India embarks on $32.4 billion state bank recapitalisation to boost economy

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The government's decision to infuse Rs 2.11 lakh crore in public sector banks and spend Rs 14 lakh crore on infrastructure projects has received the thumbs up from India Inc.

Of the planned sum, recapitalisation bonds will account for Rs 1.35 lakh crore, while the rest will come from budgetary support and equity issuance, said Rajiv Kumar, the financial services secretary.

India has remained one of the fastest growing economies in the world for the past few years, and there are strong macroeconomic fundamentals, Union finance minister Arun Jaitley said at a press conference. Purists may balk at the fact that it is financial engineering-but they must remember that we live in a time in which central banks have bent rules by even buying corporate bonds to fix economies.

"The decision to recapitalise public sector banks with 2.11 trillion rupees will address the bank balance sheet problem and push growth forward", Jaitley said.

Asked if the bank recapitalization plan will impact the fiscal deficit, he said: "It will depend on the nature of bonds and the manner in which it is dealt with". India's foreign reserves have crossed $400 billion in 2017, compared to $100 billion past year, economic affairs secretary Subhash Garg said at the meet.

Mohan Guruswamy, an economist in New Delhi, said the government should have taken action three years ago to revive the banking sector.

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In the last three-and-half years, the government has pumped in '58,848 crore capital in the public sector banks.

In an hour-long presentation made with the help of seven top finance ministry officials, Jaitley tried to explain the current slump in economic growth and assured a steady growth trajectory for the future by showcasing a number of economic indicators like lower current account deficit, declining inflation, rise in forex reserves and infrastructure expenditure.

The government came out all guns blazing, defending the economic measures it has taken in recent years after concerns raised by the opposition on GDP growth. He said banks would get Rs 18,000 crore under the Indradhanush plan over the next two years.

"But cost can be offset by confidence impact of addressing critical bottleneck, increasing credit, private investment, growth". Lauding the GST, DEA Secretary further added that GST has been one of the biggest reform embraced by the country.

India's banks have been plagued by the highest stressed asset ratio since 2000 that have eroded capital buffers and curtailed lenders' ability to offer credit.

The finance ministry said the government continues to work to achieve its deficit target. The government has just $3 billion left in its budget for bank recapitalisation. Recap Bonds are used as payment for the shares bought by the government to ailing banks in a bid to raise their capitals.

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