While lambasting the Securities and Exchange Board of India for its inept regulation of the capital market, former finance minister P Chidambaram said the government should provide incentives to increase household savings to achieve the 8 per cent growth target.
Speaking at the global conference of actuaries here, Chidambaram said the government had failed to instil trust in investors because it had not stressed on details. "The government has failed to follow up on policy commitments," he said.
The former finance minister said the economy would have to grow at 8 per cent to keep pace with China and other emerging markets. For this, the investment to gross domestic product (GDP) ratio should be 30-32 per cent, while the savings to GDP ratio should increase to 28 per cent with an incremental capital-output ratio of at least 4 per cent, he added.
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Chidambaram said the best way to increase the savings ratio was to provide incentives to household savings. "The private sector is a marginal saver, while there are no savings by the public sector. Household is the only sector left, which is deeply apprehensive at the moment," he said.
The government's decision to reduce interest rates on Reserve Bank of India Relief Bonds and limit investments in the bonds to Rs 2 lakh for investors other than the retired was a disincentive to savings, the former minister said. "With a large part of the population dependent on agriculture, small savings will be preferred for many years to come," Chidambaram said.
In order to reassure individual investors, he suggested that some investment instruments offering high returns should be made available.
Pointing to the lower share of equity in funds raised by corporates, Chidambaram said, "The capital market is not performing its basic function of being a source of funds for industry. Retail investors are staying away due to scams in the past few years and the repeated failure of the regulator."
"We cannot meet long-term growth objectives if the savings ratio is decreasing," he said.
The former minister also said more regulatory reforms were required.
"Instead of appointing retired bureaucrats, regulators must be people who have spent many years in the financial sector and have actively participated in the system," he said.
He also said the system of punishing offenders needed to be improved to speed up the process and instil confidence among investors.