Making of Aatmanirbhar Bharat - Role of Banking Industry

War, and Pandemic often come as a grim reminder that there are times when one is left to the own means; During Covid-19, for example, dependency on China for life saving apparatus, e.g., testing kits, protective equipment, and drugs, etc. could make a difference of life and death for millions. Mankind is discovering the virtues of being self-reliant or “Aatmanirbhar” again.

Aatma-nirbhar Bharat: Then and Now

India’s aspirations of becoming self-reliant is not new. India had witnessed systematic destruction of her productive capabilities under two centuries of British rule: from being a major contributor to Global GDP (16 percent by as late as 1820 A.D.), India got reduced to become mere supplier of primary goods, especially agriculture produce and minerals. Local manufacturing was destroyed to the advantage of British manufacturers. Post-Independence, it was evident that India had to pursue self-reliance in her early developmental journey. We had some success, especially in becoming food self-sufficient under Green Revolution. However, overall, pursuit of self-reliance didn’t yield the desired benefits as economy remained mired in low growth, low trade volume, lower productivity, and innovations stifled under bureaucratic inefficiency. The current calls of becoming self-reliant therefore needs to be distinguished by the changed context over last seven decades.

The erstwhile ‘self-reliance’ pursuit was motivated by desire for saving scarce foreign exchanges through “import substitution”, emphasizing localized production of goods, top down, wherein the Heavy Machinery works were reserved for public sector (the Commanding Heights of Economy), and most of consumer goods were sought to be produced by private players at relatively smaller scale of operations (popularly referred as the cottage industry or the small scale industries). The import substitution meant protecting domestic enterprises from external competition, by increased tariff and reducing foreign ownership in certain sectors. The lack of competitive pressure amidst a captive domestic market meant little incentive to innovate, and upgrade quality, which undermined productivity of our firms.

Price controls were instituted to protect consumers from profiteering. It led demand outstripped supply in absence of market clearing prices. The shortages would call for rationing of limited produce, the genesis of license-quota system. The growing imbalances resulted in balance of payments crisis in 1990, which forced a course correction in policy by restoring the role of markets, liberalizing trade and financial flows. India was seen swimming against the stream when world was harvesting gains of trade, and liberalization post the Second World War. Development experience of Japan, South Korea, and later China, are examples of India’s policy-making gone wrong.

Our growth experience since 1991 is validation of pro-market reforms bearing fruit. India is fifth largest economy today with aims of becoming USD 5 trillion in gross domestic product (GDP) by 2025. India has a massive forex war chest of USD 500 billion plus, sufficiently covering a year of imports. We are among the most open countries for trade, with few checks on capital flows. India trusts private sector to deliver goods efficiently as evident from constant push towards privatization. India is more confident and outward looking in its approach. India wish to gain her rightful place in global order, becoming the export powerhouse while meeting her domestic needs. The Covid-19 pandemic has only strengthened the resolve to become self-reliant, sooner than later. What is more interesting is India is perfectly attuned to global winds of change as she is pursuing self-reliance again.

Self-sufficiency quest is well aligned to macro winds of change

From a global macro perspective, three trends have been at play: Digitization, Rescinding of globalization, and Rise of private enterprise. Technology and regulations are both driving changes towards de-centralized living.

Digital, in particular, has empowered everyone, more so at the bottom of pyramid to help them access basic life necessities without having to undergo institutional hassles. India, for example, has a billion plus citizens, who are having cellphone and digital identity in AADHAR, which empowered them to access Finance through Jan-dhan accounts and social security benefits. We are witnessing digital deepening in all walks of life. Indians used about 12 GB data per month on average in 2019, the highest consumption globally, and it is expected to double to over the next five years. We are consuming data for socializing, entertainment, e-learning, shopping, mobile banking, seeking legal, medical advice, as also expert tips on organic farming, connecting with markets for better price discovery, etc.

Advances in information and communication technology, powered through artificial intelligence, machine learning and robotic process automation has meant that those having control on data could do wonders, both to the advantage as well as detriment of people. Data could be a tool to empower as also interfere in making a political choice, say disrupting voting behavior, and thereby influencing policy-making like never before. With so much at stake, Governments across the globe are calling for localized storage of data, within their territorial sovereignty. India has also been firm in her stance to mandate data storage within country.

Likewise, there has been growing discontent on benefits of globalization, especially the one where benefits are seen to be cornered by a privileged few while masses continue to toil hard. Global inequalities are on rise, which fuels rise of populist leaders and policies that favor home country over others. Brexit is the most popular example of this. We are witness to rise of protectionist tendencies, with tariff war making headlines for much of year. India has not been immune to it as it seeks to redress growing trade deficit with China. ‘Aatmanirbhar Bharat’ has a long time in its making.

Third is the growth of the private sector, its ability to participate in activities of national importance, and the potential of public–private partnerships. Private sector, including small enterprises in the household sector, account for about two-thirds of investment in India today, as against one-third share some three decades ago. Governments of all hue and color have been supportive of enhanced role for private sector, and Covid-19 has not altered it a bit. We have just witnessed Government allowing private sector to independently build satellites and rockets and launch them from Indian soil. India is home to second largest start-up ecosystem in world with 14000+ firms registered under Start-up India scheme.

Continuing structural reforms imperative to raise growth potential

While addressing the Covid exigencies of the day, India must not lose sight of future, investing in building capacities and capabilities to raise growth potential on a sustainable basis. India needs to continue the reform momentum, unshackling markets and nurturing enterprise. The Covid crisis has underscored importance of Government capacity in delivering public goods, say health. We do need better universal healthcare as safety of one is ensconced in safety of all. Besides, healthcare and education are seen building human capital of economy, which over time becomes biggest driver of productivity growth.

India has made substantial gains in easing bureaucratic hurdles; it reflects in India reaching to 63rd position in the World Bank’s Ease of Doing Business ranking. There are still areas where lot of work is needed, say contract enforcing (163rd Rank) and registering property (154th Rank). Besides, we must enable enterprises to grow and acquire scale over time. It is found that larger enterprises have more capacity to invest and thus grow on productivity frontier. The Government, in Aatmanirbhar Bharat package, has accordingly unveiled a new definition for micro, small & medium enterprises (MSMEs), emphasizing turn-over as criteria and raising the investment limits in plants & machinery. It will help address the perverse incentive of enterprises opting to stay small in order to stay recipient of policy benefits.

Likewise, Government has empowered the farmers to reach global markets for right price of their produce by amending essential commodities act. There are reforms in land sector for industrial usage, defence production, commercial mining in coal sector, migrants’ access to public distribution system through One Nation, One Ration Card, etc. This builds on to earlier set of reforms like Goods & Services Tax (GST), Insolvency & Bankruptcy Code (IBC), Inflation Targeting Monetary Policy through Monetary Policy Committee, etc.

There was felt need to unshackle creative enterprise of Indians, and direct it towards productive pursuits. Covid-19 has proved again that crisis becomes an opportunity for those who stand prepared. Today, India is shining example of converting crisis to opportunity. India just built a billion dollars plus sized Personal Protective Equipment (PPE) industry in a matter of couple of months. It shows if Government and industry come together, wonders can happen. India has already a success story in getting mobile manufacturing at home. We don’t have yet a major home grown mobile manufacturer but we are second largest mobile manufacturers in world.

The crisis may have arrived too soon to let the underlying changes power India to global high table of manufacturing. It is important that we derive right lessons as we rediscover self-reliance. We may need protection to begin with, but to dominate the global markets, we have to become competitive. We must invest in innovations and technology up-gradation to remain competitive. As honorable Prime Minister says, ‘Made in India’ should be synonymous with Zero Quality Defects and Zero Environmental Effects. We can certainly do so.

Plugging-in the Global Value-Chain

The Pandemic born disruption is also an opportunity for enterprises, especially the MSMEs, to get in global value chains. Multi-National Companies (MNCs), which earlier had distributed production base across continents, discovered to their detriment that having too much exposure in any particular geography, say China, for example, could severely hold up their production if Wuhan-lockdown like disaster happen.

Besides, with growing acrimony in USA and China, there is geo-political push for MNCs to diversify their suppliers. India, with a 1.3 billion population and USD 2.9 trillion GDP, is a natural choice for firms looking to diversify as it could meet their input requirements, say labor and raw material at a scale as well as absorb their produce. With 60 million plus strong ecosystem of MSMEs, India has sufficient entrepreneurship in country to plug in the place being vacated by China. The current disruption is the opportunity to strategize and reinvent. Our MSMEs need to look proactively for any horizontal or vertical diversification opportunity. We should also look for new geographies to serve, products to launch or strategic tie-ups possible.

Banking: the enabler of dreams and enterprise

Indian banking has been a trusted ally for people and enterprises in their developmental journey since Independence. Banking has gone far and deep to mobilize resources and making available funds for productive pursuits of economy. It has been empowering masses through developing savings habit as also helping them fund their aspirations of better living, be it owning a home, car or education. Similarly, banks are first port of call for millions of entrepreneurs to finance their ventures, creating value through enterprise. Banks have partnered Governments in funding infrastructure, a sector having distinct risk-return profile which makes it unattractive for private sector to make a beginning on its own. It is essential for growth in economy, however.

Covid-19 has put a spanner in growth engines of economy. When Covid reached India, the Government responded with lockdowns. Businesses had obvious difficulty in sustaining their debt repayment. There were no customers to serve so there was no receivable to gain. It was a hard time to keep workspaces shut and bade time. However, the debt-meter keeps ticking, and if left to its rhythm, it could cause permanent shutting down of businesses. Banks do understand concerns of their customers and therefore they have come with schemes to grease the wheels of enterprise with emergency working capital, while also giving the choice of debt moratorium. A third of bank customers have opted for debt moratorium, while others, having wherewithal to serve, chose to pay their installments.

Government and regulators have come with enabling provisions, both in terms of providing liquidity, easing cash-flows and market access. Governments are undertaking public works to pay wages to workers which will lift demand for produce of companies. Banks and financial institutions are empowered to serve the vulnerable through credit guarantee schemes, rolling out subsidized loans for micro enterprises, and farmers. Likewise, restructuring of debt is permitted for stressed businesses.

While we hope that no business goes under, if Covid-19 disruption continues for long, say a year, many businesses may not be able to tide through. Some will survive and few will emerge stronger. These developments will reflect on banks’ balance-sheet in terms of asset quality and will determine the profitability. It is good that banks are adequately capitalized, and some have raised capital from markets to buffer up their war chest. At present, banks are willing to help, and not extra burdened with future consequences. Together, we can swim in uncharted waters.

Banks could help ease MNCs shifting manufacturing base to India by coming with innovative financing solutions for companies contemplating so. Banks can also help digitize trade financing, thus lowering the intermediation costs for exporters, and enabling the Indian produce become globally competitive. Pooling new data flows to reduce underwriting and documentation costs, banks can enable lower cost of financing for enterprises, especially MSMEs, which will be new suppliers, thus making more firms commercially viable. Interest rates are already trending southwards. If banks can bring down credit costs by addressing information asymmetry through technological solutions, it will bring the cost of capital down in Indian economy, on a sustained basis.