The Options we have to Finance our Economic Revival

Context: With the signs of flattening of Covid curve and revival of medium-term economic growth, India should ensure adequate investment to propel a strong rebound of its economy.

Positives for the Indian economy

• High savings rate: Of about 30% of Gross Domestic Product (18% by households and 10.4% by corporate sector), higher than the global average (27%) (lower than 39.6% for Asian export-oriented economies).
• Export promotion: Production-Linked Incentives (PLIs) and corporate tax reduction: resulting in higher profitability and a better ability to service debt.

Challenges to Indian economic revival:

• Declining private investment: both household and corporate investment.
• Inadequacy of saving rate: to finance India’s consumption and investment.
  • Most household savings go into physical assets, real estate, bank deposits, pension, insurance of kept as currency.
  • The corporate sector also invests and borrows from banks.
• Risk Aversion: has led to falling credit-deposit ratio of banks and rising investment in government bonds, due to lack of business opportunities.
• Increasing Non-Performing loans (NPLs)of banks (especially of Public Sector Banks): According to the Reserve Bank of India’s Financial Stability Report - likely to increase to 13.5% of advances.

Way forward:

• Increase government investment: to crowd in private investments and kick start the capital expenditure cycle.
• Rein fiscal deficit: this will increase the deposit and credit growth of the banks.
  • For E.g. During the 2000s, Indian banks managed a deposit growth of 18.1% and credit growth of 22.1% on the back of reduced government borrowings.
• Capturing foreign capital: by Indian firms and banks to finance domestic growth;
  • Indian banks should increase their lending by taking advantage of lower government borrowings and surplus global liquidity.