Interesting Take on the Indian Economy

The India Infrastructure Investors Forum started today. I did feel a bit out of place at first, the only consultant at an invitation-only conference for investors, hedge funds, and the like, but met quite a few interesting folks who, as one would expect, were very knowledgeable the Indian infrastructure sector. I'll only mention some of the parts of the conference I thought were most interesting, the first being an overview of some key trends in the Indian economy by Prof. Raghuram Rajan of University of Chicago GSB (and previously the IMF). The most interesting points I took away from his talk were around concerns and reforms India is facing:

1. Weak non-bank system. India is still primarily bank driven, resulting in a lack of investment opportunities and loan sources for corporations. The reform necessary is creation of a corporate bond market that would allow corporations to borrow from non-bank entities and lead to the creation of interest rate and exchange rate futures markets to allow risk hedging. India also needs to expand the range of asset classes to include private equity, pension funds, etc. to attract foreign investment. I found this very surprising, as I'd never imagined that an economy so large as India's would be lacking in something as fundamental as a corporate bond market.

2. Public sector banks not competitive. Regulators often assume management of state-run banks such as State Bank of India have financial knowledge and control. With the chiefs of SBI making less than $1000 per month and a lack of technology such as ATMs, etc. their advantage will erode compared to private sector banks. The reform necessary is to distance the public sector from the government and ease some constraints to allow these banks to open branches anywhere, etc.

3. Credit infrastructure needs to be strengthened, though there has been no momentum to do so. Since over 70% of the population is outside the formal financial sector, bank-based credit reporting is insufficient. India needs to create a national ID and credit history for individiauls, multiple bureaus to track credit, a collateral registry, and inclusion of non-bank credit items such as utility bills and land titles as part of a person's credit identity. Hmm... maybe IBM's new hub system could be helpful here.

4. Disaster recovery. Prompt corrective action and regulator coordination are needed. This includes recovery from disasters such as a credit crunch currently affecting the US. On a more micro-level, poor people tend to borrow for emergency needs and need money immediately, a task the formal banking system isn't currently flexible enough to handle.

5. Inclusion. Important to stability in all emerging markets is the need to include all people in the financial system and reduce disparity. India is currently not doing well in this regard. Over 75% of loans are less than $1000 and come from unofficial sources such as money lenders and family, implying that the formal system isn't reaching the poor. It was suggested that since the interest rate ceiling on loans doesn't apply to these unofficial sources anyway, it should be removed to motivate the formal system to lend to lower income people.

Seeing India through the eyes of a prominent economist was, well, eye-opening for me, particularly the first point about India's capital markets. I knew this conference was going to be very interesting.