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Three Warnings From RBI Governor
In 2013, Raghuram Rajan took over the post of Governor at the Reserve Bank of India (RBI). Since then, the former chief economist at International Monetary Fund (IMF) has shot a lot of warnings for the Government to note.
Here is a look at the three latest warnings:
Jan Dhan Yojana
A significant portion of India's population has no access to banking facilities. To address this situation, Prime Minister Narendra Modi recently announced the Jan Dhan Yojana to encourage more people to open bank accounts. As part of the scheme, people would be able to open accounts easily with limited documentation. They would also be given a debit card and an accidental insurance cover of up to Rs 1 lakh. Some would even have access to an overdraft facility. The facility is like a cheaper loan for a shorter period of time, through which customers can withdraw more money from their accounts than possible.
Warning:On September 15, the RBI Governor spoke about the risks of the Jan Dhan Yojana at a banking conference. "When we roll out the scheme, we have to make sure it does not go off the track. The target is universality, not just speed and numbers," Rajan said. He added that the scheme would be a waste if it the new accounts are left untouched without any transactions.
Reason: Operation of bank accounts comes at a cost for banks. Yes, the deposits act as cheaper source of funds for banks, but the interest payments and additional services offered to customers are costly. This has an impact on the overall profitability of banks. Banks earn money only if an account conducts transactions that can be charged. The RBI worries about accounts that could be opened for namesake and then left unused. The scheme could also be taken advantage of by those looking to get the freebies offered by the Government . This exposes banks to risks. This is especially because banks are easing account opening rules, thus overlooking the Know Your Customer (KYC) norms. Moreover, the scheme is mainly promoted by public-sector banks, which are already under financial stress.
India is an import-dependent country. Its exports are not enough to help pay for the imports. This means, the country has to rely on other sources to fund its current account deficit - the amount it owes to the world in foreign currency. India mainly relies on fund inflows and investments from foreign entities.
Warning: Raghuram Rajan has warned about the need to reduce reliance on foreign debt. He says, it cannot be taken for granted. "We managed to bring down the current account deficit substantially; we are limiting our reliance on foreign debt. It is important we keep it this way and manage the economy in way that is careful and that is circumspect," he said in Mumbai on September 16.
Reason: The RBI Governor believes that over-reliance on foreign funds exposes India to a risk. He says that India will face difficulties when foreign investors decide to exit investments in India. "At some point, these (foreign) investors will find greater usage of their money back home and they want to go out once again," Rajan said at a college in Mumbai. In such a case, India will find it difficult to fund its current account deficit. Moreover, he believes that a significant portion the fund flows is because of low interest rates and monetary stimulus in Western countries. Once those are taken back, foreign investors could exit India.
The Indian Government ensures goods required for daily sustenance like fuel are sold at cheaper rates. This is called subsidy. The Government then compensates companies for their loss. Diesel is one such product sold under subsidy. Currently, the Government has allowed oil marketing companies to raise diesel prices by Rs 0.5 every month. This is a partial deregulation.
Warning: Rajan believes that diesel subsidies need to be eliminated entirely. "In the short run lower oil prices are helping consuming countries like us. Lower oil price means lower Current Account Deficit (CAD), lower oil subsidies and lower inflation. We need to seize this moment to eliminate diesel subsidies completely," Rajan said at a banking conference in Mumbai.
Reason: The Indian Government spends more than it earns. This is difference is called the fiscal deficit. It borrows this amount from the market. A high fiscal deficit is bad for the economy. It can cause high inflation, effectively pushing interest rates higher. Currently, international oil prices are low. This means cost of production of diesel is low. The Indian consumer can pay this amount for diesel. This would also help reduce the Government's expenses and narrow fiscal deficit.
# 7.5 crore
The Jan Dhan Yojana targets to encourage 7.5 crore new bank accounts by January 26 - the Republic Day. This gives banks five months to push the scheme aggressively. This is much higher than the six crore accounts opened in the entire fiscal last year. Media reports suggest that about 3 crore bank accounts have been opened under the scheme so far.