What will it take for India to reach double digit growth?

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“Despite the global slowdown, India has been one of the few countries to have shown remarkable growth in the last financial year. While this has been an achievement in itself, this growth rate can be taken to double-digits.” This was the key message of Dr. Frederico Gil Sander, Sr. Country Economist, World Bank Group, New Delhi. Dr. Gil Sander was speaking to students at the IIM Ahmedabad as part of the World Bank - IIM Discussion Series. The discussion centered around “Financing Double-digit Growth: Current and Long-term Challenges of India’s Financial Sector”.

Dr. Gil Sander noted that urban consumption and public investment have been the key drivers for current growth. Additionally, a good monsoon this year is expected to give a boost to rural consumption. These, coupled with the promised emphasis on supply-side factors such as labour reforms, the inclusion of more women in the labour force, and the timely implementation of GST can boost economic growth. To further increase this growth rate, potentially to double-digits, these drivers will first have to be augmented by productive capacity investment, which in turn depends on ease of credit availability from banks. However, credit growth in India is marred primarily by high lending rates, priority sector lending regulations and rising non-performing assets (NPAs).

One way to address efficient allocation of credit in productive capital investment is to increase competition in the credit market and reduce the market share of Public Sector Banks (PSBs), he said. This can be achieved through the organic growth of the private sector; issuing special licenses for small financial institutions and payment banks; and implementation of commercially oriented strategies in PSBs. Additionally, participation by foreign investors can be enhanced by creating a roadmap for developing corporate bond markets and by facilitating extension of non-bank finance.

Dr. Gil Sander suggested a two-pronged approach to resolve the issue of high NPAs. The first is to address the inherent inefficiencies in the banking sector through governance reforms. Second is to identify the sectors which predominantly generate NPAs, and the timely recognition of losses and defaults. At present, the power sector and infrastructure have been identified as the major sectors with high NPAs. In the power sector (particularly state distribution companies), ensuring the success of the Ujwal Discom Assurance Yojna (UDAY) is of utmost importance. This will improve the operational efficiency of state distribution companies, and also enforce financial discipline on these companies. On infrastructure, renegotiation of agreements for stalled projects, or state intervention to clean-up the same could be implemented. Once these impeding factors are addressed, double digit growth for India should not be far away.

Reference: Financing Double-digital Growth

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