Need for more payments entities and banks, says CEA Subramanian

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November 08, 2020 8:00 AM

The spending curbs enforced on government departments for April-December period is estimated to result in savings of nearly Rs 4 lakh crore.

Returning to high-growth trajectory gets priority over fiscal balance. Even in past, rating downgrade didn’t quite impact India’s financial systemReturning to high-growth trajectory gets priority over fiscal balance. Even in past, rating downgrade didn’t quite impact India’s financial system

Chief economic advisor (CEA) Krishnamurthy V Subramanian on Saturday pitched for the entry of more banks in the financial system to ensure greater competition as well as credit penetration. There is also space for more payment services entities like Google Pay and WhatsApp Pay, he suggested at the India Express Group’s Idea Exchange programme.

Indicating that more stimulus measures could be in the offing, the CEA said there is scope for ‘additional fiscal spending’ over and above the budgeted level (Rs 30.4 lakh crore) this fiscal. The government has re-prioritised expenditure in the wake of Covid-19 pandemic to address the immediate needs of the vulnerable sections of population, but the overall budget spending in the first half was roughly the same level as in the year-ago period, owing to spending curbs imposed on many departments.

While India has only about 500-600 banks, including the regional rural ones, the US has a network of some 26,000 banks even while having a fourth of India’s population, Subramanian pointed out.

Although only half a dozen large banks dominate the American financial system, the smaller ones act as lenders to mostly MSMEs, thus assuming an important role in the economy. Also, there is only one Indian bank (SBI) in the top 100 globally, against 18 in China.

Had India allowed more banks, say, two decades ago, the channel of credit flow to small firms would have greatly improved by now. ‘Creative destruction’ in any system is triggered more by the new entrants than the incumbents, he emphasised.

WhatsApp on Friday announced the launch its payments services in the country following nod from the National Payments Corporation of India after about two years of waiting.

The fiscal stimuli announced so far have an estimated budgetary cost of Rs 2.4 lakh crore, or roughly 1.2% of GDP, way below the average of about 2.5% for similar-rated peers, according to rating agency Moody’s.

The spending curbs enforced on government departments for April-December period is estimated to result in savings of nearly Rs 4 lakh crore. So, the government still has considerable room for unveiling more rounds of stimulus, even without altering the estimated budget size for the year or the enhanced gross borrowing limit of Rs 12 lakh crore.

Subramanian rejected perceptions of the government holding back further stimulus measures for fears of worsening of fiscal balance and consequent, possible downgrade of the sovereign rating by global agencies. At this juncture, returning to the high-growth trajectory gets the priority over fiscal balance. As such, even in the past, a rating downgrade didn’t quite impact India’s financial system, he added.

Expressing his disappointment over the underperformance of the financial system, the CEA called for greater adoption of financial technology to improve the flow of credit as well as the quality of lending. Fintech has the potential to fast improve the delivery and penetration of banking services in India.

The CEA asserted that the economy is poised for fast recovery this fiscal and high-frequency indicators, including manufacturing PMI, point at that. However, any second wave of Covid cases in the country, as witnessed now in parts of Europe, poses huge downside risk to this assessment, he cautioned. Even in the case of the Spanish flu outbreak a century ago, the second wave was far more devastating than the first one.

Subramanian stressed that although the lockdown exerted a heavy economic cost on India (GDP slide of 23.9% in the June quarter was the sharpest among the G-20 economies), it helped save lives. “It was a humane approach that the government adopted, because a loss of GDP can be retrieved but once lives are lost, they can’t be brought back,” he said.

The International Monetary Fund’s (IMF’s) has forecast a record 10.3% contraction, year on year, in real GDP for India in FY21. However, it has projected a rebound for the country in FY22, with a real expansion of 8.8%, the highest globally.

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