The Survey suggested that foreign promoters with credible banking experience should be invited in the Indian banking sector. Principle of reciprocity should be applied to countries that have allowed Indian banks to expand in their jurisdictions.

Indian economy is expected to grow at 8.6% in 2010-11 and at 9% in 2011-12, but the concern is the rising price. Hence the Survey has outlined a tight rope walking for the government for sustaining high economic growth and taming price inflation. It also noted that a sharp deterioration in weather conditions on account of climate change or a disproportionate spike in the price of crude petroleum can upset the growth process. The global recovery from the financial crisis of September 2008 is slow due to the conditions in the industrialized countries and any serious crisis in the industrialized nations in this inter-connected world can adversely impact India.

The investment rate is expected to be 37% in 2010-11 and 37.5% in 2011-12 while the domestic savings rate is expected to be over 34% in 2010-11 and 34.7% in 2011-12.

Driven by the need to foster inclusive growth, the Survey has called for financial inclusion. The reach of the banking sector should be extended to help mobilize savings, add more depth and more efficiently intermediate
opportunities including those in the traditional priority sectors. Financial inclusion needs to be accelerated through innovative solutions. Similar efforts are needed to deepen domestic capital markets and the role on non-bank institutions, especially in corporate bond a debt markets. Rapid lowering of the government’s budgetary fiscal deficits is needed to help crowd-in such developments.

Minimum capital requirement for banks should be graded, having two types of licences, one for providing basic banking to fulfill the obligation of financial inclusion and the other for full banking encompassing all activities of a commercial bank. Micro Finance Institutions (MFIs) and Non-Banking Finance Corporations (NBFCs) should be given licences for basic banking. Industrial and business houses should be allowed to promote banks and the issue of minimum and maximum caps on promoter shareholding and other shareholders should be sorted out. One of the most daunting task for the banks in the near future is the management of human resources.

The Survey called for government’s intervention in generating awareness among potential investors in the pension product. There is a need to consider passage of the long pending Pension Fund Regulatory and Development Authority Bill. It noted that a large part of the depositors; money is in the low-yielding assests like bank deposits and traditional insurance but there is a clear trend of individuals preferring security-based investments as they move upwards in income level. Therefore a big challenge for Indian policymakers to prepare an effective strategy for financial literacy of these new savers, investors and consumers to holistically plan for their financial well being.

The Survey noted that the world economy led by the buoyant economic activity in emerging economies is gradually recovering from the global financial crisis. The risk however remain as advanced economies face large fiscal deficit, high public debt and high umemployment levels and tepid aggregate demand, leading to subdued growth. The sovereign debt crisis in the perpetual euro-zone countries is contributing to the uncertainty. At the same time, large capital flows to emerging economies, rising oil and agricultural products prices are fuelling inflationary pressures that may affect the nascent global recovery.

In this backdrop the worrying situation for India is the widening current account deficit due to robust import demand and lower invisibles surplus. These are being largely financed by the relatively higher capital flows, leading to moderate accretion in reserves. There are however challenges that include volatile nature of foreign institutional investment that is characterised by surge and reversal of capital flows, deceleration in foreign direct investment and the risk of further slowdown in advanced countries that may affect Indian exports and strain balance of payments.

India’s current account deficit is estimated at 3% of the GDP in 2010-11 and 2.8% of GDP in 2011-12.

Periodic surge in capital flows could lead to problem of absorptive capacity in the Indian economy, fuelling asset price bubbles, currency appreciation and stoking inflation. The challenge is in managing such surge in capital flows. Steps should be taken to encourage FDI inflows vis-à-vis other forms of capital, the Survey said.