Arun Jaitley, India’s finance minister, speaks during the Bloomberg India Economic Forum in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

Government Unveils Rs 9 Lakh Crore Package To Stimulate The Economy

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Two Big Announcements

Finance Minister Arun Jaitley on Tuesday announced two substantial reforms after a Cabinet meeting as the government attempts to revive the economy from its worst slowdown in three years.

The first announcement was in the infrastructure space as the Cabinet approved building 34,800 kilometers of highways under its Bharatmala plan. The Centre will invest Rs 5.35 lakh crore towards the plan that is aimed to connect economic corridors across the country. Overall, the government will build 83,667 kilometers of roads over the next five years through an investment of Rs 6.92 lakh crore, including the Bharatmala plan.

The other, and bigger announcement was that it allocated Rs 2.11 lakh crore over two years for the recapitalisation of public sector banks. The plan is intended to help banks make adequate provisions against bad loans and revive lending, which in turn, may help bolster a recovery in economic growth and private investment.

Here are the highlights from the Cabinet briefing.

No Immediate Effect Of Recap Plan: Saugata Bhattacharya

The plan does not have any immediate implications this year, or the next year, Saugata Bhattacharya, chief economist at Axis Bank told BloombergQuint. He said that since part of the funds are being raised by issuing bonds, it will not add to the Centre’s fiscal deficit, except for the interest paid on those bonds.

Banking Reforms To Be Coupled With Recapitalisation Plan: Jaitley

Finance Minister Arun Jaitley said the bank recapitalisation plan will be implemented along side a host of banking reforms to cut down indiscriminate lending. He did not offer any further details on the reforms.

Jaitley said that banks lended "indiscriminately" between 2008 and 2014, when gross advances increased Rs 34 lakh crore. A "large part" of this indiscriminate lending has now turned as non-performing assets, he added.

Cabinet Approves Mega Bank Recapitalisation Plan

The government has announced infusing Rs 2.11 lakh crore to strengthen public sector banks, through a mix of recapitalisation bonds, budgetary support and market raising, said banking secretary Rajiv Kumar.

Source: Press Information Bureau
Source: Press Information Bureau

Part of the money will be from banks raising their own capital, where the government can reduce their stake to 52 percent, said Arun Jaitley, who called it a “bold move”. The infusion will be front-loaded through recapitalisation bonds, whose nature will be decided in due course, Jaitley added.

Strengthening the country's banking system will result in more jobs, growth and investments, Kumar added. Banks are ready for a take-off due to strong economic fundamentals and push to public investment in infrastructure, he added.

Once you strengthen banks, appetite for their stock will improve
Finance Minister Arun Jaitley

In three and a half years, the government has already infused Rs 58,848 crore in PSBs under the Indradhanush plan. This is compared to Rs 62,734 crore infused in the six years to 2014, Garg said.

The government's recapitalisation plan is "why banks have mostly remained Basel-III compliant," he added.

Cabinet Approves Rs 5.35 Lakh Crore Highway Plan

The cabinet has approved construction of 34,800 kilometres of highways under its BharatMala plan, said Finance Secretary Ashok Lavasa. The government will invest Rs 5.35 lakh crore towards the plans. It is aimed to connect economic corridors across the country to unlock their potential, according to Lavasa's presentation.

Government Unveils Rs 9 Lakh Crore Package To Stimulate The Economy

The plan also involves developing border roads, that will “enhance national security”. The development of coastal roads will also improve port connectivity, Lavasa added.

For funding, Rs 2.09 lakh crore for the Bharat Mala project will be borrowed from the market, while Rs 1.06 lakh crore will come in from private investments, Lavasa said.

While the BharatMala project is for highways, the government is aiming to build 83,667 kilometres of roads in the next five years, according to Lavasa’s presentation.

Huge spending on infrastructure announced today will give a fillip to private sector invest
Finance Minister Arun Jaitley

The outlay for Railways spending is set at Rs 1.31 lakh crore. Of this, Rs 50,762 crore had been spent till August-end, Lavasa said.

Government Unveils Rs 9 Lakh Crore Package To Stimulate The Economy