In the last 20 years, the Indian economy has grown from a gross domestic product (GDP) of $476 billion in 2000 to $2,900 billion today, a growth of 10 percent compounded annual growth rate (CAGR) in nominal terms and about 7.5 percent in real terms.

Total bank deposits have grown from Rs 8.5 lakh crore in April 2000 to Rs 130 lakh crore today, a compounded annual growth of 15.4 percent over 19 years. Private banks had a 10 percent share of bank deposits in 2000, today their share is 28 percent. In fact, last year private banks disbursed Rs 7.3 lakh crore in loans, nearly three times the loans given by public sector banks.

In this special show, House of Policy, we look at various aspects of India over the 20 years that CNBC-TV18 has been in existence, with the chief economic adviser Krishnamurthy Subramanian.

Subramanian said: “It has shown that growth is quite important for improvements in the lives of people. In these two decades, in this high growth rate period, we have also been able to raise the per capita GDP significantly and also reduced the proportion of people that were below the poverty line. So the emphasis on growing the pie, which is something that the honourable Prime Minister Narendra Modi also spoke about immediately after the Budget saying that the size of the cake matters. I think this is a clear sign that growth is something that is important for uplifting the lives of people.

“What you are highlighting in terms of the quantity is certainly noteworthy. What I would want to do — as an economist that has studied the financial sector across the world in great detail — is highlight to your viewers that the basic function of a financial system is to allocate capital to real projects in the economy and that is because the financial sector effectively acts as the intermediary that brings together depositors and investors, more broadly people who have money to save and distributes it to the people and companies that invest this money. So one way of viewing the financial sector is certainly by looking at the extent of that intermediation that has been done, which is from a quantity perspective."

He added: “The other perspective is also in terms of how that capital has been allocated. So a benchmark would be if the capital is indeed allocated to those firms that are best at investing those projects then one would also view the financial system as efficient in doing this capital allocation in a sound and robust manner.

“I would say that the allocation of capital to the best projects, which essentially gets down to the way banks screen their projects and also the way in which they monitor the borrowers once the loan is given. These are the two key aspects that matter when we look at the quality of intermediation and that is about what the economists call the adverse selection problem at the time of giving the loan and the moral hazard problem that possibly surfaces once the loan has been given.

"So every financial system tries to reduce the impact of these two features — adverse selection and moral hazard and what I want to bring to the attention of viewers is in these 20 year period there have been significant advances in the use of technology worldwide in trying to mitigate the impact of both these problems of adverse selection and moral hazard and I would say therefore that there is scope for our banks irrespective of whether they are on the public sector or the private sector for them to imbibe some of the best practices in the use of technology in screening borrowers and also in monitoring these borrowers which also brings me to the some of the best practices that prevail in various governance aspects as well."

First Published:Nov 7, 2019 4:00 PM IST