With the global economy still in crisis, India is struggling to sustain growth, Finance Minister P Chidambaram said at the Banking Conference in Pune today.
According to the Finance Minister, the world economy is likely to see a growth of 2.3 per cent in 2012, with more downside expected in 2013. In contrast, India’s growth will be near 5.5 per cent in the second quarter of this fiscal year, he said.
"India has to anchor growth mainly on domestic demand and find resources to get back to the high growth path. For us 8 per cent growth is not an aspiration, but necessity. India cannot afford to grow below 8 per cent," Mr Chidambaram added.
Gross domestic product data for the July-September quarter is due on November 30.
A sub-6 percent growth rate, for the third quarter in a row, will add pressure on the government to boost economic activity by fast-tracking stalled tax and regulatory reforms. It will also bolster calls for an interest rate cut by the country's central bank, which has so far ruled out any before January, citing high inflation.
"When growth declines to 5.5 per cent as it has in the first quarter (April-June) of this financial year and when the growth is likely to be around 5.5 per cent in the second quarter of this financial year, it goes without saying we are facing a difficult situation," Mr Chidambaram said.
“We have to overcome this a difficult situation through innovation, finding new ways to increase production of goods and services and finding new ways to help the poor of the country. India must depend on domestic demand,” Mr Chidambaram said.
The Finance Minister also announced that the government will launch the payout of direct cash subsidy to people through the Aadhaar based system in 51 districts of the country from January 1 with an aim to expan welfare programmes across the country. “Cash transfer is one of the government’s most ambitious programs,” Mr Chidambaram said.
The roll out of the direct cash transfer through the Aadhaar system in the entire country is likely to be completed by the end of 2013, he added.
This will, among other things, facilitate the pay out of direct cash subsidies to the targeted beneficiaries. Billions of dollars are frequently siphoned off from welfare schemes.
Prime Minister Manmohan Singh will be meeting the cash transfer committee on Monday in the run up to the implementation of the scheme from the beginning of next year, Mr Chidambaram said.
He also reiterated the importance of a strong banking system backing the Indian economy. “Banks have an important role to play. They must lead the revival of the economy. The health of the banking system will eventually determine economic health,” the Finance Minister said.
He also urged banks to reach out to new customers to achieve financial inclusion. “Banks must attempt to provide services to the unbanked urban and rural customers,” he said, adding that half of India is still without banking services.
Stating some consolidation in the banking system was inevitable, the Finance Minister said India must have two or three world size banks.
"Finding new business models will inevitably lead to some consolidation. We should not fear consolidation. I know there is pride and identity, but ultimately some consolidation would have to take place in the banking system in this country," he said.
"We must create at least 2 or 3 world size banks. China has done it. And if India wants to be and as it will be the third largest economy in the world...we must also have one or two world size banks and some consolidation is inevitable," he added.
Mr Chidambaram further said that while consolidation takes place among top banks, there would also be place for local area banks.
"In fact, I regret that the idea of the local area bank which was started in 1996 stopped after first three licences were given. I think there is place for a local area bank for serving people of the region, local area, drawing strength from those people and serving those people, he added.
India, Asia's third-largest economy, once boasted near double-digit growth but has been hard hit by the global economic downturn and a series of policy missteps.
Chidambaram told Reuters earlier this month that growth for the current financial year that ends in March could be as low as 5.5 percent, which would be the slowest rate of expansion since 2002/03.
With the economic slowdown beginning to bite India's middle class, the government faces the challenges of reviving the economy before it seeks a re-election in 2014. A weak economy has also hit tax revenues, compounding the nation's fiscal woes and raising the spectre of a credit rating downgrade.
Global rating agencies have threatened to downgrade India's sovereign credit rating to junk if it fails to put its fiscal house in order.
Wih inputs from Press Trust of India, Thomson Reuters