There is a need to consider tapping into foreign capital to trigger a cycle of investment and growth, Chief Economic Adviser (CEA) Krishnamurthy Subramanian said on July 16.
"Apart from sovereign bond issue, we also need to be tapping into foreign capital to trigger this virtuous cycle. Once this virtuous cycle is triggered, then other parts start moving, then we get investment with enhanced productivity, exports and jobs, which leads to demand and thereby creates investment again. It is this triggering which is actually important," CEA Subramanian said at the book launch of HDFC Bank 2.0 - From Dawn to Digital by journalist Tamal Bandopadhyay.
In her first budget, Finance Minister Nirmala Sitharaman announced that India would issue sovereign bonds in the global market in foreign currencies.
Former Reserve Bank of India’s Governor Raghuram Rajan has said that any plan to issue foreign currency debt has no real benefit and is fraught with risks.
A global bond sale won’t reduce the amount of domestic government bonds the local market has to absorb and the country should worry about short-term “faddish investors buying when India is hot, and dumping us when it is not," Rajan had written in a newspaper column.
The CEA said that though India is growing at 7 percent, in order to grow at 8 percent, India needs to trigger the cycle of investment and therefore foreign capital is something that needs to be encouraged.
Although the goal is a bit of a stretch, achieving $5 trillion economy by 2024-25 is possible, he said.
The Indian economy reached to the level of $1 trillion in 55 years and and added $1 million in last 5 years to $2.75 trillion by March 2019, he said.
Speaking on bank mergers, Subramanian said that mergers are being done based on synergies and the policy on it is to exploit the economies of scale.
"That's the intent behind the merger. Rather than any top down strategy or mandate which says we need to have four banks, this should be based on looking at banks that might combine very well because of synergies," Subramanian said.
In October 2018, the government had proposed the merger of three banks — Bank of Baroda, Vijaya Bank and Dena Bank — to create the country’s third-biggest lender through an alternate mechanism. Both Vijaya and Dena were amalgamated with BoB on April 1, 2019.
In February 2019, the Reserve Bank of India had pulled out Bank of India, Oriental Bank of Commerce and Bank of Maharashtra from its PCA framework, which imposes certain lending restrictions on financially weak banks.
It has been reported that the government is soon likely to invite select lenders for discussion on a second round of mergers of public sector banks.