The road to recovery and banking reforms

by Jemma Barsby Content Writer

The Rs 9.2 trillion package announced by Union Finance Minister Arun Jaitley last week is a major move to resuscitate the Indian economy. The route is through the banks (increased lending) and highways (infrastructure). The Rs 6.92 trillion proposed investment in highways and Rs 2.11 trillion bank recapitalisation would be a major turning point believes Jaitley. The farmer also had a gain as MSPs of wheat was upped by Rs 110 to Rs 1,735 a quintal and of pulses by Rs 200. These measures are expected to help improve credit flow to companies from banks weighed down by bad debts and boost public investment. The infrastructure spending to build 83,877 km roads through the Bharat Mala project in the next five years should spread an even money flow across the country; the building of roads as part of the project are expected to c rate 14 crore man days of work. The new focus on MSMEs and the planned direct benefit to them should help the struggling sector and boost employment. The overall gambit of the Finance Minister is clear - the direction should be to a new economy linked to growth and increased job opportunities.

The stock market immediately resonated with acceptance of the Government's moves with a major 435 points rise. PSU banks were the star performers followed by capital goods and infrastructure stocks. The Government move added Rs 2 trillion of wealth in a day at the stock exchanges. The euphoria is fine, but stock indices should not be taken as a major indicator of recovery. The Finance Ministry made a detailed presentation on the state of the economy while announcing the Government's moves, and as Jaitley said: "Our aim is to maintain a high growth economy." Once again, the focus is correct.

However, spending on roads also has to be prudent. During the past few years, technically many kilometres of roads were built but a significant number like parts of the Delhi-Agra highway, Delhi-Ambala highway and NH 24 were literally re-dug and are being re-laid in the name of road widening. The Government has to be cautious on such re-investment. Most roads were functional and jam points were largely because of poor planning. The Agra highway is being rebuilt for years by digging up a fine road, ditto the Ambala highway and NH24.

The NH 24 between Nizamuddin Bridge and the UP border was widened to eight lanes over two years back. It was doing fine except three bottlenecks. These could have been redone with minimum investment. The entire stretch of an excellently built road should not have been re-dug and dumped with concrete, creating endless traffic snarls, increased journey time and cost. It is taking more time in digging than rebuilding. This is useless expenditure and possibly even the Government does not realise the money being looted by contractors. The need for additional lanes may certainly be felt at times but these should be constructed in a planned way without hampering traffic or creating dangerous stretches and destroying what has already been done. Before going for "rebuilding", residents of the area should be consulted on how to save on expenditure and do a better job without everything going haywire as has happened on the three stretches mentioned above. Toll is being charged on stretches that are not drivable. The developed world spends prudently and keeps toll charges affordable. That is possibly why they are developed. They spend very sparingly spend on re-digging.

There is also a flipside to road network development as stretches in the fragile North-East have shown. Road construction has adversely affected the environment in the region but then development too must happen; a balance, however, is needed. The Delhi-Agra-Lucknow and most other expressways have gobbled up prime agricultural land and that too is problematic. The Government should do a detailed study and have discussions with all stakeholders before implementing its plans as development is essential but it has to be thoughtfully implemented and bureaucrats have to be made accountable.

Such a huge effort by the Government certainly needs a fund flow. That is why the recapitalisation of public sector banks has rightly become a priority. Public sector banks had accumulated a total of over Rs 12 lakh crore in NPAs between 2008 and 2014 which, Jaitley pointed out, had constricted banks from giving new loans. These included many for road projects across the country. The challenges for PSU banks are growing. They have to realise that their best capitalisation is through raising deposits. The policy on taxing deposits, lack of long-term deposit plans and charging bank accounts for transactions is the most imprudent approach.

This is driving away depositors, creating social anxiety and putting the economy at high risk. Banks are being recapitalised through budgetary support only to the extent of Rs 76,000 crore. The rest would be through bonds and dilution of Government stake in PSU banks. Many new stakeholders may be the defaulters themselves. Efforts to raise deposits, on the other hand, though a little time-consuming, will create strong fundamentals and would help banks make innovative plans, simplify account-opening procedures, incentivise deposits with higher rates, create competition and lead to an improvement in the overall health of the banks and the economy. PSU banks are not a just a Government resource, as Congress Ministers like P Chidambaram treated them. On the contrary, PSU banks must be treated as people's benevolent custodians and be allowed freedom of commercial functioning. PSU banks have the business acumen to do well; they should be freed of red-tape. Let us rethink the proposal to dilute Government stake as well.

The Indian economy has the capacity to reinvent itself and the Government has done much to encourage it but much more needs to be done.

The road to recovery and banking reforms - The Indian economy has the capacity to reinvent itself and the Government has done much to encourage it but much more needs to be done.

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About Jemma Barsby Advanced   Content Writer

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Joined APSense since, March 10th, 2016, From Delhi, India.

Created on Oct 30th 2017 04:30. Viewed 245 times.


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