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Over the last two decades, India has made significant economic growth. The world has made significant progress in decreasing extreme poverty, with India playing a crucial role. Within a generation, India cut extreme poverty in half and is converting itself into one of the world’s fastest-growing economies. That gives us at the World Bank Group a lot of hope, because our objective is to promote broad-based growth, alleviate extreme poverty, and increase shared prosperity.
The Indian government has implemented significant market-oriented changes in recent years. Our annual Doing Business report, which assesses the ease of doing business, was just issued. India ranks in the top ten in terms of improvements for the third year in a row. It has risen from 142nd to 63rd place in the Doing Business rankings throughout that time. According to the latest research, starting a new firm, getting a construction permit, and trading goods across the border are all easier than they were a year ago.
Understanding the Financial Sector
The financial sector is made up of businesses and institutions that provide financial services to both commercial and retail consumers. This industry includes a diverse range of businesses such as banks, investment firms, insurance firms, and real estate corporations.
Mortgages and loans, which gain value as interest rates fall, account for a substantial amount of this sector’s revenue. The financial sector’s strength determines the economy’s health in great part. The economy will be healthier if it is stronger. A poor financial sector usually indicates a weaker economy.
Loans and mortgages account for a significant amount of the financial sector’s revenue. When interest rates fall, these become more valuable. When interest rates are low, the economy allows for greater capital projects and investment. The financial industry benefits as a result, resulting in increased economic growth.
Healthy Financial Sector
The Indian economy is at a crossroads in terms of its development. Market-oriented reforms began in earnest 20 years ago, and it is now reaping the benefits. The economy is at a crossroads after a decade of explosive expansion. Today’s policy decisions will determine whether this economic boom lasts or fizzles out.
The key to realising India’s long-term growth potential is finance. The financial sector will play a critical role in underpinning growth as the economy becomes larger, more complex, and market-oriented by channelling domestic and foreign capital into productive investments. From both an economic and social standpoint, increasing access to the financial system is also a necessity for achieving more balanced and sustainable growth.
For the fruits of growth to be distributed more equally, a system that provides credit, savings tools, and insurance to a large swath of the population is required.
The global financial crisis has stalled and skewed progress on financial reform. India, like many other emerging countries, fared significantly better than established economies throughout the crisis, with just a minor slowdown in growth. This has resulted in the emergence of two potentially harmful ideas. First, keeping much of the banking sector under state control is beneficial because it makes the economy more resilient to shocks. Second, the economy will be protected from external shocks by highly insulated financial markets.
True, state-owned banks fared better throughout the financial crisis, with higher deposit growth and increased lending expansion. Another perspective is that during a period of turbulence and uncertainty, deposits flowed to banks with implicit government backing, and these institutions were emboldened and even encouraged to continue lending.
Despite the constraints they face, several government-owned banks have shown to be competitive, holding their own against domestic and international private banks. It’s past time to free these banks from government control and lower the obstacles to new private banks entering the market.
Boosting growth through Financial Strength
The Indian banking system is at a fork in the road. We are already aware of significant reforms. You safeguarded homebuyers by increasing the transparency of cash flowing into the real estate market. You instituted a system of unique identifying numbers that has made government transfers more convenient. This has assisted the impoverished in particular. You’ve also developed a single bankruptcy and insolvency code. These are encouraging signs.
Despite this, the financial sector faces a variety of difficulties. While there are evidence that commercial banks are making headway in clearing non-performing loans, considerable work has to be done.
Nearly 70% of the banking sector’s assets are held by state-owned institutions. The government’s significant engagement distorts markets, making it harder for India to solve financial deficits in important development areas including infrastructure, small and medium-sized businesses, and housing. Non Banking financial companies, also known as shadow banks, have arisen as a significant new source of lending for both businesses and consumers.
Involving the Private Sector
State banks typically hold a minority rather than a majority of market share in emerging countries, with a share of less than 20% vs 70%.
In comparison to other countries, the financial industry in this country generates a low level of credit. The credit-to-GDP ratio in India is 51 percent. In comparison, Malaysia has a rate of 136 percent and Brazil has a rate of 70 percent. Despite the fact that India’s gross domestic savings rate, at roughly 30% of GDP, is comparable to peer countries, this trend has taken root. The savings are adequate, but the system fails to put them to good use.
To achieve the aim of a $5 trillion economy, credit must expand at a faster rate while maintaining strong credit quality and avoiding excessive risk-taking.
More finance would assist India in meeting its demands in housing, SMEs, and infrastructure. Through 2035, India’s yearly infrastructure finance deficit is estimated to be 0.7 percent of GDP, more than double the worldwide average of 0.3 percent.
Deepening Capital Markets
India’s capital markets have the potential to help the country achieve its economic goals. The value of the stock market is now above $2.2 trillion, up more than 6% over the previous year. The debt market, on the other hand, is still in its infancy.
Government securities continue to dominate the debt market, while top-rated financial and public-sector issuers dominate the corporate bond market. Corporate bond issuance accounts for 3.94 percent of GDP, which is significantly lower than in comparable emerging economies. Corporate bond proceeds grew from $52 billion in fiscal 2012-3 to $101 billion in fiscal 2016-7. Since then, issuance of corporate bonds has remained relatively flat.
Deepening India’s capital markets could assist the country’s economy thrive by creating new market segments and attracting interest from domestic and international institutional investors.
Conclusion
Finally, I’d like to emphasise the significance of a strong financial system in achieving India’s aim of becoming a $5 trillion economy. Allowing more private sector participation in the financial system, making it simpler for funds to flow into capital markets, and appropriately regulating systemically significant NBFCs are all ways for India’s financial sector to evolve in a way that positions the country for rapid, broad-based growth. It cannot be delivered without a modernised finance system.
In recent decades, India has made significant progress in developing a financial industry that is tailored to the country’s specific development needs. In a world when payments can be transmitted with the touch of a button from the most basic cell phone, countries must have financial sectors that assure stability while providing deep, well-regulated markets and being agile enough to respond to rapid industrial innovation.
