The government has been busy trying to impress the stock market with its plans to sell stakes in public sector units.
Finance secretary Ashok Chawla said on Wednesday the government may bring down its stake in State Bank of India (SBI) by 4.4 percentage points. That’s welcome.
A lot depends on how this is done. Will the government sell its stake or will SBI have a rights issue the government will not subscribe to?
This is not a matter of detail. The first option means that money will flow into the government’s kitty while the second option means that SBI will get more capital.
The latter is the better option for the economy as a whole. Banks need capital to support loan growth—and Indian banks could be headed for trouble here. The Reserve Bank of India had said in a September report that banks need around Rs5.68 trillion to meet new global capital rules.
Banks starved of capital are bad news for borrowers and economic growth. In short, the need for bank capital is more important than funding the fiscal deficit right now