Reserve Bank of India Governor Bimal Jalan has called upon the key sectors of the Indian economy to improve productivity and cost efficiency for achieving higher growth rates during the 10th Five-Year Plan period.
Inaugurating the 'Bank Economists Conference 2002' (BECON) in Bangalore on Friday, Jalan said all sectors of the economy should take advantage of the most favourable climate present in the country for overcoming the bane of lower productivity and high cost of delivery.
"In spite of several areas of concern and daunting problems faced by India, I believe that the overall macro-economic situation in our country has seldom been better than now to achieve the targets of 8 per cent growth rate, reduction in poverty, employment generation, and healthcare indicators, set by the government for the 10th plan period," Jalan stated.
Listing out the key positive indicators of the stable economy, Jalan said the conditions were ripe to seize the opportunities and translate them into reality. These are the challenges we all have to face and succeed, Jalan exhorted.
Never had the country seen such a low inflation (around 3.15 per cent) despite one of the worst droughts occurring, and highest foreign exchange reserves in the world despite steep increase in oil prices during the last two years.
"In spite of continued border tension, global slowdown and the on-going crisis in Iraq, the economy has been faring well, but needs to be accelerated from the current 5-5.5 per cent to around 8 per cent at the earliest. Even a growth of 5 per cent in the face of low agricultural output and slow industrial recovery is commendable," Jalan claimed.
While foreign exchange reserves have increased manifold, the country's external debt has not increased. In fact, the country has one of the strongest external situations in the post-Independence period. Even the balance of payments position is quite good.
Turning to the banking industry, Jalan said in spite of the high fiscal deficit and high government borrowings, the Indian banks are saddled with the problem of plenty on the liquidity front.
"One of the problems faced by the banks today is the management of liquidity. There is plenty of liquidity in spite of lowest long-term and short-term interest rates. The banks have to devise ways and means to increase their productivity and efficiency to reduce the cost of financing by following prudential norms strictly," Jalan asserted.
Though most of the key indicators are in a positive framework, Jalan said the main reason for the prevailing sense of gloom in the country is low productivity and poor returns on every investment made or capital expenditure incurred.
"For every rupee of capital expenditure, made either by the government or the private sector, we get much less by way of output or returns. The only way we can reverse this alarming situation is by improving the efficiency of using our resources that we have," Jalan declared.
Lamenting over the tolerance levels of Indians for waste, sloth, and low-productivity, Jalan said though India boasted of a higher savings rate among the developing countries, the growth rate has been below par or lower than our potential to grow higher and faster.
"It is high time we move away from the bane of low productivity and high cost of doing things if we have to achieve the target of 8 per cent GDP growth rate in the next five years.
"One of the remedies to boost productivity is to become more efficient and more competitive. Unfortunately, the cost of doing banking business in India is much higher than other countries in terms of per unit of output of banking services," Jalan affirmed.
To improve productivity and cost efficiency in the banking and financial services sector, Jalan urged the banks to embark on corporate governance.
"Corporate governance has a lot to do with higher productivity and efficient way of handling operations, be they technology induction, innovative service products, or training of management personnel," Jalan emphasised.
In the case of enforcing prudential norms, the RBI Governor said though the banking industry, by and large, made a considerable progress in implementing many of the norms, a lot more needed to be done to reduce the burden of their non-performing assets.
"While people are skeptic about the need for enforcing such norms, including provisioning, capital adequacy ratio, asset liability management, disclosure and auditing, their centrality of protecting the hard-earned money of the people cannot be overlooked."
Banks deal with public money. Protection of public deposits is paramount. Being a leverage industry, the banking sector needs to observe prudential standards of the highest order.
Referring to the supervision and regulation of the banking industry even in a deregulated market regime, Jalan said it was essential to have a mechanism to supervise and regulate the industry for preventing any fallout of the external situations impacting its functioning and growth prospects.
"In an increasingly integrated global economy, no banking sector of an individual country can remain immune to the effects of such external influences or market forces. A supervisory and regulatory body can check the harmful effects of externalities on its banking sector.
"Even in the case of internal factors impacting the operations of a particular bank or group of banks, Jalan said the role of a supervising or regulatory body such as the Securities and Exchange Board of India or the RBI was crucial to ensure that systemic failures or default in payments do not precipitate financial crisis leading to a run on the bank or deposits of the public going bust.
"It is supervision and regulation alone that can make banks take prompt and remedial solutions to restore the confidence of its customers and the trust of the public, Jalan reiterated.
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