By K Raveendran
The Narendra Modi government, facing persistent criticism that the poor has become poorer and rich richer under its policies, couldn’t have asked for anything better. The IMF has literally ‘come to the aid of the party’ asserting that India’s achievement in financial inclusion is truly remarkable. The certificate will be of great value for Modi’s campaign for the 2024 Lok Sabha elections.
In 1991, when India embarked on its economic liberalization, the real per-capita income was just shy of $600. Today, that has more than tripled. An estimated 400 million people in India have been lifted out of poverty just in the last 15 years. And this is one of the fastest poverty reduction rates in the world.
The endorsement was part of the opening remarks by the Deputy Managing Director Antoinette M. Sayeh at the launch of IMF Book on India’s financial system. India’s role on the global stage has also shifted dramatically. In 1991, the country was one of the world’s largest aid recipients. Today, India is a net donor. In purchasing power parity terms, it is also the third largest economy in the world, expected to contribute about 15 percent to global growth this year. Sayeh referred to India’s G20 Presidency and said in that role its agenda focuses on global public goods and strengthening international coordination around debt, crypto assets, climate and digitalization.
IMF notes that India’s economic progress over the past decades has been underpinned by the transformation in its financial sector. The 1990s saw an increasing role of private sector banks, the introduction of universal banking, adoption of international best practices in regulation and supervision, and the creation of the National Stock Exchange as well as electronic trading. Thanks to these developments, larger firms were able to increase their access to market-based funding, using both bond and equity markets. For their part, households and SMEs could rely on banks and nonbank financial companies.
But India’s achievements in the financial sector clearly go beyond numbers of banks or market capitalization. The country has impressed the world in fostering financial inclusion through its public digital infrastructure. Just a decade ago, local shops were filled with people buying and selling goods with cash. Today, financial transactions are mostly executed with smartphones.
The public digital infrastructure is also helping to improve the efficiency of public finance management. On the one hand, the unique identifier based on biometric measurements—which underpins the digital payment architecture—allowed the government to save money by eliminating ghost employees from its payroll. On the other hand, the digital payment system boosted revenue collection from the general sales tax, while reducing tax compliance costs for businesses. It has also helped ramp-up the distribution of social benefits to millions who were previously unreachable.
And this proved particularly instrumental during the pandemic: The authorities were able to transfer 37 billion dollars in social benefits to people’s bank accounts in 2020–2021, avoiding costly intermediaries and reducing leakages.
But IMF notes that India’s financial development journey has not always been smooth. It has faced external turbulences—such as the Asian financial crisis, the global financial crisis, and more recently, the devastating impact of the pandemic and the war in Ukraine. But the authorities have drawn lessons from these shocks and applied themselves to identifying and implementing policies to increase financial sector resilience.
The Fund also refers to homegrown challenges and how the government confronted these. One notable example was the default of systemically important nonbank financial companies in 2018. Since that crisis, the Indian authorities have upgraded their regulation and supervision, and introduced a regulatory framework for nonbank financial companies. Important progress has also been made in bank recapitalization, corporate debt restructuring and oversight of financial market institutions, as well as in crisis management.
But it warns of more work ahead for India. This includes continued efforts to strengthen regulations for non-bank financial corporations, promote improved governance, and reduce the public footprint in the banking sector. India’s financial sector is also confronting challenges facing all countries, such as the spill-overs from the tightening of global financial conditions, the need to adapt to technological change, or the impact of climate change.
The deputy managing director cautioned that India was highly vulnerable to the effects of climate change and said it would benefit from broadening and deepening its sustainable finance market to support its climate mitigation efforts.
Another point sought to be highlighted relates to financial innovations and rapid financial sector development which bring many opportunities such as improved access to financial services by vulnerable populations. But these also present challenges for regulation and supervision, which constantly need to be upgraded to support healthy development of the financial sector while avoiding the build-up of risks, the senior IMF official pointed out. (IPA Service)
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