Public-sector banks (PSBs) won’t really need capital from the government next fiscal, as they are in a much better shape now than they have been in recent years, chief economic advisor Krishnamurthy Subramanian said on Monday. However, the government will intervene should there be any pressing need for it.
Having extended Rs 70,000-crore capital to state-run banks (including IDBI Bank) in FY20 and as much as Rs 3.1 lakh crore in the past five years, the government has refrained from providing for more capital in the next fiscal in the Budget. As many as 13 PSBs clocked profits in H1FY20, against just six a year before.
In an interview to FE, Subramanian also defended the government’s decision (and the timing) to trim the corporate tax rate in September last year, instead of taking steps to boost consumption, even though private investments are still hard to come by. The corporate tax cut was a “necessary condition, if not necessarily sufficient” to improve growth, as complementary measures are also important.
The government, he said, chose to offer a long-term cure for the economic ailments instead of providing a steroid-type solution. The flow of investments, in response to the rate cut, typically takes place after a time lag, he stressed.
Asked if the government would pick up equity in some shadow-lenders that are stressed to help credit flow, the CEA said whatever the Centre intended to do has been announced in the Budget. Budget provisions like the one on the Sarfaesi Act etc would help non-banking financial companies. He also asserted that NBFCs are in better shape now than they were six months earlier.
The Budget has proposed that the limit of asset size of NBFCs to be eligible for debt recovery under the Sarfaesi Act be reduced from the existing Rs 500 crore to Rs 100 crore or loan size from Rs 1 crore to Rs 50 lakh.
“If the decision to cut the corporate tax was to be taken, say, a year later, the impact would take even longer to be felt,” he said. “Sustained growth requires private investments. If you want to be a short-termist, you can boost consumption but boosting consumption without providing the right conditions for an increase in investments to enhance growth is like providing steroid when a person is sick. It will make the person look healthy for a short while but when the impact of it goes away, the disease will come back even stronger.”
Commenting on the Budget’s ambitious revenue buoyancy target of 1.2 for FY21, compared with just 0.5 (RE) this fiscal, the CEA said the slide this fiscal was caused mainly by the sharp cut in the corporate tax revenue (with potential gross revenue forgone of a massive Rs 1.45 lakh crore) and that the target is realistic.
Source: Financial Express