PSU bank capital infusion plan gets thumbs-up from IMF

The IMF has lowered India’s growth projection to 6.7% in 2017, 0.5 percentage points less than its previous two forecasts and slower than China’s 6.8%, attributing it to demonetisation and introduction of the GST.

Stressing that India will have to reform continuously to accelerate growth, the International Monetary Fund (IMF) today welcomed the government announcement to up the recapitalisation of state-run banks as a “positive”.

“We have a long view that more resources are needed for recapitalisation and from that sense, the plans put out is a positive step,” said Andreas Bauer, senior resident representative for the Fund, at an event here.

Stating that there is no dearth of reform agenda needed, he said a series of reforms is needed to achieve the 8% GDP growth aspiration.

“Reforms is not a series of 100 metre dashes, it is a marathon, a continuous process,” he said, speaking at a specially organised event on Indian growth at the NSE here.

“India needs to get more traction on structural reforms and I don’t think there is not too much of (paucity) in terms of new ideas needed. The ideas are there, in sight.”

He said no single reform can help the country and pointed out broadening of the GST net to include realty and electricity, and labour reforms as other essentials.

Earlier in the day, the finance ministry announced a plan under which it spelled out a Rs 2.1 lakh crore recapitalisation agenda for the 20-odd state run lenders which control over 70 per cent of the system.

Apart from helping the NPA-saddled lenders meet stricter capitalisation norms, the additional capital will also help increase credit supply to the economy witnessing sagging growth.

Career central banker and former Reserve Bank deputy governor HR Khan also welcomed the government announcement.

“It is a positive move. It should have happened earlier. But then it has to be accompanied by other measures in terms of governance, managerial reforms in PSU banks. Risk appetite has to increase and fear factor has to go,” Khan told reporters here.

Teerthankar Patnaik, an economist with Mizuho Bank, said now that the government has taken cognisance of the capital problem, “we can now witness the banks starting to lend again”.

The move will increase credit supply to the smaller businesses, who are not able to access the money market alternatives where credit is available cheaper, he said.

Citibank’s Samiran Chakraborty, however, flagged concerns on the potential distortions in the money supply as three kinds of state-backed instruments, including the recapitalisation bonds, vie for investments.

He, however, said “we will have to look at the ways of solving the NPA trouble”.

As the government approaches the 2019 elections, Credit Suisse’s India Equity Strategist Neelkanth Mishra said chances of more Big Bang reforms are limited, given the difficulties being faced by GST.

“There is no bandwidth for disruptions,” he said.

The country’s representative to the IMF, Subir Gokarn, said as it approaches the elections, the government should focus on the initial steps taken by it like the Jan Dhan Yojana, skilling and employment initiatives and work on improving ease of doing business.