The need for credit expansion in India

India had been one of the fastest growing economies till early 2011. For almost half a decade before that, along with China, India was clocking over 8 per cent GDP growth annually and talks among analysts were ripe that India, along with its neighbour, would spearhead Asia’s rise in the new world order of the 21st century. However, things have gone awfully wrong for us ever since! The growth rate has kept plummeting, ebbing now at less than 5 per cent in the previous financial year; even till date, there is little light at the end of the tunnel. Two of the foremost reasons for such bottoming out are dried up investments and a rising current account deficit, which are becoming worse with each passing year as the burden of the global slowdown becomes heavier. While our current account deficit has reached a record 4.8% of GDP in FY 2012-13, as per a recent chamber of commerce report, new investment proposals from domestic and foreign entrepreneurs have dried up by 75% as compared to the previous year. As compared to 2,828 investment proposals in the fiscal year 2011-12 worth Rs.6 lakh crore, the figure in FY 2012-13 was 697 proposals worth Rs.1.4 lakh crore.

Ever since the liberalization era of early 1990s, Indian lawmakers had been obsessed with foreign investments and foreign capital, as if foreign companies were the panacea for our economy and ultimate messiahs to move our economy forward. And hence, the potential of our domestic capital and investments was thoroughly ignored. The domestic financial infrastructure in terms of developing an indigenous credit market was given a cold shoulder and all policy weight was put behind attracting foreign investments. Critics were silenced with the argument that emphasis is given on FDIs and not FIIs – as the latter had been a major catalyst for the infamous South East Asian economic collapse back in the late nineties. Our policy advisers, who are mostly accustomed to aping tried and tested economic doctrines instead of formulating something that is country specific to India’s economic environment and culture, couldn’t see the danger lurking. As global recession set in to full effect, the automatic depletion of FDI was a foregone conclusion. And as we had been over dependent on foreign investments – and thus had kept our indigenous credit infrastructure half-baked – there were no defenses against our economy flattening!

If we had created world class banks and financial institutions earlier on, then we would have been saved from depending on the troubled overseas banks of United States and Europe that are themselves on the deathbed. A sound domestic financial infrastructure would have had a cascading effect on our exports, as our products and services would have been far more competitive in global markets, both in terms of quality and price. And most importantly, India could have arrested the flight of capital that goes along with foreign investments. The socialists and communists in India have tried to have their voice heard in this aspect – but the prospect and promise of employment generation going hand in hand with foreign investments, which our protective economy was struggling with, had the last laugh. However, with all due credit to Manmohan Singh for what he envisaged with economic liberalization, the cliff could not be foreseen. The fact that employment generation, at the cost of capital exodus, might not be sustainable over the long run was largely ignored and put onto the backburner. With requisite capital infrastructure and capital base in domestic markets, the wealth created could have been retained in the country and later ploughed back into our economic system to create a progression of investment expansion and a growth of the economy.

The maturing of a robust credit market will not only minimize the risk of future financial precipices but also will boost money flow and harbour an entrepreneurship boom in the economy, apart from employment generation of a sustainable kind, and an overall income level boost throughout the economy. Only domestic credit markets can ensure the growth of small scale to medium scale entrepreneurial ventures, which are the true saviours of any economy, rather than large scale global enterprises. A 2010 United States International Trade Commission report confirms that 99% of US businesses are SMEs (Small and Medium scale Enterprises). Another OECD report confirms that more than 95% of OECD corporations are SMEs accounting for 60-70% of employment. Unfortunately, SMEs in India, as per various reports, contribute only around 17% to India’s GDP. Clearly, as such business ventures swell, apart from direct beneficiaries, like employers, vendors and dealers, a host of related livelihood options will crop up into the scene. And wealth thus created by these ventures will add to the multiplier effect to foster a holistic socio-economic lift.

And that’s exactly what Japan did in the post war recovery period and what China is doing today. Both these countries were impoverished when they started their economic rise and both had limited domestic natural resources, apart from having dense populations.

Japan focused on the Keiretsu banking model, which was as unique and Japan specific as possible. The huge domestic conglomerates of Japan rose primarily on the pillars of this banking model that insulated them from the risks of capital market fluctuations. Each of these multinationals had and have small shareholdings in these banks that allow them to coordinate with policy makers on banking policies as well as expand the productive capital base under the system. The Keiretsu was successful because it was built on trust and nationalism, factors which had a triumphant drive in post war Japan.

China, too, has been developing its credit market at an astonishing pace. In 2012, the Industrial and Commercial Bank of China (ICBC) dislodged Bank of America from the number one spot, in terms of Tier-1 capital, to become the biggest bank in the world. The country today can boast of four out of the top ten banks worldwide. Not a small achievement for a country that was impoverished just a few decades ago! And what is most prudent is that instead of deregulating these banks, the Chinese government is backing them tooth to nail by maintaining ownership of their equity. That is because they realized the importance of wealth retention and the pivotal role this plays for sustenance of economic growth over the long term. This policy measure is not only domestic but can be outbound as well. Chinese ventures in Africa and other developing countries that are fetching billions of dollars directly and much more through covert influence of foreign economic policies, couldn’t have been possible without such an advanced credit infrastructure. Therefore, not only is the Chinese economy largely insulated from foreign upheavals, they have also been the benefactors for many others with their own capital.

Indian policy formulators should be well advised to build a homegrown financial infrastructure at par with the best in the world, if they have to leverage the domestic investment environment and expansion of domestic economic sectors. In the short run, even micro-credits should pave the way for small ventures, investment and job creation. Technological imports can also be financed domestically to create joint ventures and halt the looting of profits by foreign enterprises. If Japan can create Keiretsu and China can model their credit market based on local dynamics, India can do it too with ingenuity and uniqueness. The virtue required for that is to shed the baggage of mental dependency on foreign models and instead focus on developing local monetary constructs, processes and world-class banking institutions. That will shape India’s future in a better way than anything else can.

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