Bank recapitalisation, infra push, SME boost good news for economy but may not revive private investment

It is not surprising that the government has come out with its perspective on the state of the economy and the way ahead at a time when there is a substantial debate on how the country is placed.

On one hand, the government has stated that the finances are in a very good state and that India remains one of the fastest growing economies in the world. But in the same breath, it is also involved in a discussion about fiscal stimulus and has been urging the Reserve Bank of India (RBI) to lower rates, which means that the government believes that something more has to be done to push growth, which may not be too satisfactory.

Two ideas have come out of Finance Minister Arun Jaitley's presentation on Tuesday to chalk out a future path. First, the government is in control over its own expenditure, and will hence work hard to ensure that money spent is productive. So far, the progress on capex by both the government as well as central PSUs has been on target as per the Budget outline which is encouraging. This is something the government has direct control over, which can make a delta to the growth process. Second, the government has outlined ambitious capex plans in sectors like roads, power, digital economy, railways and housing which will definitely provide strong backward linkages with the rest of the economy and related industries like cement, steel, machinery etc. will get linked. But this is more of a medium term strategy and is a continuation of the track already laid down by the government.

Bank recapitalisation, infra push, SME boost good news for economy but may not revive private investment

Union Finance Minister Arun Jaitley. PTI

Two points need to be emphasised here. First, the government's path of infra spending will be limited to the fiscal space that is available, and while it has targeted Rs 3.1 lakh crore of capex in FY18, we can expect some increment in the coming years. The rest has to come from the market or central public sector enterprises in their respective fields. And second, government spending cannot on its own enthuse private spending, and one cannot jump to the conclusion that this will bring about a turnaround, though admittedly the government will be the engine to growth as has been the case so far. Therefore, one must be cautious while extrapolating this scene to the private sector.

The major problem today is consumer demand which has to revive exogenously and will do so gradually. The present stimulus spoken of is futuristic in the infra space, and will be bound by the fiscal contours that have been accepted by the government. Also, state governments are pressured with their fiscal balances and may not be very active in the next two years or so.

The other announcement, regarding recapitalising of banks, is interesting. It has been accepted that public sector banks (PSBs) have to be capitalised and various options have been mooted so far. Direct government intervention through budgetary support has its own limitations, and has hence been done according the roadmap laid down by INDRADHANUSH.

Privatisation has been on the radar but one is still not sure how to go about it, as there is the challenge of valuation in the market. Presently, given the muted demand for credit from industry, the pressure on banks on account of low capital is not really visible. But if growth starts accelerating, there will be an increase in demand for credit, especially from small and medium enterprisess (SMEs), which have limited access to alternatives, which in turn will pressure banks' capital position. Therefore, the move to provide Rs 2.11 lakh crore is pragmatic and necessary, though its implementation will have to be followed closely, since it means a combination of issuance of recap bonds (as was done earlier), privatisation (partly as per the existing plan) and budgetary support.

As an addendum to this recap exercise, the government has launched a new plan for SMEs on trade receivables, which is a major challenge for them where payments get stuck for up to three months from the buyers. By starting an online discounting scheme for them with PSBs being the counter-party, one of the main problems of these units would be addressed. This segment has been affected by both demonetisation and GST, and would hence get substantial relief if implemented efficiently, though it is still premature to jump to a conclusion, given that similar such platforms have been suggested earlier and have not quite taken off.

How does one interpret the government's take on the economy? It has not given its own GDP forecast, but believes that the worst is over and things have touched the trough and will go no lower. This sounds reasonable. But the government has quoted the IMF forecast of 8 percent in the coming years and hasn't put its own predictions on the table. Readings on inflation are right, as is the case with CAD, even though the present pause seen in software and remittances could make the 2 percent mark the new benchmark and the decimal based (ie less than 1 percent) ratio witnessed last year will not be seen this year.

The government has provided encouragement on the fiscal front that the target of 3.2 percent will be maintained and that it will move to the 3 percent mark next year. Greater comfort comes from news on disinvestment, where it expects the target to be exceeded, which has otherwise always been under a cloud of doubt. Given that Rs 20,000 crore has been raised till September and another Rs 50,000 crore will be raised in the second half of the year is good news for the stock market.

On the whole, one should be happy with the announcements. One may have less exuberance in the current state of the economy, but the future path on government expenditure on infrastructure is encouraging. Banks will see streams of hope here and given the Centre's track record of acting fast, one can also expect speedy implementation. The SMEs will see some glitter, though in limited measures until such time that these schemes really click.

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Updated Date: Oct 25, 2017 10:21:25 IST

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