Funds mop-up from market to support roads, bank recapitalisation

Call it a ‘stimulus’ or christen it any way you like, but the Narendra Modi government seems to have moved decisively to bring the mojo back in the Indian economy that’s been on a slide for several quarters. Without admitting an economic slowdown, the government is attempting, albeit belatedly, a two-pronged strategy to scale up public spending and create millions of jobs lost.

The Union cabinet’s decision to quickly implement the massive Rs 692,000 crore national roads development project, which rests firmly on 34,000-km-long Bharat Mala connecting all borders, highways, ports and airports would result in faster cargo and vehicular movement. A massive re-capitalisation package of Rs 211,000 crore will also breathe life into the moribund 39 listed banks that have been hit by massive non-performing assets (NPAs) worth Rs 8,39,000 crore. This will also create space for corporate lending that has come to a grinding halt lately. The logic of this massive public spending blitzkrieg is that the government is unwilling to deviate from the path of fiscal consolidation at the targeted 3.2 per cent fiscal deficit and below two per cent current account deficit.

The obvious question is where would these funds come from if scarce government resources were not to be breached? Well, a combination of measures seem to have been put in place to bring 14.2 crore man-days of work in five years and push up lending for job creation projects taken up by private companies. This government seems to have finally decided to lean on infrastructure development and banks clean up as twin engines to revive growth in an economy whose fundamentals continue to be strong. Re-capitalising banks beyond the Basel commitments is a big policy heft though budget spending has been limited to Rs 26,000 crore. While majority funds worth Rs 135,000 crore would be mobilised through re-capitalisation bonds, the rest Rs 50,000 crore may come in through phased market borrowing programme.

In effect, finance minister Arun Jaitley seems to have given in, like his predecessors, to spend today and pay later. The asset quality review (AQR) undertaken by the government points to understatement of NPAs, ‘indiscriminate’ lending and ‘sweet heart’ deals clinched by past Congress regimes, bleeding the banks big time. Though no break up on Rs 692,000 crore spending on roads over five years is available, the government will have to mobilise Rs 138,000 crore annually through both budget and non-budgetary resources. That may not be an easy task, given the limited flexibility Jaitley has.

Infrastructure projects with long gestation periods would definitely be funded by institutional finance, with private companies chipping in with their own bit. Even if just 30 per cent of annual funding on roads projects has to be sourced from budgetary resources, the finance minister will have to provide for at least Rs 41,400 crore when he presents the budget for next fiscal. This huge economic revival package is bound to have a bearing on the assembly elections in Gujarat and Himachal Pradesh in the immediate context. Given that the BJP is fighting serious anti-incumbency in the prime minister’s home state where it has been in power for 22 years, the package will provide a booster dose for party cadres. These two ambitious decisions will have full impact by the time Modi goes for re-election in 2019.