Financial Sector Reform for India’s Masses

The draft report of the Committee on Financial Sector Reforms, chaired by Raghuram Rajan, which came out a few months ago, followed on last year’s Mistry committee report on developing Mumbai as an international financial centre. The reports are complementary in their focus—on domestic and international markets, respectively—and very similar in perspective and recommendations. The Rajan committee was commissioned by Planning Commission Deputy Chairman Montek Singh Ahluwalia. Other policymakers have also been discussing the extension of financial sector reforms to the masses. RBI Governor YV Reddy, in an interview on October 31, 2007, said that “The democratization of the banking system is vital, not just provision of credit. The financial system, banking in particular, is like giving elementary school education. Therefore, the highest priority needs to be given to financial inclusion coupled with financial literacy and credit counseling.” Also in October 2007, Montek Singh Ahluwalia, in an interview with a McKinsey & Co director, made an even broader statement, in discussing the charge of the Rajan committee: “The idea is to take an integrated view of the financial system: looking at banks, capital markets, insurance, microfinance issues, and the whole issue of financial inclusion…. I think financial-sector reforms have to include things like: what’s the best financial system to make sure that farmers can get access to credit? What’s the best way of making health insurance readily available? What’s an environment in which different types of risks can be effectively countered? And how can you ensure inclusiveness in all this?”

Fortunately, while stock markets and high finance may seem to be a far cry from rural credit and crop insurance, the principles that govern the provision of financial services are the same at every level. Basically, financial services involve meeting two objectives: reallocating income across time and across different contingencies or states of nature. Heterogeneity of wants and initial endowments makes markets in achieving these reallocations possible. The inherent time delays and uncertainties associated with financial services are a major source of challenges for smooth market functioning. Hence, financial markets are always going to be subject to turbulence (to use Alan Greenspan’s term). The triumph of modern economies has been to tame this turbulence through good governance, while continually adding complexity and sophistication to financial markets.

Financial market institutions provide matching services, pre-transaction information and screening, post-transaction monitoring and enforcement, and basic transaction completion. Since these can all be quite complex, there are strong economies of specialization through training and accumulated experience, as well as simple economies of scale that arise from the fixed costs of making a market or creating a platform. These economies, as well as the benefits of reputation and (in the case of managing uncertainty) the law of large numbers, all favor the existence of financial intermediaries of various kinds.

The abstract principles just outlined apply to international financial centers as well as to remote villages. In any of these settings, if information is poor, if there are few potential market participants, if enforcement mechanisms are weak, then financial markets may be inefficient, limited, or even non-existent. The differences between the metro and the hamlet are often differences of degree and not of kind. Another very general aspect of financial markets, indeed of any markets, is that lack of competition hurts market efficiency. If either side of the market, or the intermediary, has disproportionate power, that party will earn excess returns at the expense of the less privileged market participants. This applies to village moneylenders and farmers in India, as it does to investment banks and entrepreneurs in Silicon Valley, or to the urban poor and pay-check-cashing companies in any number of US cities.

The most powerful means of increasing inclusiveness, or of democratizing finance, is to increase competition. This means not only increasing the number of providers of services, but also improving the information and capabilities of the users. The fact that many new mortgage borrowers in the US did not understand the contracts they were signing was a contributor to the subprime crisis. Dr Reddy is absolutely correct that improving financial literacy is important—though this must be seen in a context where even basic literacy is often missing. An overhaul of regulation is sorely needed, however, so that regulation is aimed at increasing disclosure, and allowing for appropriate escape clauses, rather than controlling suppliers of financial services so heavily that competition is stifled, along with all other incentives for efficiency.

Information technology is bringing down many of the costs of screening and monitoring, and is allowing new entrants to provide a wider array of financial services to rural India. Microfinance loans are being securitized and mini-insurance policies being offered. As growth trickles into rural India, the demand for financial products will increase, and the main constraints on supply are probably poor regulation and the existence of inefficient state-owned incumbents. It may be true that in the past, the state-owned financial institutions helped to get basic credit and deposit services down to the rural poor. But they have also been co-opted by the better-off, they have been wasteful and inefficient, and they have failed to innovate to meet emerging demands. Moneylenders, commission agents and other traditional rural intermediaries have continued to wield disproportionate power in markets for rural financial services. This will change with lowered transaction costs and lower entry barriers, and reform must be driven by these principles, and not introduce new controls. The Rajan committee report provides detailed ideas on, not so much the best way of making financial services more widely available and affordable, but on what the best way is, but rather on how to create a regulatory environment in which the best ways will emerge through competition and innovation.

9 Responses to "Financial Sector Reform for India’s Masses"

  1. schizo   July 28, 2008 at 3:18 pm

    hmmm. regulation again. then what exactly is a free market if the free market is well regulated? is a "less free market" more regulated? then who decides how much regulation is needed for a "free market" and how much for a "less free market" and how much for a "non free market"?

  2. Anonymous   July 30, 2008 at 11:27 am

    Financial Sector Reforms and Inclusive GrowthSyed Zahid AhmadThe High Level Committee on Financial Sector Reforms as constituted by the Planning Commission has received almost all public comments over their draft report and is now busy in preparation of the final report. Expectedly the CFSR may submit the final report in September 2008. It is possible that CFSR may miss some genuine issues related to economic justice and financial stability of the economy in its final report. The approach of the CFSR was not to reform the financial structure for inclusive growth; rather it was to provide acceleration in the existing financial enterprises. Majority of the commentators over CFSR draft report were basically interested to grab economic advantage in possible reforms and were guided by corporate forces. They were interesting to resolve their constraints compared to resolve the financial constraints restricting inclusive growth of India. During the whole process of suggesting financial reforms, the agenda of foster and inclusive growth was left behind debates over derivates and liberalization process. The draft report reveals that big banking players fear liberalization, while upcoming financial and investment companies are finding scope for making money through derivatives and speculation game. Individuals were more concerned with tax advantages compared to socio-economic justice. Government is more concerned about finding means to increase revenues. The major economic problems related to banking inflation, stock market fluctuations, under utilization of savings and capital resources etc. that were left unresolved because the committee members and commentators were preoccupied with their motive to find scope for their business growth after reforms. There had been hardly any voice for foster and inclusive growth with long term stability in the Indian financial sector. It should have been discussed in the report that –  Why our stock markets behave like a casino? What are the forces and practices making it behave as casino? Why prices are increasing with recession in the market? Why saving growth rate is increasing with inflation? What should be future saving products for Indian economy to ensure a sustainable growth rate? What should be the nature of financial products for our farmers, small retailers and artisans associated to agriculture and allied industries, unorganized sector retail and manufacturing industries to meet their needs? If Islamic Banking and Finance are gaining markets at international level why should India not allow its operation? Why with highest number of companies listed in Indian stock market, our stock market stand nowhere in comparison to global stock markets? Why just 1% of D mat account holders are active in transactions in stock market? How agriculture and unorganized sector would raise financial resources in coming years to compete with the global market needs?There were many more genuine questions which needed some focused attention by the committee members which could not find place in the draft report. If CFSR is sincerely making the reform proposals, I would like to know some facts related to following issues. 1. What is the allocation of Indian financial resources between the organized and the unorganized sector in India?2. What proposal has been made to ensure stable growth of the stock market?3. What is the proposal for providing equity finance to unorganized sector? 4. What is the scope of opening up of Islamic Banking and Finance in India, which is surpassing conventional banking in many countries and which may invite trillions of dollars investments in India?5. What are the real term financial constraints restricting inclusive growth of India?6. What specific banking or financial problems of the unorganized sector are taken up under consideration by CFSR?7. What is future financial product for farmers and artisans to avoid suicide cases?, and 8. What are the expected benefits of CFSR recommendations to achieve inclusive growth?The financial and economic plight of unorganized sector workers need serious and sincere efforts by our planners and policy makers because despite 60 years of independence, our financial sector and ministries are governed by the capitalists belonging to the corporate sector. We have hardly seen any representation of the unorganized sector in making reforms processes. If we really wish inclusive growth of India, we have to focus our efforts to resolve the problems associated with the unorganized sector where around 94% Indian workers are making their livelihood. Moreover, we have to ensure that our maximum savings should be converted into capital through investments in equities. Moreover we have to adopt some practices to ensure fair trade in stock market and prevent amoral game by traders and agencies. Without financial sector reforms for the unorganized sector we may not be able to help majority of Indians. If we wish to see India grow in inclusive manner, we need to have financial reforms suitable for the unorganized sector which constitute over 94% Indian workers. The reforms in formal sector will not help reduce poverty and income disparity. The analyst needs freedom to analyze various possible modules and mechanisms to control the monetary and fiscal system of our economy. We need to adopt such mechanism which is anti inflationary and equitable in nature. Such mechanism is provided by Islamic finance and banking, but we need to study and analyze those provisions and visualize the scope in all segments and sectors of our economy. Islamic Finance and Banking that promotes equity finance with risk participation can be geared to meet the requirements of unorganized sector along with corporate sector that will help attain inclusive growth of the economy as a whole. Therefore reforming corporate finance is not enough. Islamic Banking is necessary for inclusive growth of the Indian economy.

  3. Nirvikar Singh
    Nirvikar Singh   July 30, 2008 at 11:58 pm

    My response to schizo:Abstract free markets are an idealization. In practice, most markets have some institutional structure that involves a mix of self-regulation and external regulation representing socially-agreed-on aggregate interests. Who decides? In a democracy it’s a complex mix based on elected representatives, non-elected delegates, and market participants. Unfortunately there’s no unique or simple answer.

  4. Nirvikar Singh
    Nirvikar Singh   July 31, 2008 at 12:01 am

    Mr. Ahmed raises some interesting questions and makes some valid points, but I disagree with much of what he writes, and his conclusions are not supported by his logic, in my opinion. Sorry.

  5. Syed Zahid Ahmad   August 1, 2008 at 10:45 am

    I would like to know where Mr. Nirvikar Singh is disagreeing to my views. He may write me on so that I can satisfy him.

  6. schizo   August 1, 2008 at 7:09 pm

    my response to Nirvikar singh:is "less regulated FREE MARKET" better than "more regulated FREE MARKET"? a free market seems to be a relative term. it seems more like a propaganda term to me than of any other real value. as i think of it, regulation has no limit. but freeness has a limit. let the market participants decide for themselves how they want to play the "wall street casino". let the market participants decide how much transparency there is. if the company A is not transparent and fair, i am not going to play at that casino table unless i am drunk or out of my mind. if i do play, then my losses are my responsibility and not the reponsibility of the "govt". company B which has a more transparent and honest policy will ultimately attract gamblers at its table. i believe the ills of the present day markets are being caused by regulation because it makes the gamblers more trusting of the casino when actually they ought to be always suspicious of this casino

  7. Syed Zahid Ahmad   August 2, 2008 at 11:15 am

    RBI may just ruin the Indian economySyed Zahid Ahmad The present trend of recession in US and prevailed uncertainty in petroleum nations had provided an opportunity for India to pull capital resources from US and Gulf countries, but the practical approach of RBI has converted the opportunities into challenges as the liquidity and inflation is certainly not under control of the RBI who is attempting to freeze the liquidity by increasing the interest rate and cost of credits. Interest is a factor for liquidity and credit, but all cares should be taken up while we handle this instrument because if liquidity and credits influences inflation, are also necessary for growth and development. Increased cost of credits not only increases the cost of output, but also creates shortage of supply. This increases the prices levels further up. However the depositor gets higher rate of interest over their deposits and this inflates their purchasing power, thus boosts inflation. FICCI and the corporate sector have already disagreed with RBI recent announcement to increase the rate of interest. With recent trend of increased capital inflow into India the aggregate deposits by Scheduled Commercial Banks (SCBs) has increased from 80.7% in 2005-06 (Rs. 21,09,049 crores) to 102% (Rs. 31,96,939 crores) of GDP at factor cost by 2007-08. With increased deposits, the bank credits has also increased from Rs. 15,07,077 crores in 2005-06 to Rs. 23,61,914 crores by 2007-08 reflecting 75.6% of GDP at factor cost in 2007-08 as credit against 57.7% in 2005-06. This indeed is a situation, where our economists, financial sector regulators and bankers need to review the policy and practices adopted by RBI as we take interest as a major tool to control liquidity but we hardly evaluate the far reaching consequences of interest in our economic process. Our real term GDP growth rate (= GDP growth rate at factor cost – rate of inflation) has considerably declined from 5.2% in 2005-06 to 2.9% by 2006-07 and fell down to1.6% by 2007-08. As the interest increases the cost of credit and output, even the GDP value is inflated through interest. Thus the higher GDP growth rate like 9% just reflects 1.6% real term GDP growth rate if inflation rate is 7.4%. The liquidity theory of J. M. Keynes is failed here to guide RBI optimize these opportunities. The practical approach of RBI to curb the rate of inflation by increasing the rate of interest may not control inflation and might lead towards stagflation as the prices are continue to increase along with purchasing power of the depositors, but the expenditure, investment and net GDP growth rate is falling due to costlier credit and interest based deposit schemes. By increasing the rate of interest, liquidity might be controlled for shorter period, but with increased cost of credit, the GDP value will increase that leads to inflation. Interestingly the interest income to SCBs was Rs. 1,85,384.9 crores in 2005-06 which increased to Rs. 2,37,271.14 crores by 2006-07. It means by 2006-07 total interest income to SCBs was 7.1% of GDP at factor cost. It simply means that the interest income to SCBs has inflated the value of GDP at factor cost by 7.1%. With increase in rate of interest, the aggregate deposits might increase and SCBs may need to pays more interest over increased deposits. Total Interest expended by SCBs over deposits was Rs. 89,742 crores in 2005-06 which increased to Rs. 1,20,261.08 crores by 2006-07 showing a net annual increase of 34%. This growth is inflationary as it increases the buying capacity of the depositors. By 2006-07, the interest expended over deposits was around 4.20% of GDP at factor cost. If we add the interest income of SCBs to interest expended over deposits, it stands for around 12.5% of GDP at factor cost and 8.6% of GDP at market prices in 2006-07. Considering the impact of interest on inflation, we may need to add interest income of SCBs through investments / commercial credits with interest expended by SCBs over deposits. This amounts to approximately 9% of GDP at factor cost and 5% of GDP at market prices in the year 2006-07 while annual rate of inflation was 6.7%. It reflects that basically inflation is a result of interest charged on credits expanded by SCBs and interest expended over deposits. The interest charged by SCBs increases the cost of GDP and the price levels, while the interest paid by SCBs over deposits increases the purchasing power of the depositors. Both ways the interest is increasing the price level and causing inflation. Since RBI regulates the banking business in India, by increasing rate of interest it is increasing the inflation and decreasing the real term growth rates. Further to note that RBI is increasing the rate of interest for over one year to control the inflation which ultimately increasing the cost of GDP showing higher GDP value and increasing inflation instead of controlling it. Our total final consumption expenditure as % of GDP at market prices is already declining from 67.8% in 2005-06 to 65.5% by 2007-08. This decline along with inflation cannot be controlled by increase in interest rate. This economic tendency may leads to stagflation which is more dangerous for economic stability and growth. The unemployment rates in increasing, the investment rate is also declining; so RBI should review its policies and practices to monitor liquidity, credit and inflation, if we have to combat inflation and attain desirable growth rate. Islamic economic ethics suggests mechanisms for stable and anti inflationary monetary system which should be adopted by RBI to make our monetary system more stable and anti inflationary. Hope the RBI will consider these ethics as measure to combat inflation and stagflation. Islamic Banking principles and practices will not only increase the equity deposits and finances but also promote capitalization and investments. It will help increase employment and business opportunities which are must for inclusive and foster growth of India at a time where world is eying upon Indian economy for making more investments. Otherwise consistent approach of RBI to control inflation through interest rate may let the UPA government face cruel failures in capitalizing the investment and growth opportunities with worst off inflation and stagflation. Wish all the best for Indian economy, the general Indians, RBI and the UPA government.

  8. Indian Banker   August 7, 2008 at 6:43 am

    Syed,YOu make some very important view points. Appreciate it.However, Indian private sector seems to get good funding, clearly going up im the value chain and creating lots of jobs.The consumption story is good.Are these not reasons to cheer ?

  9. Syed Zahid Ahmad   September 7, 2008 at 2:39 pm

    Economics of Islamic Banking in IndiaSyed Zahid AhmadWith Indian Muslims have rather suppressed desire to have Islamic Banking in India, some of our vocal financial sector players and political leaders are suggesting that besides considering the religious, social, political and diplomatic dimensions, we should understand the economics of Islamic banking for Indian economy.Financial Sector Reforms and Islamic Banking:Though the draft report was silent about Islamic Banking, it is expected that the final report by the Committee on Financial Sector Reforms (CFSR) will add brief note about Islamic banking because the issue was raised during the seminar at Mumbai on 12th June 2008 where the committee members assured to consider it in the final report. The recent growth trend of Islamic investment funds worldwide has made some financial sector players feel that it was like a lost wisdom to miss Islamic banking so far which has some post modern financial products / services. There may be bureaucratic resistance to Islamic banking as there was to economic reforms and privatization in the early 1980s. India may now miss the Islamic banking as its missed Globalization bus in the eighties and Asian Tigers including China superseded it. Recently Zee news and the statesman have published projecting high potentials for Islamic banking in India. And latest with statement of Mr. Amar Singh (Samajwadi Party) on 1st September 2008 to pitch for Islamic banking, this issue has got some more attention in India. So, before it become a political agenda, it is better to evaluate its economic value for India.Silver Lining for Islamic Banking in India:In recent years the Islamic Investment business is gaining considerable grounds and companies like McKinsey & Company Inc. and Bearys Group are already dealing big businesses through Shariah Investments funds. East wind launched Islamic Index; and Reliance Money and Religare have launched Shariah Complaint Portfolio Management Services. As a result Indian Stock market is also observing some better trends in Shariah complaint stocks. With increased market of Shariah investments world wide, if China is going for Islamic banking to attract Islamic Investment Funds, why India should not allow Islamic banking with 150 millions Muslim who may help us pool around one trillion dollars Islamic investment funds from Gulf countries that too on equity base which keep our national current account and fiscal deficit under control. The experience of Islamic banks of Malaysia and Britain may be interesting; as in Malaysia, the Chinese businessmen are the biggest customers of Islamic banking, in Britain also, Islamic banks are not for Muslims alone. Similarly Islamic Bank in India will not stand for Muslims alone but for all poor Indians especially engaged in the unorganized sector.Facts and fictions about Islamic banking in India:It is unfortunate that our financial sector regulators, bankers and professional have failed to see the prospects of Islamic Banking in India, that’s why RBI or any other committee have yet to visualize the scope of Islamic banking in India. So far Islamic banking has been considered as a mere religious matter for Indian Muslims and thus it is not allowed with a fear of financial segregation, a threat of parallel banking system for RBI along with any hidden fear for SCBs to loose Muslim depositors. There has never been any public committee analyzing the impact of Islamic banking in India because Muslims of India were never so evocative about features of Islamic banking in India while the other community members had no background to conceive this concept to required level for projecting its utility for Indian economy. Off Course the concept of Islamic banking is driven by ethics of Islam, but it has more economic utility compared to its religious vigour which needs some genuine study by professionals having basic knowledge of Islamic banking and expertise on Indian economy because Islamic banking carries more advantageous features to boost real sector economy compared to financial sector. It is a need of the hour that Indian government should constitute a committee on public domain to study and analyze the economic significances of Islamic banking for the Indian economy.Economic analysis of Islamic Banking in India:Islamic banking may not be allowed just for a community as a religion based banking business, but it should be allowed after thorough study of its potential to resolve our real economic problems. The report by Sinha Committee was incomplete and thereafter still we have to find any report on economic viability of Islamic banking and its impact on inclusive growth. We have to remove the prejudices about Islamic banking and need to study it as a core economic issue irrespective of its base driven form Islam.Future leaders of Islamic banking in India:There might be a prejudice among top bankers that since Islamic banking originates from Islam, Muslims might take a lead in Islamic banking and their supremacy in banking sector may not be sure after Islamic banking. However the reality may be far different from the fiction. Indian Muslims are hardly capable to hold major shares of Islamic banking business in India as they lack required infrastructure, financial depth, banking creditability to attract the general depositors and investors under Islamic Banking. Islamic banking is not a children’s game. It requires even better professional expertise compared to conventional banking because it deals more with commercial projects than mere monetary credit and debit transactions. Indian Muslims may feel privileged in terms of Islamic ethics required for Islamic banking but they certainly lack professional efficiency to manage modern commercial banking on Islamic ethics. Our leading nationalized bank (SBI) is somehow reaching to that expertise which may be required to manage a complex banking project such as Islamic banking, but they have to hire services of experts on ‘Islamic Banking’. The RBI code of conduct to SCBs putting thrust on SMEs is reflecting the need of advanced commercial banking in India which would be focus under Islamic Banking. The performance by SBI has been best among nationalized banks to lend commercial credits. But still majority of unorganized sector workers who are non-bankable due to collateral problems are actually needing equity finance instead of debt finance. All the difference among nationalized bank’s operation and Islamic banking is the mechanism of credit and deposits. Under Islamic banking mechanism thrust would be on equity deposits and credits while interest charged would be replaced by profit margins on commercial credits and interest expended over deposits would be replaced by dividend on equity finance with deposits mobilized as equity deposits by banks.It is expected that with introduction of Islamic banking in India, the first choice of depositors and investors would be nationalized banks as despite contradiction of interest, Indian Muslims have a confidence in nationalized banks. To ensure security of deposits majority of Muslims depositors would prefer to join Islamic banking managed by nationalized banks. However it is expected that Foreign Investors looking to invest in India through Islamic banking, would prefer to have services of foreign banks. As far Indian Muslims are concerned, they have to make hard efforts to find their place in managing Islamic banking in India because they lack required financial depth; infrastructure and more importantly they have poor credibility among the depositors and investors due to some past failures of financial institutions.Beside to take political, social, religious and diplomatic advantages, Islamic banking is more desired for Inclusive growth of India. It is all important to evaluate probable impact of Islamic banking in different segments of Indian economy. Every segment is expected to enjoy its benefits.• The 150 millions Indian Muslims would enjoy their religious rights in banking sector with provision to get rid of interest which is strictly prohibited in Islam.• With introduction of Islamic banking, the UPA government may get advantage to please the second largest community of India who are somehow uncomfortable with linking of recent terrorist attacks with only Muslim community or in other words by hearing the terminology of Islamic terrorism.• With introduction of Islamic banking, Indian government will gain diplomatic advantages to make financial dealings with Muslim dominated nations especially to attract trillion dollars of equity finance from gulf countries.• The operation of Islamic banking will allow the Muslims to work with majority community in banking sector which is not found in proportion to their population share so far, because RBI has just 0.78% Muslims and SCBs have just 2.2% Muslim employees. Similarly Muslims have a poor employment rate in NABARD and SIDBI because every where financial institutions are dealing with interest and Muslims do not like to work with interest based banking and financial institutions. It is a major factor causing financial exclusion of Indian Muslims. With Islamic banking this exclusion may be removed and it would definitely help us build civil society economy.Islamic Banking is rated as one of the urgent needs of Indian economy as it is the only banking mechanism which seems to arrest the liquidity and inflation problem along with allowing GDP growth with adequate share in all segments. The increased percentage share in GDP by agriculture or manufacturing industry, or per capita income growth is just not indicative of true inclusive growth. For real inclusive growth, we have to ensure increase in income and employment status of workers at all segments. Empirical evidences reflects that though India has registered better growth rate in recent years, the number of poor living below poverty line has increased in our country. It may be noted that the household consumption is directly related to household income which has declined in recent years; while corporate savings are directly related to income of corporate sector which has increased. Thus we may conclude that with better GDP growth rate in recent years, our corporate sector has snatched the fruits of growth, while majority of work force have failed to enjoy the fruits of development.Similarly if we analyze the share of financial sector in GDP growth, we may find that in recent years the growth rate of financial sector has been better which indicate that share of deposits and credits to GDP has increased. Since our SCBs extend debt finance, these credits put interest cost as part of GDP cost which causes inflation. While under equity finance since the credit cost is zero, the growth of credit share to GDP cannot add cost of GDP thus cannot create inflation. On the contrary the dividend shared by depositors on equity finance help equitable distribution of income generated through financial sector, thus instead of concentration of credit to corporate sector, the generated income will be shared by household sector which would increase level of consumption, pushing the economy on faster growth track. This is the basic difference of debt and equity credit which needs our financial sector regulators attention. The prime economic advantages of Islamic banking could be as following –Islamic Banking and Financial InclusionThough we do not have any survey to compare community wise financial exclusion in India, the primary study of data available through Sachar Committee report reflects that still around 50% Muslims are financially excluded and banking is inversely related to concentration of Muslim Population. The reason is just prohibition of interest in Islam and thus wherever Muslims are concentrated; they find means practicing interest free banking through societies and NBFCs. With inception of Islamic banking it is expected that Muslims will join Islamic banks which will remove their financial exclusion.The Indian Muslims have a share of 7.4% in saving deposits while just get 4.7% of credit in terms of PSAs. If we consider this as a standard proportion in national aggregate deposits with and credits maintained by SCBs, Indian Muslims annually loose around Rs. 66,700 crores because Muslims have a credit deposit ratio of 47% against national average of 74%. It shows that Muslims of India loose around 27% of their deposits by not availing as credits. After Islamic banking this deficit may be removed to curb financial loss to Indian Muslims because with 31% Muslims living below poverty line and 40% Muslim workers as own account workers, the deficit of credit is like economic assassination of the community. Muslims avail just 4% and mere 0.48% credits from special financial institutions like NABARD and SIDBI respectively because there also the community has to indulge in interest which is strictly prohibited in Islam.Business of nationalized banks would be increased:So Indian Muslims are looking for Interest free banking to avail much needed credits for development which is possible through introduction of Islamic Banking in India. This may add at least approximately 60 millions Muslims to formal financial sector. Through this financial inclusion of Indian Muslims to formal sector Islamic Banks, it is expected that Indian nationalized banks may see additional savings worth 1,00,000 crores and credit worth over Rs. 2,00,000 crores which may help banks to gain higher rate of profits compared to their SLR. After successful operation of Islamic banks by our nationalized banks, private banks may also enter into dealing with Islamic bankingStock Market CapitalizationSince Islamic banking focuses on equity deposits and finance, it is expected that Stock market will be the most preferred avenue for investments by future Islamic banks of India because currently it is our stock market which is attracting new investments under Shariah Finance schemes. With advanced art of technology for investment with liquidity and profitability, it is expected that majority of deposits with Islamic banks in India will be preferably canalised to stock market. It would be the safest and fasted mode of deploying equity funds. Thus Islamic Banks may add additional 6 million new D mat accounts with expected capital gain of Rs. 60,000 crores from domestic market and around 1 trillion US $ through Islamic Banks managed by foreign bankers in India.Formal Sector Economic AgentsUnder Islamic banking the formal sector economic agents like corporate firms listed with stock markets would be the first likely beneficiary of Islamic banking because their shares would be subscribed through investors at Islamic banks. All the companies listed in stock markets will have additional potential subscribers to genuinely subscribe their shares instead of mere trading stocks to gain for speculation.Islamic banking will bring Revolution:Islamic banking will allow the manufacturing and retail enterprise of unorganized sector and agriculture to obtain equity finance which would bring revolution in Indian economy because our majority of poor and vulnerable workers are associated to agriculture and unorganized sector that are not in a position to afford financial risks for capitalization which affects their productivity and income levels. Their financial background is not encouraging SCBs to extend debt finance to them in lack of collaterals. While in case of Islamic banking the inadequate capital ratio in unorganized sector could be resolved through equity finance which might be a revolution is our agriculture and unorganized sector. With improved capital ratio, our poor and vulnerable workers associated with agriculture and unorganized sector might be able to compete with the formal sector workers with their enhanced productivity. This might allow our leaders to substitute grants and subsidies with financial institutions focussing on equity finance because self reliability is more important for growth which never comes through grant and subsidies but with successful utilization of equity finance. The stabilization fund for poor farmers and artisans may be utilized to experiment such finance with Islamic banking.Islamic Banking and Public Finance:Islamic banking may further help us mobilize capitals on equity base to meet the investment needs for irrigation, dams, roads, electricity, and communication projects along with other infrastructure where public finance is insufficient and debt finance may be cause deficit to the government. With Islamic banking raising equity funds would be easier for banks. We must not forget that over 50% of our rain fed lands need irrigation which need equity finance to reduce the credit costs. The total investment in infrastructure, in 2006–07 was estimated to be around 5% of GDP. It has to be 9% of GDP by 2011-12, it means that we would require Rs. 2,07,291 crores in 2006-07 and Rs. 5,74,096 crores by 2011-12 to finance our infrastructure. The total investment amounts to Rs 20,56,150 crore for the 11th five year plan. Of which Rs. 14,36,559 crores is supposed to be met from Public Investment wile Rs. 6,19,591 from private investments. Islamic banking through promoting equity finance from national and international markets may reduce this burden effectively with keeping public finance well under control and probably we may need not to worry about fiscal deficit as well.Since Islamic banks may also have managerial control over commercial financing, government might use banking units as source to mobilize taxes as well which might reduce mobilization costs for public revenue and increase margins for governments.Islamic Banking and Indian Economy:Viewing the probable multi dimensional positive impacts of Islamic banking on Indian economy, there are many reasons to smile for Islamic banking in India. It is helping our financial sector maintaining stability while helping real economic sector attain inclusive growth. The public finance would be much benefited through Islamic banking by generating investment funds on equity basis. Thus Islamic banking should be considered as a core economic need of the economy instead of viewing it as a religious matter for Indian Muslims. By any projections, it is expected that Islamic banking may help us mobilize business up to 5% our GDP with making due corrections in financial and real markets. Therefore it should be considered as a genuine economic need of the nation instead of considering it as religious, social or political issue. Hope all patriot Indians will flag green signal to Islamic banking as it is opening the doors towards faster and more inclusive growth – An approach to 11th five year plan of India.Since we have no project or viability report on this issue, it would be better to form a committee on public domain to analyze Islamic banking and its impact on Indian economy before we take any action in this regard because a delay but careful step is far better than any hasty move with prejudice.