What The Economy Needs Now 

 •  1



The post-COVID world is going to be rather different. But will this change be for better or for worse, we don’t know yet. With the disheartening current figures of India’s GDP making headlines, the rise in the unemployment rate, the increasing number of children dropping out of school, and most importantly, the disparity in the access to healthcare, all of us are concerned about an uncertain future with a guaranteed dearth of resources. In What The Economy Needs Now the world’s top economists, Abhijit V. Banerjee, Raghuram Rajan, and Gita Gopinath, combine brevity with insight and give us prescriptions that can potentially cure many of our economy’s ailments. It is an indispensable guide for any concerned citizen. 

Here are some of the problems and solutions pertaining to two of the Indian economy’s most crucial aspects – Banking and Finance: 

Raghuram Rajan on Banking Reforms

The Problems:

  • Indian banks – particularly public sector banks – are loaded down with non-performing loans. This means that they find it difficult to grow their new lending to industry, and growth suffers.

  • Cleaning up bad loans cannot be left entirely to the National Company Law Tribunal (NCLT), as that will quickly become clogged. But bankers worry that if they take bold decisions out of court then they will be subject to investigation.

  • Public sector banks are not professional enough. The government still controls appointments to their boards and their managements are short of talent and expertise.

  • Banks are forced to do too much and take on too much risk. Public sector banks have to bear the burden of government policy priorities such as loan waivers and directed lending. All banks suffer from the lack of well-developed financial markets that could take on some of the risk.

Suggested Solutions

  • The P.J. Nayak Committee recommended a path to greater independence for public sector banks, and its ideas should be implemented. Eventually, public sector bank boards should be independent and accountable and allowed to choose the banks’ CEOs.

  • Banks need to build up more in-house talent for such specialized tasks as managing project finance. Public sector banks may have to start paying more to attract world-class talent.

  • Some mid-sized public sector banks should be privatized as a test case.

  • Banks should not be forced to implement the government’s policy priorities. In particular, an all-party agreement that loan waivers should be avoided is in the national interest.

Eswar Prasad on Financial Sector Development and Reforms

The Problems:

  • Indian companies depend too much on borrowing from banks to finance their investment. They need to be able to access a corporate bond market as an additional source of credit.

  • Banks are forced to spend some of their capital on government debt through the statutory liquidity ratio (SLR). The government uses this to tap household savings to finance its fiscal deficit. But it means that there is less room available for corporate bonds.

  • The government’s reliance on banks to hold its securities means that individuals and foreign investors find it difficult to access safe and secure sovereign-guaranteed returns.

  • While many Indians now have a bank account, trust in – and understanding of – the formal financial sector still has to be built to encourage households to save financially rather than through, say, buying gold.

Suggested Solutions:

  • The government should expand, through deregulation, the market for corporate bonds. Long-term investors like pension funds and insurance companies should be encouraged to participate; the limits on foreign investors should also be relaxed.

  • Create a clear pathway to reducing the requirements for banks to hold government securities. Open up the government debt market to more foreign investors, as well as to individuals – who should be offered secure, inflation-indexed bonds.

  • Financial literacy needs to be built up, especially among those accessing formal finance for the first time. Mobile-first and rural-focused models for banking need to be developed to encourage people to shift their savings away from gold.

  • Both the regulatory and legal systems need to be strengthened. The Insolvency and Bankruptcy Code needs to be effectively implemented, and equivalent bankruptcy proceedings for financial firms need to be worked out.



what the economy needs now

One Comment

  1. Yegna / September 5, 2020 at 10:57 pm /Reply

    The books authors are away from the country. The solutions proposed can work well only if the “socialist” mindset prevelant in our country to a new hardnosed financial mindset to loot all over and pretend to do ethical “banking” as in the west.

Leave a Reply