Charles Dallara, the managing director of Institute of International Finance Inc, Washington and the former executive director of International Monetary Fund was recently in India to interact with the new Indian government, RBI and bank officials. Dallara spoke to DEV CHATTERJEE on Indian banking and economic scenario. Prior to joining the institute, Dallara served in various senior positions in the US government, he was the Assistant Secretary of the US Treasury for international affairs. Dallara was also the representative of the United States' to the IMF from 1984 to 1989. What do you think about the banking sector reforms in India? What needs to be done to make Indian banks more competitive in the years to come?
I think there should more liberalisation in the Indian banking sector. The banks in India can offer more products and all kind of services, if they get more freedom to operate. In the years to come, the government should allow more mergers and amalgamations sothat financial conglomerates could emerge in the banking sector. At the same time, government should not hesitate to close down unviable and weak banks which are a burden to the nation. The government should disinvest in banks and open up the insurance sector to facilitate investments.
The Reserve Bank should be strengthened further in order to monitor the banks in a more effective way. In every country, banking industry is consolidating, the private ownership of banks should be encouraged to maintain pressure to achieve productivity and profitability.
What kind of risks are being associated by your institute with India?
Due to the status of the entire South East Asian region, we think foreign direct inflows to the entire Asian regions will come down to $ 170 billion in 1998 as compared to $ 200 billion FDI received by the region.
The main risks in India is the political complacency, slowdown in the reforms process, besides the external risks like turbulence in the South East Asian region,which can still go worse.
We have to view India in this backdrop where FDI flow to the entire Asian regions is slowing down. We think there will more discrimination in allotting funds for the entire Asian regions, including India. The FDI inflow to India would decline from $ 2.8 billion to $ 2.6 billion in the calender 1998 as compared to 1997. Of this, foreign portfolio investment would decline to $ 1.6 billion in the current year as compared to $ 2.5 billion in 1997.
As East Asia has cast a cloud over the entire regions India should drastically change its present business environment. Investments in the core sector especially in the ports, electricity, transmission and distribution of power is a necessity. A protected and over-regulated economy, built around vested interests, is extremely vulnerable when there is a global recession.
Fiscal deficit has been identified as a major problem in the Indian economy by your institute. What do you think the Indian government could do to tacklethis?
Fiscal deficit of India is a very serious problem. I think India should take every possible step to control its widening fiscal deficit. In Thailand, Indonesia and other South east Asian countries, the macro-economic imbalances are due to external factors. In India, macro-economic imbalances are triggered more by the domestic factors rather than the external factors. The government must eliminate all those subsidies which are made on political grounds rather than human needs. The subsidies to the agriculture sector is doing more harm to the nation than doing any good. The government can evolve a better safety net and target the poor instead of giving subsidies to wrong target group.
At the same time, the government should strive to reduce its massive size of bureaucracy and reduce its role in decision making. The wage hike among its employees should be based only on productivity instead of any other criteria. Disinvestment in the public sector units is another important step to cut deficit. Ithink the present tax structure could be improved to contain the fiscal deficit.
India should also review why its exports are not performing well. It could be due to the absence of good ports or lack of good transport network.
The new government at the Centre is more keen on promoting Indian enterprise instead of welcoming FDI. Do you think this is the right approach?
The new government should welcome foreign investments in all sectors instead of any "swadeshi" bias. One cannot protect an inefficient and weak industry in the name of nationalism in an era of globalisation. Though the first statements by the new finance minister suggests that the new government means business, and would welcome FDI. I think a lot has to be done, especially in the infrastructure sector where encouragement to the foreign investment is necessary.
The government is sending mix messages. It should welcome foreign investment across the board. In the United States, Toyota's operations in is known more as anAmerican enterprise with American labour rather than a Japanese venture. More FDI will create more jobs and will help reduce poverty in this country. The government should invite both Indian and foreign capital to promote infrastructure in the country.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
