The government recently announced plans for investment in roads and recapitalisation of public sector banks. (Click to know more on Bharatmala Pariyojana and bank recapitalisation)
How much can these contribute to revive the economy from its present status of slowed growth rate is highly uncertain.
What are the challenges?
Infrastructure - Resource mobilization on the scale required for road projects may not turn out to be feasible.
Given the long gestation period for many infrastructure projects, the benefits to the economy might not kick in for some time.
Credit - It is not ensured that there would necessarily be an increase in the supply of credit through bank recapitalisation.
For one, the details of recapitalisation bonds will be announced in the next quarter and recapitalisation will happen in 2018-19, delaying any immediate revival.
Secondly, the space for lending depends on the allocation of capital among PSBs.
The finance minister says discretion will be used in allocation, but it will be discrimination based on the past record and future performance of PSBs.
Demand - The demand for credit in the economy is sluggish because investment levels are low, investor confidence is weak, and interest rates are high.
Thus, even if there is an increase in the supply of credit, recapitalisation cannot ensure demand for credit.
This is reflected in the excess statutory liquidity ratio funds with PSBs.
What is desired?
The infusion of equity capital into PSBs could help these banks to provision for their NPAs and clean up their balance sheets.
However, a sustainable solution depends on reforming the lending practices and ensuring that the practice of bad loans didn't continue.
Governance problems in PSBs, compounded through flawed appointments of independent directors as a form of patronage for supporters or cronies, must be addressed.
