Union Budget 2016: By sticking to fiscal deficit target, Jaitley has just passed the ball on rate-cut to RBI’s Rajan

Those desperately waiting for a rate cut from the Reserve Bank of India (RBI) may have good news soon.

One thing the Mint road was looking from the union budget 2016 was government’s firm commitment to stick to the fiscal consolidation roadmap. Announcing the Budget on Monday, Finance Minister Arun Jaitley said the government has met its 2016 fiscal deficit target of 3.9 percent and has retained next year's target of 3.5 percent, which is in line with the fiscal consolidation roadmap earlier set.

Union Budget 2016: By sticking to fiscal deficit target, Jaitley has just passed the ball on rate-cut to RBI’s Rajan

Union Finance Minister Arun Jaitley. PTI

“Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth,” Raghuram Rajan said in last bi-monthly monetary policy.

In simple terms, this would mean that the RBI will mostly likely go for a quarter basis points rate cut, as early as in March. The RBI has so far cut its key lending rate, repo, by 125 basis points. One bps is one hundredth of a percentage point. This is possibly one reason why banking stocks, which had crashed initially after the Budget, bounced back. But, it is another question that even if the RBI cut rates, will banks pass on the benefit to the end consumer. So far, despite a 125 bps cut in repo, banks have cut an average 60 bps to the consumer.

Indeed, it was a tightrope walk for Jaitley to stick to the fiscal deficit path given the huge burden on the 7th Pay Commission falling on the government in fiscal year 2017 and government struggling on the disinvestment.
Jaitley has cut down the infrastructure spending by 12 percent in the 2016 budget.

Disappointment on capital

But, beyond this, Jaitley has left nothing much for state-run banks, which control 70 percent of the industry, to cheer. Jaitley has provided Rs25,000 crore for budget, as part of the Rs 70,000 crore announced for five years last year. This amount is too little to take care of the capital needs of India’s government-owned banks given that the banking industry, 70 percent dominated by state-run banks, is in the midst of a crisis. Banks have begun aggressively disclosing their bad assets after RBI set a target of March, 2017 for banks to clean up their balance sheets.

With their total bad loans exceeding Rs 4 lakh crore at the end of December, analysts said Jaitley should have provided more support to tide over the difficult phase. “The allocation given in the budget is inadequate to meet the capital needs of state-run banks,” said Vaibhav Agrawal, vice president research at Angel Broking Ltd.
Remember, Jaitley, as finance minister, has failed so far to get hold of the root of the problems that has engulfed India’s Rs 95 trillion banking industry. He underestimated the capital needs of state-run banks in the initial days of this NDA government when he allocated merely Rs 11,200 crore and refused to think of radical reforms in the banking sector such as merging small banks and bringing in private capital. Though the finance minister recognised the issues later and offered more capital (Rs 70,000 crore over five years), it was too late and too little.

Aversion to privatisation

It is becoming even clearer that the Narendra Modi-government doesn’t want to take up the issue of privatization of state-run banks. This was evident in the budget speech. The only mention Jaitley made in this context was IDBI Bank, when he said the government is examining the option to bring down government stake in some banks below 51 percent in the lender. There wasn’t anything more.

As Firstpost had highlighted before, the problems faced by India’s state-run banks is deeper and concerns with issues of operational efficiency and autonomy, which will remain as long as the government retain the control of these institutions.

The PJ Nayak committee, which had come with a slew of reform measures for the banking sector had proposed to bring down the government stake below 51 percent to provide more capital to the banks. This is also against the spirit of Modi’s own stated agenda of government staying away from the business of running institutions. But, till now, there isn’t any sign of Modi-government progressing on that part.

(Kishor Kadam contributed to this story)

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Updated Date: Feb 29, 2016 15:35:34 IST

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