Today, there is not only tremendous capacity for growth directly in the financial sector, but also that the financial sector itself could contribute to the growth process by allocating resources better and by managing it better. So both directly and indirectly there could be tremendous growth. The kinds of jobs that are available in financial sector are high value-added jobs and these could be very beneficial for the young generations that are coming out, including many from this place. However there are weaknesses in the financial sector and this could hinder the long-term objectives of growth, inclusion and stability, and this is why we need reforms.

Now why reforms are important?
One reason is greater inclusion and by inclusion we must remember that we are not just talking about the poor. The median Indian household is actually an excluded household from many perspectives. It does not get access to several financial services. One statistics that I find specifically interesting is despite the focus on credit, the whole nationalization process was an attempt to send credit to the sections that had been missed out. The most recent survey of financial habits of households suggests that a median household borrows 75 percent from informal sources, and only 12 percent of its borrowing is from formal sources. This is appalling. It suggests that actually a median household does not really have any access to financial services. This is for credit and it is also true for the saving accounts. Despite the RBI’s attempt to get universal savings account, and there has been a lot of talk, action is going on but too little. At this rate, even if we increase two to three million accounts a year, to get accounts to every household will take 25 to 50 years and that is too long for people to wait. So there is a problem, despite the change, despite the growth and that problem needs to be remedied.

The second big problem is that the public sector banking system is falling behind – not today, not in terms of profitability, but from a longer-term perspective, from the perspective of the future. They don’t have the clients that the private sector banks have, they don’t have the staff and the skills that the private sector banks have, they don’t have the automation and the low cost increasingly in reaching the customers that the private banks have, and finally they don’t have the capital to meet the needs simply because the government is not willing to let go. The government has to be a part of the capital raising process if the banks have to have capital. So they are serving as a drag and they are serving as a drag for two reasons—one they will increasingly become less and less efficient unless these constraints on them are remedied, and second because the Reserve Bank fears that these public sectors bank will prove unequal to competition. So it restricts competition in a variety of ways. It restricts the kinds of activities that banks can get into, not only in public sector but also in private sector in order to stabilize the system. This kind of two-way drag is going to be problematic in future and we need to think about how to remedy it.

Third, the infrastructure financing needs are enormous. The financial institutions are relatively small and the markets don’t have depths to finance the needs, which are going to come on board. Five to six hundred billion, and lot of financing needed! We need depth, not just in equity market but in corporate bond markets which are completely missing at this point.

Fourth, the international forces are buffeting the country. We saw the rupee appreciate a considerable amount last year and we saw it depreciate a considerable amount this year. Our macro economy is being buffeted by international forces and we need to ask if we have a macro-economic framework which can actually cope with these forces. Unfortunately in my view, our macro-economic framework has not adapted enough to take into account these new sources of concern. So now we can take these issues a little bit more in detail and talk about the kinds of reforms one might propose.