Equity markets can't sustain growth, stronger debt markets needed: Sanyal

At a time when stock indices are scaling record highs and companies making handsome debuts, a senior policymaker on Wednesday said India needs strong support from debt capital like bank loans for long-term economic growth.

Principal Economic Advisor Sanjeev Sanyal said banks have been cleaned up now and need to expand on credit rapidly to support the economy, stressing that the country needs lenders of bigger sizes.

The stock market indices have been breaching previous highs and companies like Zomato have had dazzling debuts on the bourses lately.

"In the end, if you look at economic history, rapid economic growth sustained over long periods of time have never happened with just equity markets financing that growth, it has eventually happened with debt capital, a lot of it coming from banks," Sanyal said speaking at an event organised by non-bank lenders' lobby grouping FIDC.

Accessing risk capital through the equity markets is in good shape, he said, pointing to many issues by start-ups and other companies. The debt market is also not doing too badly, he said, while underscoring the fact that the corporate debt market is under-developed.

Sanyal said India needs a much bigger banking system than what it is right now, if growth has to sustain over decades. He added that banks should expand on their lending activities.

Despite exhortations, bank credit growth is at a low six per cent even after the ebbing of pandemic restrictions probably due to lower demand and policymakers are already planning to have 'loan melas' to drive lending.

Sanyal said the banking system has been cleaned up ahead of the COVID-19 crisis, making India one of the few economies to have a system with the wherewithal to support growth.

"We are well capitalised for the banking system which is in the position again to expand again after many years of cleaning. NBFCs (non-banking financial companies) will also be in a good state for the most part," he said.

He said China had also had a rapid expansion in the GDP over the past three decades which was fuelled by bank balance sheets expansion. The senior Indian policymaker also said that the impact of the downgrade of Chinese developer Evergrande on the broader Asian financial markets will have to be seen.

The wider financial system, including credit rating agencies, analysts and the media, needs to behave in a "responsible" way to let this credit expansion happen, he said.

Credit rating agencies do not see a problem coming and when it arises, they create massive problems by downgrades which causes a wider problem, he rued.

At a time when the regulatory demands from NBFCs are growing, Sanyal said "we need to be careful not to impose" full-scale bank-like requirements on such companies that operate because of the flexibility. However, he conceded that the large-sized ones classified as systemically important entities will have to adhere to certain norms.

On the economic front, Sanyal assured that there is higher surveillance on the feared third wave of infections aspect and added that it has already hit Kerala. He said the second wave had also first hit a single state before spreading out and the government will be watchful.

Drawing attention to the fiscal numbers, Sanyal said fiscal resources are there if needed "to push the accelerator". He added that monetary resources are also available to push demand because rates are not near zero in India as in some developed economies.

After two deep policy rate cuts in the initial weeks of the pandemic, the RBI has been maintaining the status quo on rates and has been forced to adopt other unconventional measures to push growth because of high inflation.

Sanyal said the government is already carrying out the biggest vaccination drives in the world and added that the growth process benefits with the opening up of more sectors.

He said that despite the political pushback on farm laws, the government has stood its ground and will look into whether the issues are "legitimate concerns" and smoothen them out.