Speaking at a Ficci event on Wednesday, Subramanian said the Indian economy has been caught in a
chakravyuh due to bad decisions made by banking executives in the last few years.
“Large parts of the current slowdown is because of problems in the banking sector. NPAs, risk aversions and decline in corporate lending had an impact on investment which led to slowing of growth which in turn led to drop in consumption. This again led to lower investment,” he said.
The veteran economist said we need to focus on making Indian banks on the scale of any global economy. He highlighted that today just one Indian bank is in the top 100 bank list, against 18 for China and 12 for the US. Countries such as Switzerland, Sweden, Singapore, etc, that are a fraction of India’s size are all better positioned.
“Any economy that is sizable enough has been built only when the banking sector had large banks. This is one area in which India lags behind spectacularly and a lot of work is required,” said Subramanian.
So what exactly is hindering Indian banks to become one of the biggest in the world? “Banking sector is marred with both scale and quality problems. When we try to achieve scale, we do not end up lending the right way because the banking sector also has a problem allocating capital to good quality projects. Both of these are equally important,” he said.
Subramanian also suggested a way to solve the above problem — adopt technology and use big data to screen sketchy borrowers. “We are using data and analytics for retail lending, but use of the same for corporate lending is not adequate,” he said.
Competition key to success
Outlining the free market theory, Subramanian said Indian firms will have to compete against the best to build capabilities. And utilising India’s large market as a comparative advantage could help them in the process.
He gave examples of FMCG firms who pack their products in small sachets to serve low-income customers, hence not sticking to just a select number of customers.
“The lesson that people can take away from shampoo sachets is that the bottom of the pyramid also wants to avail products and services that are similar to those available to the richest 25 per cent. But the price point needs to be better because of the nature of the cash flow at the bottom of the pyramid,” said Subramanian.