What is the issue?
- Despite the costs to the exchequer, the decision to recapitalise banks have been largly well received.
- The action has but added to the consistent shift away from the promise of ‘less government intervention’ for better governance.
What is the price of Recapitalisation?
- The government is to provide around Rs 1.5 lakh crore, over two years for recapitalising banks.
- If the sum is assumed to be split evenly, the fiscal deficit this year will go up by about 0.4% of GDP.
- This will come on top of the expected shortfall in non-tax revenues.
- So that the year’s deficit could be about 4% of GDP - a slide from last year’s 3.5%, instead of moving forward to the targeted 3.2%.
- It will also raise the ratio of government debt to GDP, which is already too high.
Is government intervention increasing?
- Banking - More than 70% of the fresh capital to be pumped in is to come from the government.
- Notably, in many banks the extent of government shareholding has slipped to well below that level.
- This means recapitalisation in the manner announced will raise the level of government ownership in banks.
- This would be a policy reversal from the early 2000s (Narashiman Committee Recommendations), that intended to reduce government’s stakes in banks.
- Forced Bailouts - The public shares issued by General Insurance Corporation (a PSU) got a poor response.
- Among institutional investors, the biggest investors were other government owned entities like the Life Insurance Corporation.
- As the list also featured some government banks there is suspicion that government had proded them to bail out the shares issued.
- Notably, since the price of the new shares fell immediately on listing, all investors have lost value at the moment.
- Trend - Increased government role has been felt in pharmaceuticals through price controls.
- Vigourous pursuit of Aadhaar related compliance is seen as an intrusive approach by an over-zealous government.
- Hence, increased government interventions has been felt across sectors and is indicative of a trend rather than isolated incidences.
- Private Withdrawal - Meanwhile, the private sector’s role in infrastructure creation has become more cautious.
- Even new sectors that opened to the private, like ‘defence production’ has made little progress.
What is the way ahead?
- The current regime is clearly faultering on its promise of reducing government’s interventionist approach.
- But the opposition too doesn’t offer much solace in this regard and has rather vouched for a more interventionist leftist agenda.
- The pressure of slowing growth and lack of jobs has been driving most of the present internventions.
- It is to be noted that enhanced GDP growth is what would provide more head room for both pro-market policies and increased welfare speanding.
Source: Business Standard