News: India can free $48 bn of capital through reform

(Bloomberg 10/06/2006) London - India could free up 48 billion dollar of capital a year and raise economic growth by almost three percentage points by reducing government controls on the financial system, Mckinsey and Co said.

The growth would boost household incomes 30 per cent higher than current projections to more than 1,200 dollar a year by 2014, lifting millions out of poverty, Mckinsey said in a report.

“To achieve this, the government must loosen its grip on the financial system. This means lifting directed lending policies and restrictions on the asset holdings of banks and other intermediaries to release more capital for more productive investment,” the report said.

Government-controlled institutions such as State Bank of India account for 80 per cent of banking assets in Asia's fourth-largest economy, which grew 8.4 percent in the year ended march. He said might rise to 9.4 per cent a year from the current forecast for 6.5 percent by loosening controls.

Government-run banks give 57 per cent of credit to state companies, agriculture and tiny businesses, the consulting firm said. That impedes growth because such concerns are only half as productive as private firms and require twice as much investment to get the same additional output.

Similar policies have led to 90 per cent of the assets of provident funds and 50 per cent of life insurance assets being held in government bonds and related securities, the report said.