With the availability of digital infrastructure and data through systems like account aggregator (AA), India will see an elongated financial cycle and by next year increased financial services penetration, said Chief Economic Advisor (CEA) V Anantha Nageswaran, expressing confidence in the country’s digital public infrastructure and expected growth in the coming year despite the macroeconomic uncertainties.
The caveat amidst this flourishing growth will be the need to have regulatory guardrails in place to prevent misuse of data, mis-selling of financial products and predatory practices, he said.
An account aggregator is an RBI-regulated entity that helps individuals in accessing and sharing information digitally from one financial institution to another.
“Because of this data facilitation through this AA framework, not only financial access will improve but access to multiple financial services that are not necessarily related to credit are also going to improve…Access to finance is the foundation to personal and commercial progress, you can imagine the statistics we will see in the next year,” he said at Samvaad 2023 in Mumbai, organised by Sahamati, an industry body for AA ecosystem.
According to Nageswaran, in the same conference next year, he will be talking about how the financial penetration expanded not just by AA but by many other digital initiatives that the Finance Minister and the Prime Minister are taking up.
He added, “AA is not only about financial access but ensuring India fulfils its potential of financial growth. Whenever we celebrate a good day, there should be someone keeping an eye on the guardrails we put in place.”
“AA is a door opener for financial inclusion and for financial returns for the participants, but misuse of data, mis-selling, predatory practices need to be guarded against. And self-policing is the best policing,” Nageswaran said.
Elongating India’s financial cycle
Nageswaran reflected on the previous decades of India's financial cycles comparing it with the macro growth and financial cycles globally.
He spoke about the growth India’s GDP saw in the first decade of 2000s. “One of the big drivers of 8-9 percent GDP growth for India in the first decade was on the back of export growth, did not really flourish in the second decade,” he said.
“On top of that, we have the banking crisis. India’s bank credit to GDP ratio was barely below 30 percent in the 1980s and 1990s. It spurted to 55-56 percent GDP in the first decade of the new millennium,” he said.
But this bank credit to GDP ratio growth too fell in the second decade of 2000s due to the banking crisis including the fall of IL&FS and several housing finance companies, leading to a second decade marked by a growth slowdown.
The entire financial cycle retrenched, explaining India’s second decade of a growth slowdown, he added. But cut to the next financial decade, the pandemic hit for almost two years.
As that ended, there was a spurt in commodity prices in 2022 because of the war in Ukraine. In the course of 2022-2023, the central banks around the world increased interest rates – in such a short period by 400-500 bps depending on the country you look at, Nageswaran highlighted.
But, now with the AA system maturing, availability of data and several other fintech initiatives in place, he is confident that India will be able to elongate its financial cycle.
“With all of these innovations I am hoping that the financial cycle will be doubling or trebling over the previous financial cycles,” he said.
“If India has to achieve sustained growth rates, more than 6 percent GDP per annum, we need a financial cycle that doesn’t end in half a decade. It has been India’s bane in the past. Whenever we have gotten credit cycle growing, within a few years there is overheating, excess lending, excess borrowing, NPAs, write-offs etc.,” he added.
"We need to have at least a decade long consistent above 6 percent GDP growth to see real transformation in the bottom of the financial pyramid."