Is India Better (or Worse) Off Increasing Competition in the Banking Sector?

asifma-annual-conference2014-header564x185At the Annual Asia Securities Industry & Financial Markets Association (ASIFMA) conference in Singapore, Deputy Governor of the Reserve Bank of India Shri R. Gandhi explained why India would be better off increasing competition in the banking sector.  The opening of branches in un-banked and under-banked centers, he said, would increase the flow of credit necessary for equitable development, diversify risks and help to tap latent opportunities.  “On the one hand channelizing foreign investments; on the other hand boost competitive spirit amongst the financial sector entities, thereby, raising the efficiency bar of the domestic players,” he continued. (Gandhi, 2014)

These statements are a powerful reminder of the transformational role foreign banks play in influencing the host country economies.  However, let us also consider the implication of policy preferences of various socioeconomic groups toward further financial integration.

First, foreign banks account for less than one per cent of total branches of commercial banks in India.  Out of the total of 318 foreign bank branches, 315 are in urban and metropolitan areas (RBI, 2014).

Second, over the long Photo taken by Sophia N. Johnson Chandigarh Punjab Sector 25. 2008run, international financial integration has historically favored capital over labor (Rogowski, 1987; Frieden, 1991).  In the shorter run and in terms of politics and policies, financial integration favors capitalists with mobile or diversified assets, and disfavors those with assets tied to specific locations and activities such as manufacturing or farming (Frieden, 1991).

Third, its true an important explanation for the current stability and growth of India’s financial sector has been the role of the Reserve Bank and the Ministry of Finance (along with other institutions like the Securities and Exchange Board of India (SEBI) that were set up by them in the 1990s), (Kapur, 2010).  However, international capital mobility changes the pattern of lobbying over national policies in developing country economies.  More specifically, it tends to shift the debate toward the exchange rate as an intermediate or ultimate policy instrument, thereby driving a wedge between those more sensitive and those less sensitive to exchange rate fluctuations and between those who favor currency appreciation and those who favor depreciation (Frieden, 1991).  This tracks a division of the economy between producers of tradable goods on the one hand, and international investors of producers of non-tradable goods and services on the others.

India Must Carefully Consider Strategic Response to U.S. – China Climate Accord

 Chinese President Xi Jinping and President Obama seen here during a ceremony at the Great Hall of the People in Beijing announced pledges to reduce greenhouse gases on November 12. Photo source Huang Jingwen Xinhua LandovThe new targets for carbon emissions reductions agreed on by the United States and China at the Asia Pacific Economic Cooperation (APEC) Summit, is important for understanding the risks and strategic responses to global climate change (GCC).

President Barack Obama announced the United States commitment to emit 26 percent to 28 percent less carbon in 2025 than it did in 2005 (double the pace of reduction it targeted for the period from 2005 to 2020).  President Xi Jinping pledged to boost the share of non-fossil fuels in its energy mix to around 20 percent by 2030.  Other plans include one initiative that aims to reduce pollution by cities, and another that encourages trade in “green goods” and environmentally clean technology.

A key component of the GCC’s political strategy has been to engage in a public debate over the science of climate change (Levy and Rothenberg, 2002).   Organizational scholars conceptualize that responsiveness to institutional pressures as a strategic choice (Goodstein, 1994), are based on assumptions and forecasts that arise within an institutional environment.   In particular – causes, constituents, content, control, and context – are considered forces motivating strategic responsiveness to institutional pressures.

The Climate Accord expresses with greater certainty the fact that aggregate economic losses accelerate with increasing temperature, though global economic impacts from climate change are currently difficult to estimate.   Now, there will be strong pressure on India, Brazil and other large developing countries to make a move.  The government of India must carefully consider its strategic response, as whether to follow the principles of this deal, or take the climate talks in a new direction.