PRESENTATION ON STATE OF ECONOMY

₹1.35 trillion will come from recapitalisation bonds, ₹76,000 cr through budgetary allocation and fundraising

The government made a detailed presentation on the state of the economy, saying it was on a strong wicket with sound macroeconomic fundamentals. India has been the fastest growing major economy for the last three years, it said and added temporary hiccups were not unusual when reforms were effected.

The finance ministry on Tuesday announced a ₹2.11 trillion recapitalisation package for state-owned banks weighed down by bad loans, seeking to stimulate the flow of credit to spur privatesector investment. Capital allocation to banks would ensure borrowers get adequate funding, said Rajiv Kumar, secretary in the department of financial services. The government is seeking to kick-start the private sector investment cycle to boost an economy that grew 5.7% in the quarter ended June, the slowest pace in three years.

Out of the total commitment, ₹1.35 trillion will come from the sale of so-called recapitalisation bonds. The remaining ₹76,000 crore will be through budgetary allocation and fund-raising from the markets. The recapitalisation package marks a sharp increase over the current budgetary allocation. Under the Indradanush plan, the government has allocated ₹20,000 crore towards bank recapitalisation over the current and next fiscal years.

Indian banks are sitting on a stressed asset pile of close to ₹10 trillion.

According to some experts, considering the government’s current fiscal position and the huge recapitalisation requirement, this method of capital infusion is possibly the best option because not all public sector banks are in a position to tap markets given the asset quality issue.

Such bonds were sold in the 1990s to recapitalise banks via a route which was cash-neutral. Here, the banks sold their shares, through a rights issue, to the government, which in turn sold these bonds to the banks.

The government has not specified details of the issuance of recapitalisation bonds.

Finance minister Arun Jaitley told reporters that the impact of the recapitalisation bonds on the fiscal position will depend on their legal nature and the issuing agency. The budget has set a fiscal deficit target of 3.2% of GDP for this fiscal.

While there will be takers for such instruments, the rate on the bonds will depend on what route is used to sell them and whether these bonds get statutory liquidity ratio status, bond dealers said.