[Answered] “The public and private bank’s inability to extend more credit for major infrastructure projects to debt ridden states, will jeopardise India’s social and economic goals.” Comment.

Demand of the question
Introduction. Contextual Introduction.
Body. How inability to lend more will jeopardise India’s socio-economic goals?
Conclusion. Way forward.

Indian banks are experiencing stress due to non-performing assets from long time. This led to decline in lending to industry and states especially for infrastructural sector. Banks are decreasing their overall lending with focus on correcting their balance sheets. These trends have implications for growth in the immediate future.

How inability to lend more will jeopardise India’s socio-economic goals?

  1. Decreased growth: Indian growth in last decade was based on credit financed investment and consumption spending.
    • So a decrease in credit availability will lead to slower economic growth.
    • This may jeopardise India’s $5 trillion target by 2024.
  2. Infrastructure creation: India’s growth strategy need investments in infrastructure.
    • Public sector banks had been the vehicles for financing the infrastructure projects in the past.
    • Inability to lend will slow India’s infrastructure projects, thereby creating further bottlenecks.
  3. Agricultural growth: Agricultural sector is already facing crisis due to dependence on monsoon, lack of irrigation and climate change.
    • Due to non-availability of capital, states may find it difficult to wave off loans to farmers and support agriculture through subsidies.
    • Also, agriculture is driven by lending though banks and money lenders. With limited capabilities banks will further reduce lending to agriculture.
    • This will further stress agricultural growth.
    • This will jeopardise interests of farmers and food security in India.
    • Further it will reduce agricultural exports.
  4. Decline in Exports: Due to inability to lending it will impact exports.
    • This will stress India’s balance of trade.
    • It will jeopardise India’s objective of becoming an export hub and world’s next manufacturing hub.
  5. Fiscal consolidation: Due to rise in cost of loans and decrease in loan availability, state may find it hard to achieve their fiscal consolidation roadmap.
  6. Capital formation:
    • Unavailability of loans will hinder capital formation by states like roads, transport etc.
    • This will impact linkages and will slow down India’s growth.
  7. Impact on energy sector: Cost of energy and electricity will increase due to inability of states to provide subsidy that they are providing at present. This will jeopardise energy security in India.
  8. Will hurt MSME: Limited availability of loans will hurt MSMEs and will prevent their growth. This will impact India’s exports and Make in India initiative.
  9. Public confidence:
    • Credibility of banking system is affected greatly due to higher level NPAs.
    • It reduces the confidence of general public in the soundness of the banking system.
  10. Inflation:
    • As the loan cost will increase, it will lead to higher prices.
    • This will jeopardise government’s goal of containing inflation at normal level.
  11. Decreased competition: As many industries will not get credit it will reduce their productivity and profitability, thereby decreasing competition in the market among companies leading to higher prices and less choice of products.
  12. Unemployment: Due to lesser credit companies’ profitability will be reduced due to decreased production. This may lead to companies’ inability to pay their employees and will lead to loss of jobs.

Thus bank’s inability to lend to state and private sector may jeopardise India’s economic and social targets. What is need of the hour is to correct balance sheet of banks through selling of bad assets. Restructuring of NPA should be done efficiently.

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