The Hindu Business Line : Getting banking priorities right

MORE than industry and agriculture it is the services sector "that anchored the growth process during the year, contributing as much as 70.5 per cent to the real GDP growth in 2004-05," says the RBI Annual Report 2004-05.

Trade, transportation, communication, business and financial services, software services, including Information Technology Enabled Services (ITES) - Business Process Outsourcing (BPO), were the key movers of services sector growth. Incidentally, the government has a limited role in this area and thank god for that.

"The most visible dimension of the sustained growth in the services sector", has been the contribution of the software sector, including ITES and BPO segments. For the National Association of Software and Services Companies, the total revenues (exports and domestic) of the Indian IT-ITES industry grew by 32 per cent to $22 billion in 2004-05, forming 3 per cent of GDP. The Annual Report admits "it was on account of the rapid growth in demand from overseas and domestic consumers, backed by technological advancement and proactive policy reforms such as deregulation, privatisation, opening up to FDI and generous tax incentives for the sector."

Employment in this sector has risen from 2,80,000 people in 1999-2000 to 1.05 million in 2004-05 - a compound annual growth rate of 29.8 per cent. The central bank believes the buoyancy in this sector is "sustainable" in the medium term in view of "enabling policy developments, encouraging investment climate, improvement in business expectation, affordable labour force, talented technological manpower, time zone advantages, improved telecommunication facilities and above all, a low-cost destination for outsourcing."

Can this sector alone mop up growing numbers of young hitting the jobs market?

RBI now fairly admits agriculture cannot offer more jobs with 2004-05 proving the rain dependence of Indian agriculture.

Industry is unlikely to come to the rescue as economic reforms are on the "pause mode" and more corporates are keen on trimming the labour component to keep afloat.

The issue crops up in the chapter on Assessment and Prospects which states: "It needs to be recognised that agriculture has a limited or no direct role to play in providing additional employment opportunities in the recent decade. Employment in agriculture remained virtually unchanged at about 190 million people during the 1990s.

"Concomitantly, the employment growth for the economy, as a whole, decelerated from above two per cent during the 1980s to only 1.1 per cent in the latter half of the 1990s. With the growth rate of working age population exceeding the overall population growth rate, the unemployment rate could worsen further if the economic growth envisaged does not give rise to new activities that are appropriately labour intensive." Does this explain partly the huge inflows of young and old from rural areas into cities like Mumbai for a pathetic living? And does it follow that RBI and New Delhi have given up on funding agriculture? Maybe not.

Agri business is thought to be a good idea provided farmers are granted the leeway to mind their business.

Most bank groups have touched the 40 per cent priority sector norm (the target for aggregate advances to the priority sector is 40 per cent of net bank credit for domestic banks and 32 per cent for foreign banks) excepting two out of 27 public sector banks and 12 out of 30 private sector banks.

Agricultural advances have gone up but are still way below the 18 per cent norm showing up the reluctance of the banking system.

Bank credit is minimal for the BPO sector with most banks banging into each other to serve a few corporates, who incidentally prefer to do without them.

The point is conceded when the Annual Report admits: "Although there has been expansion, greater competition and diversification of ownership of banks leading to both enhanced efficiency and systemic resilience in the banking sector, there are legitimate concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population, in particular pensioners, self-employed and those employed in the unorganised sector.

"Against this background, the RBI will implement policies to encourage banks which provide extensive services while disincentivising those which are not responsive to the banking needs of the community, including the underprivileged. The nature, scope and cost of services will be monitored to assess whether there is any denial, implicit or explicit, of basic banking services to the common person."

Fine. But how will the RBI proceed?

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