India's Economic Growth and Investment Needs
India's GDP is projected to grow from $3.7 trillion in 2023-24 to $7 trillion in 2030-31. This growth is supported by robust fiscal and monetary policies, along with world-class infrastructure.
- The investment required to achieve a $7-trillion economy is approximately $2.5 trillion.
- This translates to an investment-to-GDP ratio of 34 percent.
- Corporates and households are net savers, while the government runs deficits, limiting its investments.
Challenges in Private Sector Investment
The private sector's share of investment relative to operating cash flow has decreased from 114% in 2008-09 to 56% in 2023-24. This decline may be due to uncertainty in future demand and geopolitical issues.
- There is a need to incentivize overseas savings and investments.
- MSMEs are not receiving their fair share of credit.
Banking Sector and Financial Intermediation
India's banking sector faces challenges due to regulatory preemptions and liquidity requirements.
- Banks are required to maintain a Cash Reserve Ratio (CRR) of 4% and an SLR of up to 26%.
- This leads to higher lending rates and reduced lendable resources.
- Only the Liquidity Coverage Ratio (LCR) is used globally, unlike India's dual system of LCR and SLR.
Priority Sector Lending and Credit Growth
Banks have a priority sector lending requirement of over 60%, which needs to reflect the changes in India's GDP composition.
- The need for cash-flow-based lending and risk-based pricing is emphasized.
- Lower credit growth compared to nominal GDP growth is a significant concern.
Government Bonds and Derivatives Market
The Indian government bond market is the third-largest in emerging markets but has a low share in global indices.
- There is a call for easing regulations and reducing preemption for government securities.
- Encouraging the use of derivatives alongside cash instruments is suggested for market development.
Technological Investments in Indian Banks
Indian banks are investing heavily in technology to enhance their capabilities.
- Large banks report around 5% of their annual spending on technology.
- The increased spending aligns with global trends where tech spending outpaces revenue growth.
Social Responsibility and Cost Recovery
Indian banks also bear social responsibility costs, such as not charging for UPI transactions, which impact their cost recovery.
- Examining international practices for service charges could help address cost recovery.