Banks recapitalisation will hurt govt’s debt-to-GDP ratio
New Delhi: The government’s decision to recapitalize public sector banks through issue of bonds worth Rs1.35 trillion over two years will increase India’s debt-to-GDP ratio, making it difficult for the government to implement the N.K. Singh fiscal discipline review committee’s report.
Finance minister Arun Jaitley on Tuesday announced a Rs2.11 trillion bank recapitalisation plan for state-owned lenders weighed down by bad loans, seeking to stimulate the flow of credit to spur private investment and economic growth that slowed down to a three-year low of 5.7% in the June quarter of 2017-18.
Over and above the bond issue, banks will raise funds from the market while diluting government equity. The government has not yet revealed the nature of the bonds and the issuing authority though it has said most of it will be front-loaded with maximum allocation in the current fiscal itself.
The N.K. Singh committee that submitted its report in April this year recommended anchoring India’s fiscal discipline by focusing on bringing down the debt-to-GDP ratio of the centre steeply to 38.7% by 2022-23 from 49.4% in 2016-17. The government is yet to take a final view on implementing the recommendations of the committee.
UBS Bank in a report released on Wednesday said while recapitalisation bonds may not be counted as part of the fiscal deficit and are likely to be liquidity neutral, yet debt-to-GDP could increase by around 120 basis points if the government goes ahead with the issuance.
Brokerage and investment firm CLSA in a note said the downside is that bank recapitalisation will increase the central government’s debt-to-GDP ratio by one percentage point to 48% and will lower the chances of a sovereign credit rating upgrade.
The finance ministry in a statement on Tuesday said from the angle of internal and external public debt stock, India does not face serious fiscal solvency-related issues. “Government of India’s total outstanding liabilities-to-GDP ratio is budgeted to decline from 46.7% by year-end 2016-17(RE) to 44.7% by year-end 2017-18,” it added.
The N.K. Singh committee and the government’s calculations of public debt vary as both follow different methods.
Chief economic adviser in the finance ministry Arvind Subramanian said as per accounting practices followed by the International Monetary Fund (IMF), such a bond issue is considered “below the line” financing and does not add to the fiscal deficit while under Indian accounting practice it adds to the existing fiscal deficit.
“IMF convention more economically intuitive because issuing bonds a capital transaction; they do not increase demand for goods and services. Finally, accounting is mostly moot. Government already liable to banks as owner. Issuing bonds merely makes explicit an implicit liability,” Subramanian tweeted.
However, he did concede that such a bond issue will add to public debt.
N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, said even if the government keeps the recapitalisation bond issue off-budget, the interest payment has to be made from the budget which in turn will have a marginal impact on fiscal deficit. “The impact will be felt more next year as only five months are left in the current fiscal year,” he added.
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