K C Chakrabarty: Challenges for next generation banking
Address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at the Indian
Chamber of Commerce and Industry, Coimbatore, 25 June 2011.
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Mr. Krishnan, President of Indian Chamber of Commerce and Industry, Coimbatore;
Mr. M. Narendra, Chairman and Managing Director of Indian Overseas Bank; Mr. D. Raj
Kumar, Regional General Manager, The Hindu; Mr. K.G. Balakrishnan, Past President of
ICCI, Coimbatore; members of ICCI and captains of industries in Coimbatore;
representatives of banks in Coimbatore; members of the print and electronic media;
distinguished invitees, ladies and gentlemen,
I am very happy to speak at this "Voice of Tomorrow - Fuel to Excel", programme which is a
commendable initiative by ICCI, Coimbatore and the Hindu.
At the outset we must be clear about whose voice we are talking about when we say voice of
tomorrow. To my mind the voice tomorrow belongs to the youth and the millions of business
entrepreneurs of the country. Not that the voice of business is not heard now. But they are by
and large limited to lobbying through associations like ICCI. What I mean is that the collective
voice of millions of private enterprise across the country. It is this voice together with the
voice of the youth which will mould and build the future of this country.
The young demography of this country will make the voice of the youth matter the most,
going forward. And in a market based economy, with further reforms in critical areas to
follow, the private business community will increasingly shape the face of the economy and
also become a prominent voice in setting our vision for the future. It is in this context that
industrial cities like Coimbatore assume importance.
Mr. Narendra mentioned that the Indian economy is likely to register an average growth of
above 8% in the Eleventh Five Year Plan and that the 12th Plan will see a growth of 9 to
10%. It is my view that it is possible for India to aim at a 10% growth for the next 20 years.
Only then growth will be truly sustainable and inclusive. Private enterprise and investment
coupled with the demographic advantage can be the underlying drivers of the country's
immense growth potential, going forward. We cannot forget the fact that India's new growth
trajectory of the last decade coincided with a significant pick up in private investment and a
transition to a younger demography. Both factors make us believe now that a 10 per cent
growth can be achieved and sustained, going forward.
At that rate, India's share in world GDP will rise from the current level of about 2 per cent to
10 per cent by 2030. But this will not happen by itself. Mere policy will not transform into
growth. This will happen only when all of us work hard to overcome the challenges and seize
the opportunities offered by global and domestic developments. Let me highlight some of the
major challenges and opportunities.
Now, Mr. Narendra talked about the demographic dividend. India is the only country in the
world where the working population would increase for the next 20 years. Young
demography offers us an opportunity, but addressing the challenge of creating adequate
productive employment opportunities will determine how best we are able to reap the
demographic dividend. Estimates of United Nations suggest that by 2041, working age
population in India will increase by 312 million, while in China it will decline by 126 million.
Creating gainful employment for this order of new entrants to the labour market is a daunting
challenge but not impossible.
Education and skill development are the challenges here. When I say education, what I
mean is quality education. The demographic change will generate a huge scope for quality
education but the demographic dividend can be reaped only if we can make quality
education affordable. I believe that technology and innovation can make such education
accessible and affordable by bringing down the unit cost of quality education. It is here that
places like Coimbatore, which is both a centre of educational and entrepreneurial excellence,
can play a leading role.
We must accept the fact that the overall skill base of India is rather low compared to
developed economies. This may be difficult to believe, given the global recognition our
IT professionals have received and the well known contribution of this sector to the
knowledge economy. I have often wondered why our talented youth can perform so well in
Silicon Valley but fail to do so in their home country.
With services accounting for 65 percent of the country's GDP, one would tend to presume
that India's growth must be skill intensive. Facts, however, suggest the opposite. Many
developed countries have tertiary enrolment (i.e. vocational training) levels of 60 to
80 per cent in the age group of 15-29, which is as high as 96 per cent for Korea. The
comparable level for India is less than 15 per cent. Expenditure on research and
development (R&D) in the developed countries is in the range of 2 to 3 per cent of GDP on
an average, which is just 0.8 per cent in India. This probably explains the gap between
employment and employability in our country. How to bridge this gap is the challenge for the
voice of tomorrow.
The skill gap will become increasingly costly for the economy. Way back in 1948, while
addressing the conference on All India Education, Maulana Azad had stressed that "...we
must not for a moment forget, it is a birth right of every individual to receive at least the basic
education without which he cannot fully discharge his duties as a citizen". In April 2010, on
the occasion of "The Children's Right to Free and Compulsory Education Act" becoming
effective, the Hon'ble Prime Minister emphasized: "...We are committed to ensuring that all
children, irrespective of gender and social category, have access to education. An education
that enables them to acquire skills, knowledge, values and attitudes necessary to become
responsible and active citizens of India". Enhancing employability of the labour force requires
focus on both skill development and an economic structure that could ensure that the growth
process become more employment intensive.
According to the national skill development policy 2009, the current capacity of the country to
conduct skill development programmes is about 3.1 million. The target is to cover 500 million
cumulatively by 2022. The policy recognizes that 93 per cent of the country's workforce is in
the unorganized sector, but contributes only 60 per cent of GDP. Strengthening the skill base
in this segment will contribute to improving productivity, working conditions and living
standards.
When we talk of living standards what is of immediate relevance is shelter. The right to
shelter is as important as the right to education and employment. Now, since the past
decade or so there has been a tremendous demand for housing as the economy flourished
and income levels increased significantly. The banks entering the housing finance market in
a big way provided a major fillip to this sector. But when we talk of shelter to all we mean
housing units which will be within the reach of the common man. To bring down the unit cost
of housing to that level would require a great deal of technological and financial innovation.
To deal with the challenge of gainfully absorbing the expected large number of new entrants
to the job market, the Government has set a target of raising the share of manufacturing in
GDP from the current level of about 16 per cent to 25 per cent by 2025.
But there are huge challenges here. Power will be the major challenge. The International
Energy Agency estimates suggest that the shares of India and China in the world fossil fuel
demand by 2030 will be 16 per cent and 38 per cent, respectively.
Alternative clean energy and energy security will be critical for India in the years to come,
and this would require innovative ideas from the youth and timely investment by the private
sector, with necessary support and an enabling policy environment from the Government.
Hon'ble President of India had emphasized while addressing the students of IIT, Kanpur in
2010 that "...The next ten years, declared as the Decade of Innovation, can be a fruitful
decade in India. Qualified and talented individuals of our nation have to find innovative
solutions to our myriad challenges, keeping in mind our specific conditions".
The voice of the youth and the private business enterprises would need to ensure food security
along with energy security. A country with 1.2 billion population can ill afford to depend on the
outside world for meeting its needs for energy or basic food. Adverse shocks from these two
sources have, as you all know, often led to high inflation, which in turn becomes a risk to
sustainable high growth. Higher agricultural productivity and adequate investment to increase
the supply of protein rich food items would require a new revolution, driven by new technology
and additional investment. As the average income of the young population increases with high
growth, demand for items like milk, meat, eggs, fruits, vegetables and pulses will increase, and
without necessary supply augmentation, containing inflation will become a difficult challenge.
When I say we must raise our productivity I do not compare ourselves with America or other
countries. I am talking about inter-regional comparisons within our own country. We say one
reason for inflation going up is people are drinking more milk. How can milk prices come down
if do not produce more milk? Why our success in Anand experiment cannot be replicated in
other parts of the country? Only when productivity goes up and cost comes down, can inflation
be curbed. We need to innovate to emulate at least our own Indian benchmarks and best
practices to meet the productivity challenge.
When I stress on the importance of innovative ideas, I must also caution that destructive
innovations that led to the global financial crisis are not in the interest of anyone. The field of
finance and banking often attracts the best from among the youth. Any misuse of the financial
system - caused by the actions of a few smart educated individuals - could impact the life of a
billion plus population. I need not emphasize the importance of ethics and value systems to this
audience. India avoided a financial crisis at home in the midst of a severe global contagion. It is
our collective responsibility to raise this ethical awareness. Trusted newspapers such as The
Hindu can take the lead here.
One cannot look to the government to solve every problem. Similarly banks cannot provide
solutions to all your needs. It is the responsibility of everybody to build the future of tomorrow.
That includes civil society such as the Save Nilgiris Campaign which is doing good work in the
Nilgiris. Government and banks can at best facilitate the process of economic development.
Let me take the example of quality education and housing mentioned earlier. Recent estimates
suggest that for every one percent increase in GDP, demand for education loan increases by
3 per cent, and demand for housing loans increases by 5 per cent. Given the demography, as
income increases, more and more students would aspire to get quality education, as a means
to a better future. On the other hand, the costs of private quality education seem to be
increasing significantly in recent years. After education, once they get gainful employment,
decent housing will be the next aspiration. While banks will have to meet the aspirations of the
youth by ensuring access to credit at competitive price, to get quality education and shelter, the
private sector would have to recognize that artificially created inflation driven by unreasonable
profit motives in these two critical segments would be a constraint to our growth and
development ambitions.
This leads to me to another critical challenge to our future growth - i.e. inclusive growth. High
growth that coexists with rising inequality will become unsustainable at some point. As
inclusive growth is not possible without financial inclusion, the RBI's vision is that everyone in
the country should first have access to financial products and services, which is being achieved
in phased manner. The rationale behind this is that access to finance, along with fair and
transparent products/services, is a source of empowerment and allows people to participate
more effectively in the economic and social process. Our dream of inclusive growth cannot be
realized unless we properly educate and make employable the future generation of youth and
create millions of micro-entrepreneurs across the country.