Many in the alternative media, including this author, have seen the outrage engendered by the Indian people over Prime Minister Modi's intrusive measures of capital controls where he has virtually declared war on both cash and gold. And without a doubt, the attempts by Modi to wean the people off their long-standing traditions of a purely cash economy were done with little planning or thought of the consequences they would trigger.
But when you look below the surface you will find that this policy, albeit through a slower and more methodical way, may actually be necessary if not vital to the future of India as it attempts to grow its economy into an international power.
Since 98% of India's commerce is currently done using only cash, it is virtually impossible to determine the true amount of capital that would be available for the country to expand in both growth and investment since the majority of the nation's wealth resides outside their financial system. And this has been one of the reasons why India has acted primarily as the world's labor pool rather than as a true economic power.
Yet despite their large GDP which ranks them number seven in the world, they still remain behind economies such as China, the EU, the U.S., Hong Kong, and even Russia in growth potential.
Make in India
Earlier this year Prime Minister Modi created a program to try to entice business creation and expansion into India, using their relatively well educated and vast labor pool as the sweetner. And this move was to try to end a long-standing trend where most of the best and brightest inevitably left India for better opportunities in Europe, Asia, and the U.S..
However, Modi's Make in India program has accomplished only minimal results at best, and in part this has been due to their antiquated financial system, and the fact that most workers expect to be paid in cash rather than through a formal banking mechanism.
The Indian economy is at a critical inflection point in its modern history. India’s GDP growth has accelerated to become the fastest of all major economies in the world, with income levels today at China’s c.10 years ago, it is expected that India is now the next big story. Given its favorable demographics and other resources, India has the inherent drivers to sustain 7-8% growth over the medium to long term and the potential to achieve 10%.
An India that can sustainably harness its core assets and create new ones has the potential to emerge as one of the key drivers of growth and stability in a world faced with increasing global economic and geopolitical uncertainty. In order to attain this position, however, India will need to do what China has historically excelled at, creating significant population-wide savings and channeling these into (reasonably) efficient assets to deliver competitive returns. Doing this requires a robust financial machine ready to finance the nation’s growth.
Despite the significant growth and evolution of its financial services industry, India’s financial sector continues to be hamstrung by major structural inefficiencies, including an old fashioned state-dominated banking system and, despite increasingly aggressive changes, a lack of financial inclusion for large parts of the population. It is a sector in need of a new vision as the basis of a restructuring so it can play its part in India’s new growth story.
Recent years have seen a concerted effort by both the Reserve Bank of India (RBI) and the Modi-led government to rapidly grow financial inclusion and bring more and more of India’s poor into the formal banking system. The country’s technology sector has also made a significant contribution by developing delivery systems that reduce transaction costs and spread access by leveraging growing smartphone penetration.
However, as various factors including the large pile-up of stressed assets in the banking system, the sharp slowdown in industrial credit growth and other measures of inefficiency of the financial system indicate, India still faces significant challenges in creating an effective financial system if it is to stride more aggressively towards its potential.
While addressing these challenges will undoubtedly be a painful process and require the expenditure of political capital, the prize is significant: potential incremental growth of 2-3% p.a. would set India’s growth on the path to achieve the double digit levels necessary to replicate China’s economic miracle. - Great Pacific Capital
It is a difficult act to change the confidence of a people in an institution when their natural reaction is to go on the defensive, especially when that policy is instigated from a government that has a history of corruption. Yet if India is ever going to move ahead and reach their full potential in the global economic system, then both the people and the government will have to find some way to compromise, otherwise India will remain simply a labor pool for the world's other economic powers, and continue to be considered only a second world economy which helps grow the overall wealth of everyone else.