Dr. Debesh Bhowmik
(This lecture was delivered on 2nd March,2024 as a resource person in the seminar organised by Institute for Policy Research in Economics Management and Social Development, Berhampur, Odisha on the selected topic “Sustainable banking : A Road Map towards mission 5 trillion dollar economy”)
The government of India has set the target of reaching a 5-trillion-dollar economy within 2025.Will this target be realised?
IMF concluded that India may have reached the target in 2029.
Let us discuss about it.
It was announced that India’s target in agricultural value added and industry value added will reach 1 trillion dollar each while service sector will reach 3trillion dollar within 2025.
From the RBI data it was found that during last 7 years Indian agriculture achieved the average growth rate of 4.5% per year. According to RBI data value added in agriculture in 2022-23 is 569699 million dollar which will grow at 0.741 trillion dollar in 2028-29.The average industry growth was found as 4.12% per year and value added in industry in 2022-23 is 620155 million dollar which will grow in 2028-29 is 0.78 trillion dollar ,and the average growth rate of service sector is 9.0% per year. The present value is 1903003million dollar in 2022-23 which will grow in 2028-29 is 3.19 trillion dollar. Lastly, the average growth rate of GDP is 7.0% per year and present GDP is 3405089million dollar in 2022-23 which will increase to 5.11trillion dollar in 2028-29 when we apply the formula Pt=P0(1+g/100)t] , where g=growth rate, Pt=present value,P0=initial value, t=year.
This implies that agriculture and industry may fail, but as a whole India may reach 5trillion dollar economy in 2028-29 if India’s average growth retains 7% per annum. If agriculture grew by 10% and industry grew by 9%, then each will reach at 1 trillion dollar in 2028-29.
If world bank data is taken, then GDP will reach 5.08 trillion dollar in 2029 if growth of GDP assures 7.5% per year. If growth rises by 20% then GDP will 5.18 trillion dollar by 2025 which is absolutely impossible.
Now,let us talk about the role of bank in this context relating to the indicators of banks.
Banking sector is a part of the service sector of an economy. Banking system including Central Bank which controls monetary and financial system of the economy where role of money supply is the key indicator which has good nexus with inflation rate and the other areas of development of a country. Central Bank controls money supply, credit and deposit behaviour of banking system, manage interest rate which played the fundamental role to changes in credit and deposit in which credit/deposit ratio signifies the recession and expansion signals. Through open market operation Central bank controls the money market where bond, equity, shares, other assets showed financial strength of the capital market at home or abroad. The exchange rate regimes and fixation of exchange rate is determined by the Central Bank which strengthens the external as well as internal sector that indicates the monetary and financial stability. Management of exchange rate is the key policy issue which stabilise the capital or money market where balance of payments is the basis to analyse. More broadly, savings and investment scenario wholly depend on banking behaviour. Saving Investment inequality is the source of cyclical behaviour of business cycles as noted by Hicks, Kaldor and others. Thus, the role of bank is the crucial indicator in macroeconomic development.
Let us justify the exchange rate impact on GDP growth in Indian economy.
The exchange rate regime has great impact on the export, import and GDP too because it was found that gold standard regime influenced on GDP much better than in gold exchange and floating exchange rate regime in India.
During 1870-1913 under silver standard and gold exchange standard, rupee pence exchange rate declined at the rate of -0.805% per year while GDP grew 1.88% per year. But, one per cent decline in exchange rate led to 1.263% increase in GDP per year during 1870-1913.
During 1914-1947 under gold exchange standard, rupee per sterling declined by 0.11% per year while GDP grew 0.87% per year.
During 1948-2020, one percent increase in rupee per US Dollar lead to 1.476% increase in GDP per year. (in fixed and floating) while GDP increase by 6.174% during 1914-1947.(under gold standard and gold exchange standard)
More specifically, it was estimated that during 1872-73-1892-93 under silver standard, the growth rate GDP and GDP per capita were 0.60% and 0.23% per annum. During 1893-94-1912-13 under gold exchange standard, the growth rate of GDP and GDP per capita were 0.39% and 0.25% per year respectively. During 1950-51-1970-71 under sterling peg, the growth rate GDP and GDP per capita were found as 1.58% and 0.58% per year. During 1975-76-1990-91,under basket peg system, the growth rate of GDP and GDP per capita were 1.85% and 0.97% per year respectively. During 1990-91-2020,under managed floating system, the growth rate of GDP and GDP per capita stood 8.86% and 5.45% respectively. The double log regression model states that one per cent increase in rupee dollar rate per year led to 2.07% increase in GDP per year significantly during 1990-2020.Moreover, one per cent increase in rupee dollar rate per year led to 1.276% increase in GDP per capita per year significantly during the same period. Thus, the exchange rate regimes determine the GDP and GDP per capita in India since long. This exchange rate regimes are controlled by the Reserve Bank of India.
Let us check the impact of broad money supply during 1990-2020.
One per cent increase in broad money supply per in India led to 2.367% increase in inflation per year in India significantly (CPI index,2010=100).At the same time one per cent increase in currency in circulation led to 0.542% increase per year in inflation rate significantly.
Log(cpiindex)=-5.510+2.367log(ms)
(-7.48)* (13.30)* where R2=0.85,F=176.96*,DW=0.18
Log(cpiindex)=-2.375+0.542log(currency circulation)
(-16.63)*(46.73)* where R2=0.98,F=2184.18*,DW=0.45
Although one percent increase in inflation rate per year led to 1.302% increase in GDP per year significantly at 5% level during 1990-2020.
Log(gdp)=21.929+1.302log(cpiindex)
(97.10)* (24.83)* where R2=0.95,F=617.21*,DW=0.16
But inflation target, or threshold limit of inflation-gdp nexus during 1960 -2015 found that beyond the threshold CPI=3.258 and WPI=4.12 at 2010=100,the growth -inflation nexus is negative in India.
So that target rate of inflation is the key policy issue to have the desired level of GDP.
Let us have a look on credit and deposit scenario of Indian banking.
One percent increase in credit per year lead to 1.849% increase in GDP per year significantly while one per cent increase in deposit per year lead to 2.819% increase in GDP per year significantly, i.e., deposit influence much better than credit in GDP. Moreover, one per cent increase in C/D ratio per year lead to 4.687% increase in GDP per year significantly during 1990-2020.
Log(gdp)=20.951+1.849log(credit)
(60.69)* (19.05)* where R2=0.92,F=363.25*,DW=0.24
Log(gdp)=16.307+2.819log(deposit)
(24.44)*(16.79)* where R2=0.90,F=282.05,DW=0.38
Log(gdp)=29.508+4.687log(credit/deposit)
(168.98)*(12.32)* where R2=0.839,F=151.99*,DW=0.42
So that C/D ratio is a good indicator in boosting GDP.
But credit supply is inflation creating.
Log(cpiindex)=-0.4126+1.323log(credit)
(-1.09)(12.49)* where R2=0.843,F=156.01,DW=0.155
In the similar way, the institutional credit has great impact on GDP. One per cent increase in institutional credit per year lead to 0.486% increase in GDP per year significantly during 1990-2020.
Log(gdp)=21.745+0.486log(institutional credit)
(160.18)*(42.68)* where R2=0.98,F=1822.22*,DW=0.68
In external sector, one per cent rise in current account deficit will lead to 0.01157% decline in GDP per year significantly, and one per cent rise in debt-service ratio leads to 1.16349% decline in GDP per year. It implies the more deficit in current account balance and more hike in debt service ratio the less is the GDP during 1990-2020.
Log(gdp)=27.26-0.01157log(cab)
(86.52)*(0.784) where R2=0.020,F=0.615,DW=0.027
Log(gdp)=30.694-1.16349log(debt/service)
(64.16)*(-6.83)* R2=0.61,F=0.603,DW=0.695
Thus, in policy concern the depreciation in curing BOP deficit may be adverse impact in increasing GDP. So, the scale of depreciation is the crucial factor.
If increasing export policy and decreasing import policy are chosen which are the right one to affect both on BOP deficit and to decline in debt-service ratio.
Let us have a quick look on NPA(non performing asset).
In India,during 1996-97-2013-14,it was found that NPA and GDP was inversely related.
Growth rate of NPA of commercial bank during 1996-97-2015-16 was 9.85%,in case of public sector bank,the rate was 9.43%,in case of cooperative bank,the rate was 10.93% per year.
In this period, six types of banks, with 117 observations, the panel regression between NPA/ADV (ratio of NPA and advance) and GDP was inversely related significantly.
Log(gdp)=13.075-0.776log(NPA/ADV)
(53.36)*(-9.011)* where R2=0.429,F=13.28*
It implies that one percent increase in NPA/ADV per year led to 0.776% decrease in GDP per year in India significantly.
Also, there was short run causality from NPA/ADV to GDP during that period.
After 2017, it is a good sign that NPA has been declining in commercial and public sector banks and private banks in India while their amounts are more than 15% which had created banking crises that produced mergers and close up or privatisation. These unhealthy situation in Indian banking showed credit crises, recession and panics.
Apart from this event, Introduction of central bank digital currency, and other digital payments system created panic in general masses and non-use of banking facilities and attracted towards private banks and non-banks, post offices etc which damages liquidity demands from banks and inverse pressure on GDP growth.
Thus, the sustainability of banking requires
[1] Stable exchange rate, low or decreasing current account deficit,
[2] To get desired level of GDP(GDP growth rate),determine the threshold level of inflation rate and determine money supply growth rate (broad money supply).
[3] Determine interest rate by which capital or money market become stable and competitive.
[4] Manage floating exchange rate efficiently against instability or adopt fixed exchange rate.
[5] Minimise NPA to get desired level of money supply.
[6] Determine C/D ratio in order for neither depression or boom.
[7] Determine employment rate for desired level of GDP.
Finally, banking sector is the heart of the economy where privatisation is not the solution for sustainable development.
