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India can’t afford to grow below 8%: Chidambaram

The RBI has projected a growth of 6.5% in the fiscal year 2012-13
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First Published: Sat, Nov 24 2012. 01 45 PM IST
Union finance minister P. Chidambaram. Photo: Hindustan Times
Union finance minister P. Chidambaram. Photo: Hindustan Times
Updated: Sat, Nov 24 2012. 05 33 PM IST
Pune: India has to get back to minimum 8% annual growth path and “cannot afford” to grow less than that as a developing economy, Union finance minister P Chidambaram said on Saturday.
Asia’s third largest economy is likely to have grown 5.5% in the July-September quarter, the minister said.
Most economists expect the growth to be lower due to the continued slowdown in global and domestic markets.
“(In a slowing world economy), India has to anchor growth mainly on domestic demand and find resources to get back to the high growth path. India cannot afford to grow anything less than 8%. It is not an aspiration but an imperative,” Chidambaram said at the Bancon annual banking conference in Pune.
A prolonged slowdown in major world economies with its ripple effects being felt in the domestic market, the Indian economy grew 5.3%—the slowest in nine years—in the March quarter before improving marginally to 5.5% in the June quarter.
The Reserve Bank of India (RBI) has projected a growth of 5.8% in fiscal 2013.
“When growth declined this fiscal, it goes without saying that we are facing a difficult situation. We have to overcome this (phase) by finding ways to increase production of goods and services. Banks have an important role to play,” Chidambaram said.
In mid-September, the government had announced steps, including hiking the foreign direct investment limit in sectors such as aviation, multi-brand retail, insurance and pension, among others.
The execution of these announcements, however, is critical to decide the future course of the local unit, dealers said.
Asked about the lower-than-expected revenue from the auction of telecom 2G spectrum, Chidambaram said the process of auction is not yet complete and that the government is confident of achieving the set target of raising Rs.40,000 crore through the sale of spectrum.
The Union government is also optimistic of meeting the revised target of 5.3% fiscal deficit, projected for fiscal 2013.

Cash transfer through bank accounts

In an ambitious plan, the government plans to route pay outs of direct cash subsidy to citizens through the Aadhaar-linked bank accounts with a view to improve efficiency of government-sponsored programmes.
To begin with, the government plans to route direct cash transfers to people in 51 districts in 16 states from 1 January 2013, Chidambaram said.
Going ahead, the government plans to roll out of the direct cash transfer through the Aadhaar system in the entire country by the end of 2013.
This will, among other things, facilitate the pay out of direct cash subsidies to the targeted beneficiaries, Chidambaram said.
“We want the roll out (of Aadhaar-based subsidy transfer) to be completed by the end of 2013,” he said.
According to Chidambaram, Prime Minister Manmohan Singh will hold a meeting of the cash-transfer panel on Monday in the run-up to the implementation of the scheme from the beginning of next year.
Currently, the government transfers subsidies and other schemes to the beneficiaries through the local self-government bodies, which many times do not reach the end-beneficiaries and causes delays.
Chidambaram, however, did not give any further details about how much money the government intends to transfer to people in the first phase.
Chidambaram reiterated the government’s view that RBI should consider issuing new bank licences even without an amendment to the Banking Regulation (BR) Act. Recently, in a letter addressed to RBI deputy governor Anand Sinha, the finance ministry had said that the central bank doesn’t need to wait for the BR Act to be passed to commence the process of issuing banking licences as the existing laws of the banking regulator has the powers to do so.
“I don’t know whether a formal reply has come. Our letter was sent 10 days ago. Let me emphasize that the powers RBI wants (to control new banks) are already with them. I’m pretty sure the Act will be passed by the time an occasion arises to exercise these powers. I’m sure RBI acknowledges and appreciates the well-considered position of the government,” Chidambaram said.

Bad loan worries

Chidambaram said the rise in bad loans in the banking sector is expected in a slowing economy, where stress develops across various sectors, and individual banks need to manage the rise in their respective non-performing assets (NPAs). “World over, when economy slows down, bad loans rise in the banking system. It is the duty of banks (to take care of the issue),” Chidambaram said, adding the rise in bad loan levels of public-sector banks is high as they lend to more segments such as agriculture and education, unlike the lenders in the private sector.
Gross NPAs of Indian banks rose to Rs.1.67 trillion in September from Rs.1.13 trillion a year ago. That apart, a large chunk of the restructured assets, about 25-30%, is also projected to turn bad. Gross NPAs from the education loan segment stood at about 6% in March.

State-run banks not clones

According to Chidambaram, state-run banks must not be identical in their operations and should devise their own growth models depending upon their size, strength and operational culture.
“I am opposed to uniformity. I don’t think one (state-run) bank can be a clone of another bank. Paths to achieve goals must be different. Each bank has its own strength and culture,” Chidambaram said, adding that the department of financial services will not try to bring in uniformity in the operations of state-owned banks.
Going ahead, banks also need to focus on giving small loans as the demand for smaller amounts of loans are increasing, especially from customers in rural areas, Chidambaram said.
Further, the Indian banking system should move towards the path of consolidation to strengthen the banking system, and there needs to be at least two or three large banks which can compete in the global markets, Chidambaram said.
“Finding new business models will inevitably lead to some consolidation. We should not fear consolidation. I know there is pride and identity, but, ultimately, some consolidation will have to take place in the banking system in this country,” he said at the Bancon-2012 meet.
However, the government does not have a road map for consolidation in the banking sector, and has always maintained that the boards of the banks should drive consolidation, Chidambaram said.
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First Published: Sat, Nov 24 2012. 01 45 PM IST
More Topics: P. Chidabaram | Bancon | banking meet | Economy | RBI |