A lot has been spoken on the near term growth slowdown, which has put into question the government’s ability to drive the economy. However, a look at the measures undertaken over the last 3 years (like efforts on ease of doing business, electricity for all, kick-starting road building, ensuring credit and banking facility for the bottom of the pyramid, GST, new insolvency code, etc) point to a holistic approach adopted by the government to address economic growth.
Policy makers can play a key role in rekindling the animal spirits and spur growth. This is evident from the sharp market reaction to the two big announcements this week, (1) Rs 2.1 trn PSU bank recapitalization and (2) 83,000 km of road infra entailing Rs 7 trn capex. These announcements should put concerns to rest regarding the government’s ability to accelerate economic growth.
October data suggests economy is seeing an uptick with PMIs implying manufacturing and services in growth territory, recovery in exports and flat inflation. Autos (2W, PVs, CVs) are growing in double digits and so is exports, implying GST impact is behind us. While growth headwinds are seen in the form of weak consumer sentiment (job creation), weak farm sector realization (low food prices), and risk aversion in bank lending, we expect government to take further steps to accelerate growth.
The MATH of recapitalization
Capital infusion will not only aid in providing for the bad assets for PSU banks but also help in restarting the credit cycle. Reported stressed asset of PSU banks has been at ~15% of advances. However, with ~55% provisions on Gross NPAs and limited provisions on other stressed assets, the requirement for capital was intense. This Rs 2.11 trn (of which majority may be front-loaded in next few quarters) will help in providing for complete bad assets in coming quarters.
Total recapitalization includes Rs 1.35 trn via recap bonds and Rs 760 bn from budgetary support and market raising
Recapitalization bond of Rs 1.35 trn will be front-loaded and we await clarity on the dynamics (Interest rates, timing etc.) and structure of the recapitalization bonds
Of Rs 760 bn, Rs 180 bn will come budgetary allocation of GoI (as announced in Indradhanush Scheme) and remaining Rs 580 bn will be raised by the individual banks from the market