Thursday, May 7, 2009

Financial sector reform for stimulating investment

"There are certain Indian realities we must face up to. Deserving small and fresh entrepreneurs are finding it very difficult to get loans from the banks while retail banking seems to be at its peak. This is not a healthy sign. Activities promoted by retail banking do not create significant value addition and employment. From a macroeconomic perspective, people have perceived lower deposit rates a threat to their future earnings and increased savings substantially. Thus, low interest rate may not boost up aggregate demand even if it keeps raising consumption among the relatively affluent sections of the young generation."
"Labour-intensive small and self-employed activities are the right ways out of poverty and stagnation of millions. Way back in mid-1960s there was a debate as to whether the stagnation in Indian industries was caused by an 'effective demand' problem. The situation is very different now. But somehow it seems that 'investment demand' by small firms is not being materialised and public investment is still trapped in a low level equilibrium."
(Asian Development Bank in 'Macroeconomic Management and Government Finances,' p. 163 OUP)

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