The Centre announced a Rs.2.1-lakh-crore capital infusion plan for state-owned banks and an ambitious road development programme to boost the economy, which it said was “poised for takeoff “ after short-term disruption caused by structural reforms.
Banks burdened by bad loans will get Rs.1.35 lakh crore from bonds, Rs.18,000 crore from the Budget and raise the remaining Rs.58,000 crore through share sales. Fitch Ratings estimates India's banks will need nearly $65 billion in bank capital by March 2019. The capital infusion announced by the government amounts to about half that.
The capital infusion programme that seeks to clean up banks' books and get them to lend more, will run over the current fiscal and the next and will be bolstered with further reforms to make lenders more accountable. Credit growth at the end of September was 7% compared with 10% a year ago. Bolstering this is key to lifting private investment so as to revive growth.
The Rs.6.92-lakh-crore, five-year roads programme approved by the cabinet, which includes the Bharatmala project, seeks to generate 142 million mandays of work and addresses one of the biggest criticisms against the government -that not enough jobs are being created.
Finance minister Arun Jaitley said the measures evolved after detailed discussions within the government as well as with Prime Minister Narendra Modi. India's economy is projected to slow to 6.7% in the current fiscal, according to the International Monetary Fund, after first-quarter growth dropped to a three-year low of 5.7%. He characterised the measures as a bold step by the cabinet to address economic growth.
The recapitalisation of state-owned banks would be followed by a series of reforms to make them more accountable, he said, without giving any details.
Details of the bonds will be announced later.
The government said the impact of the capitalisation on the fiscal deficit will depend on the nature of the bonds and who issues them, also signalling that this could be routed through quasi government institutions.
The government has pledged to stick to a fiscal deficit target of 3.2% of GDP for FY18, which some experts say could come under pressure.
Chief economic adviser Arvind Subramanian said the spending would be “below the line“ as per IMF norms and not add to the fiscal deficit number.
Though the capital infusion will be spread over two years, the bonds are likely to be front-loaded and be completed over the next two quarters to get things moving quickly.
The government has set aside Rs.10,000 crore for banks this year, which is not likely to be increased, which means the remaining Rs.8,000 crore will come next fiscal.The government holding in banks can fall to as low as 52%, Jaitley said, adding that stake sales in state-owned banks will become attractive after recapitalisation. The government said capitalisation will help create more jobs, and spur growth and investments by creating bigger and stronger public sector banks. The government indicated that not all state-run banks will be equally supported.
The government said the focus will be on prudent and adequate credit and criticised indiscriminate lending under the previous United Progressive Alliance government that led to the bad loans problem.
Public sector banks have been plagued by the highest stressed asset ratio since 2000 that's eroded capital buffers and curtailed lenders' ability to offer credit.
Non-performing assets of banks have increased to Rs.7.33 lakh crore in June from Rs.2.75 lakh in March 2015. Jaitley said enhanced financing access will directly benefit micro, small and medium enterprises and give a boost to employment generation.
A trade receivables electronic discounting system for public sector units will be created in 90 days to ensure MSMEs get their receivables in time or are able to leverage this with banks.
Jaitley said there was need to increase public investment and Rs.7 lakh crore for road expansion will generate employment opportunities. Apart from Bharatmala, the government is also focussing on providing 20 million houses under the `housing for all' scheme. This will entail a total expenditure of Rs.14 lakh crore.