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India plans cautious approach to banking reform

Indian Finance Minister Palaniappan Chidambaram attends a session at the annual meeting of the World Economic Forum (WEF) in Davos January 22, 2014.


India is aiming to issue a new generation of small, private banking licences before spring elections, but will continue to keep the sector largely in Indian hands, its finance minister says.

In an interview at the World Economic Forum, Palaniappan Chidambaram said he would like to see a round of licences issued to increase momentum for financial sector reform.

India's banking sector is often seen abroad as a reason for slower economic growth than that generated by its Asian peers. Mr. Chidambaram defended the cautious approach to banking reform, promoting financial stability over all-out growth. "That's one reason not one bank collapsed during the financial crisis," he said on the sidelines of the global conference.

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Canada's big banks have largely steered away from India, out of frustration over restrictions on foreign banks.

Mr. Chidambaram said more licences, including looser restrictions on foreign investment in the sector, could come after the election. His Congress Party faces a tough fight with the Hindu nationalist Bharatiya Janata Party, which is generally seen as more pro-business.

The finance minister said despite growing international complaints about the investment climate in India, he does not detect a slowdown in interest. He cited pharmaceuticals and telecom as two sectors generating significant overseas interest.

"We are witnessing a slowdown in our growth rate but tell me one county in the world that is not witnessing a slowdown," he said, defending his economic record.

Facing serious fiscal deficits and a steep drop in the rupee last year, his government has pledged to cut fuel subsidies. However, it recently announced a major increase in food subsidies, which may be a vote winner in rural areas but will increase the central deficit.

"How can we apply textbook economics and say, 'Let people die of hunger, that you produce food but it would not be available to its people'?" he exclaimed.

About 45 per cent of Indians receive some form of subsidized food, he said. The expanded program will raise that to about 67 per cent of the population, and cost an additional $4-billion a year.

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