New Delhi: Failing to reform India’s banking system by privatizing the public sector banks has been the biggest shortcoming of the Narendra Modi government, Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management said on Saturday.

Speaking at the Rising India Summit, Sharma said lack of banking sector reforms is the real big problem that has not been fixed in India. “Banking system is the archery; it lies at the heart of what a nation can do. It is the single biggest shortcoming of the last few years," he said.

When asked by the moderator whether this is the biggest missed opportunity by the Narendra Modi government where it could have utilized its political majority it enjoys driving through privatization of the public sector banks, Sharma answered in the affirmative.

Sharma said every country needs a few public sector banks to meet some social objective, but there is no country like India where the figure is so lopsided. “In India, two third of the assets are with the public sector banks. This is the highest in any democratic country in the world. The average across emerging markets is one third. It’s not about public versus private, it’s about a balance," he added.

Sharma said all incremental economic activity such as the massive retail lending, credit cards and trade finance is happening through private sector banking in India. “The banking system is privatized but it is happening with a huge cost where the public sector banks are not only destroyed in value but it is also choking the economic recovery," he said, terming the phenomenon “privatization by maligning neglect".

Giving examples of Italy and the US, Sharma said in major economies of the world until the banking system was fixed, it was very difficult for those economies to go back to their full potential.

Sharma however said the single biggest risk for India in 2018 is that we have a regulatory overkill. “Many public sector banks are getting completely frozen to lend. The side effects are that the access to credit is going to be directed more and more towards the companies with established credentials. When you have this kind of credit environment, it is the small and medium size companies which get hurt the most, when risk aversion sets through because a cost of making a bad loan is now almost like a criminal offence. This is what India has to be careful about," he added.

Dishing out an interesting statistics, Sharma said since 2014, 23,000 millionaires have left India. In 2017, 7,000 millionaires left this country—the largest number in recent times—compared to 4,000 in 2016. “In absolute terms, this is still behind China. But as a share of total millionaires living in this country, this is the largest compared to any nation in the world," he added.

Sharma said some may some may say this is a good thing as India is driving away the most corrupt from the country, but there is a side effect. “At the end of the day, you need your own domestic people to invest in this country. Foreign investment is needed, but it is the domestic investors who make a nation going forward," he added.

Sharma said India is entering a critical period where the global economy is doing well, but the country has not been able to fully participate in the massive global economic revival seen in the past 18 months or so.

Sharma said more than the growth disconnect with the developed world, India has to be more worried about the employment disconnect where unemployment is at a 40 year low in the developed world whereas, India keeps debating about lack of enough jobs.

“If you look at the success stories whether Japan, China or Taiwan, they all exported their way to prosperity by producing low end manufacturing goods where you get huge amount of employment growth as well. To say that we have missed the bus in this regard may not be correct because in our own neighbourhood, Bangladesh, Cambodia and Vietnam have picked up the low end manufacturing after China vacated it. For that we need to improve the infrastructure that we provide and the labour law that we have in this country," he added.

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