He answered a variety of questions posed by the audience at the National Seminar on financial inclusion, including on the usefulness of rupee devaluation. Following are his answers:
Q: Will the devaluation of rupee be considered to encourage the exports?
A: The issue of the value of the rupee is a complicated one. Some people think that for increasing exports, the answer is simply devalue the rupee. First you have to ask how you devalue the rupee and certainly there are ways of doing it but a lot of them require significant actions on the financial system. Some of our neighboring countries have been using financial repression for a long time in order to sustain long-term undervaluation of their currency.
The currency is a complicated animal. Cheaper price for my export may allow me to export more, but it also means my imports are costlier and often the exporter imports a lot of what they export. So, it is not obvious that just devaluing helps everybody. There are some people who say that keep the rupee stable and I can export more once I know what the value of the rupee is, but once you start devaluing and there is no end to it then I have no idea what price is to charge. So some of our emerging market counterparts such as Brazil which have had significant devaluation have not necessarily seen a tremendous expansion of exports because it also created some anxiety and volatility in the movement of currency.
So we have to be a little careful about saying devaluation is the answer. It has a lot of side effects, including inflation will pickup in this country. You have to pay significantly more for your imports, it will have inflationary impacts which may offset any benefits you get from devaluation. Broadly, my belief is todays value of the rupee is pretty reasonable and I don’t think we should emphasise moving one way or the other as the answer to any problem.
Q: How to reach the per capita GDP level that of countries like China?
A: Let me emphasise that China’s GDP per capita is four times that of India today. At one point in the 1960s, we were at the same level. So yes, we have a long way to go before we catch up with China’s GDP per capita. That means many, many years of strong sustained growth. I want to emphasise the word sustained because a few years of strong growth will not help if after those few years we have very slow growth.
We need sustained growth which is why we need systems in place and macro economic stability in addition to growth. Whether just GDP numbers are enough to say that we are developed? Absolutely not. If that is the intent, some aspects of the environment which is not measured by the GDP has to be taken into consideration. It is good if we reach that level of GDP without any kind of environmental damage that has accrued in China and that is happening in some parts of India.
We have to have an environmentally sustainable development path, plus also we would benefit from having an equitable development. The equity ensures that every citizen can rise to their level of potential and that the benefits of growth are not captured by very few. We need to make sure that the capacity to grow is there for every one which is why financial inclusion is so important.
Q: What should be done to contain farmers’ suicides?
A: There are a variety of factors that lead to farmers suicides. It is not necessarily the states that have the most indebtedness that see maximum suicides. There are certain states where this is more prevalent. This is a complex phenomenon we need to understand. It also mean that we need to emphasise the need to make access to credit easier, but we have to also ensure that the credit any body possesses is manageable. Over-lending is as much a problem as not having access to credit. Over-lending obviously has reference to your capacity to generate income. Clearly, part of the answer is to expand productivity and the ability to generate income.
I also talked a little bit about the need to have some forgiveness in the credit system. Again, this has to be managed carefully. That it has to be done in such a way that it doesn’t shot off credit but in cases where levels of debt are unmanageable, there is some scope for some relief. We have to work on all fronts. It is not just an issue of livelihoods, it’s not just an issue of economics, it is also an issue of culture. It is a tragic phenomenon.
Q: Can banks join hands with moneylenders in order to further the goals of financial inclusion?
A: Let me put it this way, to the extent that an arrangement of that kind can provide credit at reasonable prices without extra legal recovery mechanisms that some times money lenders are accused of using, it is certainly some thing worth exploring. But there are issues of reputational risks that banks will have to think about. There are issues of being able to control the entity that is working with you. So it is not something that you can very easily say but clearly I think to the extent that some of the concerns can be managed, one has to explore all the avenues to expand credit in the country.
Q: Your advise to the students.
A: As a country, our credit-to-GDP ratio is about 50%, which is significantly below where it could be even for an emerging market. In a number of emerging markets, credit-to-GDP ratio is 100 and 120%. In China, it is closer to 150. We need to find ways to expand credit without over-indebtedness, over-borrowing as well as the pain associated with it. We need manageable credit expansion, sustainable credit expansion. We should be working on different ways to expand it. It is not just about credit, it is about savings, it is about insurance, it is about health insurance. I think if you broaden the scope, it is some thing that students could spend a long time working effectively on it.
Q: How do you see the role of micro finance institutions in achieving the goals of financial inclusion?
A: Micro finance institutions perform a very important and valuable role so long as they are broadly constrained by the intent of expanding financial services and charging appropriate prices for them. Our Micro Finance Regulations try and ensure that. Clearly, they provide valuable services in a number of parts of the country. One of the bigger constraints has been access to cheap finance which then can transmit forward. I think with the advent of small finance banks, there is a possibility that successful MFIs may migrate into the banking form, thereby getting access to cheaper finance by which they continue their activities on a broader scale. The idea is not that MFIs should get the small bank licence and abandon their previous activity. It is that they have the ability to expand them as well as pass on the benefit of cheap financing to their customers and that is what we would like to see.
Q: Your view on cooperative banking system in India?
A: Cooperative banking system is the corner stone of the financial system in this country and I want to emphasise that it is extremely important. It reaches parts of the country that other financial institutions don’t, and it has to be nurtured. What we need to do in some cases is to understand why cooperative banks departed from the spirit of cooperative systems. We need to find ways to bring them back to the very important and worthwhile goals of cooperative movement. This is work in progress.