Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Recapitalisation of banks: With caution
The government has commited itself to a bold programme to provide additional capital to public sector banks. The Rs2.11 trillion recapitalisation plan—Rs0.76 trillion of equity from the government and financial markets and another Rs1.35 trillion through recapitalisation bonds has been approved. It should be adequate for the next two years. Rating agency CRISIL has estimated that public sector banks will need about Rs1.4-1.7 trillion of additional capital by March 2019 to meet the international Basel III requirements.
Burdened with bad loans as well as stressed assets of close to Rs. 10 lakh crore, India’s banking sector has been facing issue of extending fresh loan in recent quartes.
The economy has been seized in the twin balance-sheet problem. Over-leveraged companies unable to invest or borrow afresh and banks unwilling or/and unable to finance fresh investments made private investment-led recovery seemed unlikely.
The Centre is betting that recapitalisation plan will strengthen the banks’ ability to extend credit at a faster clip. RBI Governor Urjit Patel has said this is the first time in a decade that there is a real chance of meeting the banking sector’s challenges. Although resorting to recapitalisation bonds is not a desired outcome, it is perhaps the best that the government could have done in the given circumstances. It is important to note that India is predominantly a bank-financed economy and would find it difficult to grow at a higher rate without the necessary support from the banking system. Infusion of capital will fast-track the resolution of non-performing assets and will help economic revival with the restoration of flow of credit to small and medium enterprises. Drastic corrective measures were needed to solve the twin balance sheet problem.
As the recapitalisation deals with the stock of toxic assets, the challenge will be to ensure that the lending spree to influential industrial groups that took place is not repeated.
Giving banks extra capital was only one of the seven grand themes of the Indradhanush programme announced in 2015. The reform of the Indian banking sector—and especially the privatization of banks—should be the next step.
Every bank recapitalisation of this sort naturally brings in its wake fears of moral hazard. Banks will not take adequate precautions when they are lending when they know that the government will step in to help if the loans turn sour. The weaker banks should be given capital only to maintain their current operations, maybe by asking them to use incremental deposits only for investment in government securities. Meanwhile, the larger borrowers who have defaulted on loans should face the heat of the new insolvency law, rather than be allowed to free ride on the recapitalisation. Such market discipline is needed.
The government needs to decide what proportion of the fresh capital will go for provisions against existing bad loans and how much is to be allocated for new loans.
The NPA reform and disciplining of errant companies should be focused upon. This will give credence to the initiative.
The government should back bank recapitalisation with reforms in the financial sector—and in public sector banks in particular. The fact that recapitalisation bonds can be used for capital infusion should not become an alternative for better governance.
Connecting the dots:
The central government recently approved the plan for recapitalisation of banks. Discuss the rationale behind and also what all other steps are required to be taken if the plan is to succeed in revamping the banking sector.
TOPIC: General studies 2:
India and its neighborhood- relations.
Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.
Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.
Important International institutions, agencies and fora- their structure, mandate.
An alternative to Belt and Road Initiative
Recent developments have set the stage for some real competition for promoting connectivity in Asia and opened up fresh opportunities for India to shape the outcomes. Only a few months ago, Delhi seemed alone in opposing China’s trillion dollar Belt and Road Initiative (BRI) that has been viewed with awe around the world and enthusiastically embraced by most of its neighbours in the region. Now Delhi may be in a position to work with its partners — especially Japan and the US — to offer a credible alternative to the BRI. The US and Japan have supported Delhi’s criticism of the BRI during Prime Minister Narendra Modi’s visit to Washington in June and Prime Minister Shinzo Abe’s visit to India in September. Delhi, Tokyo and Washington have also begun a serious conversation on working together on Indo-Pacific infrastructure development.
India’s objection to BRI:
When Beijing convened a high-level international gathering to seek political endorsement of the BRI last May, India refused to participate at any level despite much diplomatic pressure from China.
Arguing that projects under China’s BRI have not met international norms for infrastructure development, Delhi insisted that the “connectivity initiative must follow principles of financial responsibility to avoid projects that would create unsustainable debt burden for communities; balanced ecological and environmental protection and preservation standards; transparent assessment of project costs; skill and technology transfer to help long term running and maintenance of the assets created by local communities.”
Delhi also affirmed that “connectivity projects must be pursued in a manner that respects sovereignty and territorial integrity” of other states.
The return of Prime Minister Abe with a sweeping mandate in the snap general elections to the lower house of the Japanese parliament should help reinforce Tokyo’s own programme to promote connectivity in Asia.
In 2015, Abe had announced the partnership for quality infrastructure (PQI) with a fund of nearly $110 billion. In an enhanced version of the initiative announced in 2016, Japan plans to spend about $200 billion during the next five years on infrastructure projects around the world.
Unlike China, Japan brings much greater experience in executing development projects in third world countries and is offering much better terms for its assistance.
Well before Xi announced the BRI in 2013, Abe had unveiled a new vision of regional connectivity. During his first term as prime minister, Abe visited India in 2007 and in his address to Parliament talked about “confluence of the two seas”.
More recently, he expanded on the concept by talking about a “Free and Open Indo-Pacific”. It now calls for connecting “two continents” — Asia and Africa — and “two oceans” — the Indian and Pacific through trans-border connectivity corridors.
In a major speech, the US Secretary of State, Rex Tillerson, outlined a strong critique of China’s Belt and Road Initiative. Describing China’s development assistance as “predatory economics”, Tillerson accused Beijing of undermining the sovereignty of its neighbours in Asia. He echoed India’s criticism of the BRI by saying China’s projects burden host countries with large debt and conditions that force a swap of debt for equity and strategic control of assets.
India needs to provide a real alternative to the BRI. Delhi has seen countries like Sri Lanka and Burma express political reservations against some of the Chinese infrastructure projects, suspend some of them, but eventually renew the engagement with Beijing.
Many Indo-Pacific nations have limited alternatives when it comes to infrastructure investment programmes and financing schemes, which often fail to promote jobs or prosperity for the people. It’s time to expand transparent, high-standard regional lending mechanisms — tools that will actually help nations. India and the United States must lead the way in growing these multilateral efforts.” Tillerson has revealed that the US has begun consultations with other countries in the region about providing alternative financial mechanisms to China’s BRI.
India’s emphasis in the coming days must be three-fold.
One is to press ahead vigorously with the large number of infrastructure projects that it has undertaken with its own resources in the Subcontinent and the Indian Ocean.
Second is to intensify the current discussions with the US, Japan, Europe and other partner countries to coordinate their regional infrastructure initiatives as well as take up joint projects in the Indo-Pacific.
Third, Delhi must quickly find ways to overcome its many institutional limitations in implementing projects in other countries.
Offering an alternative to China’s BRI is not about a zero-sum rivalry with Beijing. By demonstrating the possibility for sustainable infrastructure development, Delhi and its partners can improve the bargaining capacity of smaller countries vis-a-vis China and might eventually encourage Beijing to discard its predatory geoeconomics and turn the BRI into a genuinely cooperative venture.
Connecting the dots:
While earlier India seemed to be only country to object to BRI initiative of China, recently US and Japan have also raised their concerns. This opens up an opportunity for India to ensure collaboration with US and Japan to provide an alternative to BRI. Critically discuss.
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