Recapitalisation and the Promise of Less Goverment

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