India's wealth has been growing steadily as it becomes one of the world’s largest emerging economies. But there’s still much that needs to be done within its financial services sector in order for it to keep pace with other nations. In a session sponsored by NDTV, author Vikram Chandra brings together a panel of experts who share their views on the future of finance in India.
Demonetisation in India
The Indian government has recently taken steps to address the growing need for demonetisation and Indian Trade Minister Nirmala Sitharaman talks about these moves in greater detail.
She says that the practice of “round-tripping”, a process whereby assets are shipped in and out of the country with tax left unpaid at either end, has been a common occurrence and tougher measures have been brought in so that the poor tax-to-GDP ratio can be countered. “87% of our economy has been in the informal, cash-driven segment,” she says.
Ken Rogoff, Professor of Public Policy and Economics at Harvard University applauds the Indian government for the tough decisions it has had to make in tackling corruption. But he argues that digitisation of the economy isn’t going to happen overnight, and a five-to-seven year easing programme would be preferable, in order to minimise collateral damage.
In addition to corruption and underground money, another issue facing India is disparity of wealth. 58% of the country’s wealth is owned by one per cent of the population, and Arundhati Bhattacharya of India’s State Bank says that because of this, few Indians are experiencing the benefits of its economic growth. “The gains of prosperity aren’t affecting everyone”, she says. She also adds that rural areas of the country are suffering more than cities when it comes to efficiency and ease of banking, due to understaffing and the reality that the majority of citizens are still relying on cash transactions.
Comparison with other countries
Frederico Sturzenegger of the Central Bank of Argentina draws attention to the popularity of digital payments in his home country which has diminished dependence on cash payments. The process of printing money is not only inefficient, it’s also expensive, he says. He points out that demonetisation has been incredibly effective in countries like Sweden, where only 6% of the population are using cash today. Sturzenegger believes that the Indian government must make digital payments appealing enough to the population that cash is no longer considered an option.
Carmen Reinhart, Professor of the International Financial System at Harvard Kennedy School, describes India’s transition as “short-term pain, but long-term gain”. She mentions similar scenarios which have been successful in the past in other nations, such as Canada and Singapore, but India will be going through a much grander undertaking, purely due to the size of the economy and its population. Reinhart also asserts that due to the fact that India is continually rising in its world position, it needs to broaden its tax base and monitor the underground economy. Sitharaman agrees. “We have to show maximum intent within the next five years to contain black money”, she says.
The consensus among the panelists was positive. Arundhati Bhattacharya believes that liquidity has increased massively within the Indian banking system, and the government’s agenda is achievable - but no-one can afford to be complacent, in case banks and businesses regress into old ways of operating. The floor is opened up to audience questions, and government official Amitabh Kant mentions the advent of biometric payments, which India is pioneering at the moment. He and Bhattacharya thought this could be implemented on a wide scale by 2020.