is now time for him to utilise this political capital to carry out some difficult economic reforms.
Dr Neeti Shikha teaches at the University of Bradford, UK. Rahul Prakash is a financial economist and PhD Candidate at the University of Texas.