Financial sector reforms must for 8% growth: FM
Finance minister P Chidambaram has made a strong pitch for reforms in the banking, insurance and pension sectors — partly held up because of the Left’s opposition — to sustain a 7-8% growth momentum.
In a 20-page presentation the titled “Overall economic scenario and way forward” to the UPA-Left coordination committee on May 23, Mr. Chidambaram pointed out that the main constraint in the growth of bank credit and insurance penetration was capital.
While the banking system needed Rs 42,000 crore more capital by March 2010, the insurance sector required Rs 12,000 crore in the next four years.
According to Mr Chidambaram, the bank credit to GDP ratio in India was less than 50% and lagged behind developing economies in East Asia. The increase in credit to GDP ratio was essential for high growth of income and employment.
He also said credit to hitherto neglected sectors like agriculture and small-scale industry needed to grow further.
In insurance, he said penetration had gone up to 3.28% in 2003 from 1.93% in 1999. Stating that insurance was critical for social welfare, and also to provide long-term funds for infrastructure, he said, the target was to achieve 8-10% penetration in the near future. Though, the government had proposed a hike in the FDI limit to 49% from 26% now, it has still not been able to build a consensus with the Left.
The finance minister also tried to impress upon the Left the need to expedite pension reforms through the enactment of the Pension Fund Regulatory and Development Authority Bill. He said the existing system suffered from limited coverage with just about 13% of the working population being part of some pension scheme. The combined pension payment of the Centre and states stood at over Rs 65,000 crore and was growing unsustainably, he said.
To consolidate growth at 7-8%, Mr Chidambaram said, investment needed to be stepped up from Rs 7.3 lakh crore in 2003-04 to Rs 16.3 lakh crore in 2008-09.
Besides, the government must create strong institutions to garner and allocate funds efficiently among sectors that are critical, he added.
Mr Chidambaram, however, admitted the government faced a fiscal challenge in terms of creating fiscal space to enhance public investment and simultaneously meet the commitment of eliminating revenue deficit.
There were looming concerns too of additional expenditure because of enhanced petroleum and fertiliser subsidies, revival of PSUs and interest subvention on bank credit to farmers at 7%.