Since Demonetisation, Modi government has undertaken series of reformative steps, which the government termed as “Structural change” in the Indian Economy, however, remain (until now) evasive on the wound it caused to the economy.
On 24th October, Finance Minister Arun Jaitley’s announced to infuse 2.11lakh crore into Public Sector Banks (PSBs) through Recapitalization and 7lakh crore investments on Mega Infrastructure projects. During this announcement, he said this move is unprecedented. The announcement is indicating two issues; First, Modi Government finally though not in words but in action agreed that there exist a serious financial crisis, which needs huge and urgent financial liquidity push amounting to around 10lakh crore and secondly, Government’s reservation on the disclosure of Issuance and type of bonds implies, it is still unconfident whether this move gives positive result.
By the by, our discussion is neither on how the recapitalization works nor to re-present the statements which were equivocally hyped by the government. Before elaborating my point, as a citizen of India I only can expect that Modi Government’s another “unprecedented” move might bring a positive consequence, unlike previous restructurings. The fiscal infusion into the PSBs and investment on infrastructure is recommended step for countering economic slowdown, but under certain circumstances and for a certain objective.
Before thrash out where Modi Government has done its estimation wrong or say more precisely, shifted its priorities for political image building, I would like to quote C. Rangarajan who worked shoulder to shoulder with Dr. Manmohan Singh as RBI chief, “structural reforms could not be introduced unless a degree of stabilization was achieved. On the other hand, stabilization by itself would not be adequate to prevent the recurrence of a similar crisis in the future. (Reforms 2020, Last 20 Years, Next 20 Years)
In the year 2014-15 when Narendra Modi took oath as Prime Minister of India, the economy was not vibrant like 2004-2010, nevertheless a mixed situation. Industrial growth was 4.8% (reviving since 2011-12), service sector growth was 1.8% lowest in the last decade (except 2012-13, 2013-14), and Agriculture growth was also lowest (4.6%) inflation and CPI was lowest in the last 5 years, export was high (323.4 billion USD), capital formation was moderate (36%). The gross fiscal deficit was 4.09% and revenue deficit was 2.89% of the total Gross Domestic Product (GDP). Public consumption was high (7% of the GDP) than the private consumption (4.5% of GDP), mean manufacturing sector had depended more on government. One deciding factor was, people had lots of liquid cash on hand to invest, but lion's share was invested on Real Estate and Bullions.
It would be a mature step for the Modi Government to choose and address technically some of the key issues from a number of concerns like unemployment, fiscal deficit, trade deficit, reviving sick PSBs, boost to manufacturing and agriculture sector. Instead of doing this government undertook several measures simultaneously. Modi government had preferred the revival of sick PSBs and sticking to fiscal consolidation. In the process, it had called for minimum government, maximum governance. To compensate the spending on manufacture and infrastructure it supportively allowed FDI through “Make in India” scheme. But till 2016 end, government for some mysterious reason failed to take a time-bound appropriate step to resolve the issues. Subsequently, this worsened the situation of the ailing sectors. The exasperated Modi Government had chosen a shortcut way i.e. “Demonetisation”. The aftermath situation can be rightly described by a quote of Gary Busey, “If you take shortcuts, you get cut short.”
In the year 2014-15, the total notes in circulation were 14483.12INR Billion and the notes held in banks was 621.31INR Billion and the Statutory Liquidity Ratio (SLR) was 22.50%. Just before the Demonetisation the total money in circulation “unprecedentedly” increased to 16634.63 INR Billion and notes held in banking department was 662.09INR Billion as per the Statutory Liquidity Ratio adjusted to 20.75%. Repo Rate (6.25%) and reverse Repo (5.75%) Rate was also an all-time low. It seems that Government itself allowed people to take more credit from the Banks. In such situation, It seems highly suspicious that why Modi Government all of sudden increased the Notes in Circulation and overnight demonetised them. By the by demonetisation only did one thing it increased the currency availability in the banks considerably.
On 26th October 2017, Arundhati Bhattacharya, the former head of State Bank of India (SBI) India’s largest PSB said in a media event that If they prepare extra for anything, then its fruit or result was better. Obviously, if there was more preparation (for demonetisation), then definitely it would have been less strenuous on us.
When the whole Economy was yet to heal from the onslaught of demonetisation, Modi government has pushed another ambitious reformation, Goods and Service Tax (GST) with a mid-night celebration in Parliament house. GST, which Narendra Modi, PM of India termed as Good and Simple Tax made such a mess that GST council made more than 7 amendments including tax structures within four months since its implementation on 1st July 2017. The government, as usual practice, hide the weaknesses but puffed that the first quarter since the roll out the Indirect tax collection rose than the previous years. However, in reality, it deliberately concealed the amount to be returned as input credit. An Independent estimation revealed that there are more than 20million job loss and more than 20 thousand small and medium industries closed down after the twin blow of demonetisation and GST.
Let’s have a look at the data provided by the RBI in his Handbook-2017, in 2016-17 financial years, Gross bank credit outstanding with Agriculture and allied sector is 9923.87INR Billion, MSME (26800INR Billion), Retail trade (2346.87INR Billion). Many sectors (except manufacturing 2014-15 3800INR Billion, 2015-16 3714 INR Billion and 3697 INR Billion) has taken new credit to start or boost their business before the GST rollout. Similarly, except Chemicals and Chemical products, Basic Metal and metal products, Rubber, Plastic & their products, and Leather and leather products, credit inflow to all other industry sectors have been decreasing since 2013-14. A government should be more cautious while bringing out any painstaking financial reforms when only a few sectors are optimistic in their business. Instead of widening the positive outlook it allowed to do more economic as well as policy blunders. For example, the BJP and its rightwing Hindutva ideologues went after Cow protection, which almost devastated the Leather and leather-based industry, which had been on the considerable growth track.
When most of the industries not optimistic and don’t find useful to turn the face towards Banks for their business, Modi government infused a lump sum amount in the PSBs. As SBI’s new chairman Rajnish Kumar in an interview pointed out that after the recapitalisation Bank might give more priority to manufacturing industries like steel and cement and less interest rate for certain baskets. This presumption came forward because of government, on the other hand, investing around 7 lakh crore in the mega infrastructure Projects like Bharatmala in the next 5 years. It mean both government and Banks shifted their priorities to certain areas of interests. This will be another blunder, as the Investment on infrastructure gives fiscal gain at a distant future also increase the fiscal deficit, as per the report India’s fiscal deficit during April-August touched 96.1% of the budget estimate for the full fiscal year that ends on March 2018. The deficit was 76.4% of the full year target during the same period a year ago.
Since the Recapitalisation initiative for Modi government is not new as I have pointed out earlier in this article. In 2014-15, it launched one of the ambitious Indradhanush scheme to rescue the PSBs which are burdened by the Bad loans and NPAs. It planned to infuse 70,000crore over the four years. Consequently, the Recapitalization scheme of Modi government is not at all unprecedented, but the amount which Finance Ministry put forth. Recapitalization scheme is not new and also at hand fiscal activity to bail out the banking sector, but it is very crucial how to bailout without further burden on the state exchequer.
While giving clarification to this Finance Minister Jaitley said, the Rs 2.11 lakh crore capital infusions into the banking sector will come over the next two years. It will come in three parts. The government itself will directly pay banks Rs 18,000 crore by buying their shares. It will also encourage banks to raise Rs 58,000 crore from the market. But the bulk of the amount – Rs 1.35 lakh crore – is expected to come from recapitalisation bonds.
According to Reserve Bank of India estimates, the total excess deposits accrued to the banking system due to demonetisation was in the range of Rs 2.8 lakh crores to Rs 4.3 lakh crore. It is these excess deposits that the banks are expected to use to buy the recapitalisation bonds.
Many economists and financial advisors had exhorted Modi Government to increase liquidity ratio to make economy float safely in the crisis. Conversely, Modi government allowed a moderate 10k crore capital infusion for the PSBs in the 2017 budget and push for consolidation of the banking sector. But all of the sudden walling the process of consolidation of PSBs, not bringing out an evolutionary mechanism for debt recovery in a haste government is going to infuse huge money in the banks, even though it is not sufficient. According to the Fitch ratings on September 2017, by 31 March 2019, Indian PSBs need 65USD billion (around 4lakh 23 thousand crores) to meet Basel III capital standards.
In 18th November 2016 when asked in Loka Sabha to provide details of the Loan defaulters and give data state-wise The Union government in his answer remained evasive to provide the names and state-wise data. According to the information given by Ministry of finance, in 2013-14 the wilful defaulters were 6336 with an amount of 45,731INR Crore which grew considerably in 2015-16 to 8,167 with an amount of 76,685INR Crore. The recovery and conviction rate were also not satisfactory.
According to the information given by Care Ratings on the Non-Performing Assets (NPAs) of PSBs, within 1 and quarter years the NPA ratio has grown from 7.69% to 10.21% in June 2017. Data shows soon after the GST roll out the NPAs increased manifold. There is an understandable reason behind it, as government delayed the repayment of input credit, Business needs more credit to run its business forward. Although RBI, not changed its interest rate, it is not easy to lend money to all the sectors.
Secondly, the difficulty of distribution of the recapitalisation fund to the banks. Since, till June 2017, the 11 PSBs account for a share of 67% of the total NPAs 829,338INR Crore. SBI, PNB, BOI, IDBI, BoB account for a share of 47.4% totalling to 3,93,154 INR crore. If the government will focus on NPAs of PSBs only the state-owned banks and other cooperative banks will suffer collaterally as most state governments are not in a condition to bail out their own banks.
I’m going to conclude by quoting Johan O’ Donohue, “Our trust in the future has lost its innocence. We know now that anything can happen from one minute to the next. Politics, Religion, economics, and the institutions of family and community all have become abruptly unsure.”
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