CEA Subramanian Hints At Further Consolidation Among Public Sector Banks

India may further reduce the number of its state-run lenders as such institutions will be classified as a strategic sector under the government’s new policy for state-owned enterprises, Chief Economic Adviser Krishnamurthy Subramanian has indicated.

“In most strategic sectors, there’s competition from private sector; where there isn’t, that will be enabled,” Subramanian said, while addressing the media over video conference on Thursday. India has 12 state-run banks at present after 10 such lenders were merged into four in April this year.

Finance Minister Nirmala Sitharaman, in the “Atmanirbhar Bharat” (self-reliant India) economic package, announced in May that the government will classify sectors into strategic and non-strategic. All state-run enterprises in non-strategic sectors will be privatised, while the number of state-run entities in strategic sectors will be limited to up to four. All other entities in strategic sectors will be privatised, merged or brought under a holding company.

Subramanian said while work on classifying sectors is on, banking is a strategic sector.

To a query on whether India should have a government-backed bad bank, Subramanian said the haircut banks take while selling bad loans affect their profits. This affects the selling of such loans, he said, adding that until this is addressed, a new structure won’t be “potent” in addressing the problem.

Growth Uncertainty

Subramanian said India’s actual growth will depend on the timing of economic recovery. It’s uncertain if recovery will happen in second half of this year or next year, he said. The Finance Ministry’s working on a large range of growth estimates for this year, he said.

“If recovery doesn’t happen this year, the economy will basically have a decline in output, and suppose in second half there’s a recovery, that may be limited,” he said. In April, India’s growth was estimated at 1.5-2%, according to government’s internal calculations, Subramanian said.

Sovereign Rating

Subramanian said India’s fundamentals demand a much better rating after Standard & Poor’s retained the country’s rating at lowest investment grade, and Moody’s Investors Services downgraded the rating by one notch last week.

India’s ability and willingness to repay debt is gold standard, he said.