But the Reserve Bank of India, which hasn't issued any new banking licences in 10 years, is holding up the finance ministry's plan, and for good reasons. Before it allows new deposit-taking institutions to be set up, including by non-financial corporate groups, the RBI, which is also the country's banking supervisor, wants the legal authority to sack rogue bank boards. Amendments to the country's banking laws that would have accorded the monetary authority such wide-ranging powers were introduced in parliament seven years ago. They were never passed. The central bank is quite right to be circumspect, even at the cost of annoying the finance minister.
Pending an infusion of new capital into the banking system, the government is seeking to counter the cyclical downturn by cajoling cash-rich state-owned firms to speed up investments. A better strategy would be for the government to curtail its own consumption expenditure and reduce its borrowings. More household savings would then be freed up for corporate investments, and not just by state-controlled companies. But fiscal consolidation in a slowing economy has to be gradual, lest it makes the short-term growth challenge worse.
It's already been about five years since the end of the last big credit boom in India. On present evidence, seven lean years is not a far-fetched proposition.
- Indian officials concede new deficit target already looking doubtful
(Andy Mukherjee is a Reuters Breakingviews columnist. The opinions expressed are his own)
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