rakesh mohan : economic growth, financial deepening and financial inclusion address by dr rakesh mohan, deputy governor of the reserve bank of india, at the annual bankers'conference 2006, hyderabad, 3 november 2006. this draws heavily on my earlier lecture on a similar subject at the ficci - iba conference in mumbai on 26 september 2006. * i. * * introduction i would like to thank the indian banks association and the andhra bank for inviting me to this conference, which has become an annual feature of the calendar for bankers and financial sector professionals. in view of the theme of the conference, viz.,'inclusive growth – a new challenge ', i thought it would be appropriate to place financial inclusion within the broad context of economic growth. there is yet another motivation for choosing the theme. what is the big change that has taken place in india since 2004? the indian growth story has been steadily coming of age and the performance of the indian economy has attracted worldwide attention. the indian growth story is now mentioned in the same breath as that of china. the economy has been averaging a growth rate of more than 8. 0 per cent during the last three years. the recently released numbers from cso have placed the first quarter growth ( april to june, 2006 ) at 8. 9 per cent, more than the overall growth rate of 8. 0 per cent reiterated recently by the reserve bank in its mid - term review. on an earlier occasion in this forum, in its earlier avatar as becon in december 2002, i had noted the slow growth of credit and taken to task that audience of bankers as ‘ lazy bankers ’ ( mohan, 2002 ). fortunately, you seem to have taken this observation seriously and non - food credit growth from 2002 - 03 to 2005 - 06 averaged 28. 8 per cent. this growth shows little sign of abating in the current year when it has recorded a growth of over 30. 0 percent. the growth in broad money since 2002 - 03 has averaged 16. 2 per cent, which during the present year has been of the order of 19. 0 per cent. these trends signal further that india is on a high economic growth path accompanied by financial deepening. a new concern has emerged in the process : that of financial inclusion. moreover, the government of india has also expressed its explicit concern on the issue of overall inclusion in the development process through its various initiatives such as the rural employment guarantee scheme, the bharat nirman programme, the sarva shi

cent : its share in overall bank credit consequently increased from 6. 4 per cent in 1990 - 91 to 25. 5 per cent in 20052006. earlier, most of bank credit had gone to the industrial corporate sector. hence this shift to retail credit can also be seen as a move toward financial deepening, and one that itself fuels industrial and overall economic growth through expansion of greater demand for consumer goods. the high industrial growth is also corroborated by the record of very healthy performance of the corporate sector, which has recorded unusually high profit growth over the past three years : over 40 per cent growth in profit after tax for 11 successive quarters from q3 2002 - 03 to q1 2005 - 06. although this growth has slowed somewhat in the last four quarters, it continues to be high, between 25 and 35 per cent. corporate sector savings have grown from 4. 4 per cent of gdp in 1999 - 2002 to 5. 3 per cent in 2004 - 05. hence, the probability of continued high corporate growth in terms of output is made more likely by the availability of high retained earnings, burgeoning valuations, and continued productivity growth. all these developments point to overall financial deepening but, once again, one has to ask the question whether such performance extends to small and medium enterprises also and, whether there has also been extension of financial intermediation for such enterprises, raising issues of financial inclusion. the high industrial and credit growth of recent years has also been supported by high trade growth in both merchandise goods and services. merchandise exports have grown from 5. 8 per cent of gdp in 1990 - 91 to about 13. 1 per cent in 2005 - 06 ; and gross invisible receipts have grown from 2. 4 per cent to 11. 5 per cent of gdp. if we take gross trade, the sum of both current account receipts and payments, as a proportion of gdp as an index of the openness of the economy, this has increased from 19. 2 per cent in 1990 - 91 to 49. 5 per cent in 2005 - 06. since all such receipts and payments pass through the banking system, this increasing openness of the economy has also added to financial deepening, while aiding the acceleration in economic growth ( annex table 2 ). the high credit growth witnessed in recent years has, however, not been matched by adequate deposit growth. the growth in deposits since 2001 - 02 has been far lower than that required to support overall credit expansion ( graph 1 ). banks