Budget 2013-14: Recapitalisation of banks must be ensured

By Dr Brinda Jagirdar,

Economist, State Bank of India (SBI)

The Budget 2013-14 is framed against the backdrop weak industrial growth, sticky inflation, concerns on fiscal deficit and widening current account deficit.  Since industry has grown only by 0.7 percent during FY13 so far (April-December), it will be quite a challenge to even touch the 2 percent growth projected by Central Statistical Office (CSO) for the financial year.

The slowdown in overall GDP growth is also impacting the business growth and asset quality of banks. So in my view, the first issue the Budget must address is reviving investment in the economy on a sustained basis. In particular, to enable the economy to achieve 8-10% GDP growth, the recent decline in domestic savings rate, especially in financial assets, needs to be reversed.

At a time when interest rates in the economy are softening, it will be a challenge to mobilise financial savings. The current trend of lukewarm growth in bank deposits is a matter of concern more so because bank deposits are getting pushed out and funds are flowing into the shadow banking system of Liquid Mutual Funds, Tax Free bonds by PSUs and so on. 

Perhaps, companies offering tax-free bonds should not be allowed to unfairly crowd out the retail market and there is no necessity of giving tax advantage to these large infrastructure companies as these entities have the financial strength and standing to raise funds directly from the market.

Instead, banks, provident funds and pension funds could be allowed this benefit of garnering tax free long term funds for investing in infrastructure, which would help promote a vibrant corporate debt market and incentivise infrastructure development. Therefore, the tax advantages flowing to non-banks, which affect deposit mobilisation by banks, may be re-examined in the present context.  

As we have to leverage our demographic dividend urgently, the Budget must focus education and incentivising capacity creation in this sector. Skill development must go hand in hand with education and manufacturing and all this must be done with a sense of purpose and urgency. 

Banks are already extending education loans and to improve recovery and further incentivise them, the UID may be made mandatory for borrowers availing education loan. Further, presently deduction under Section 80-C for payment of tuition fees up to Rs 1 lakh is allowed.

This may be raised by another Rs 1 lakh to cover repayment of principal amount, where the benefit has not already been taken under section 80C as tuition fee.

The third area I will emphasise is agriculture. Government is already providing interest subvention for crop loans, but this interest subvention may be extended to all term loans in agriculture.

Term loans help to add overall investment and therefore interest subvention will give a fillip to capital formation in the economy. India's banking sector has remained resilient in the face of the global economic crisis and has received praise from abroad as it has managed to weather the economic and financial storms raging globally.

A sound regulatory framework as well as strong systems and processes in banks have helped India's banks. Going forward, the Budget must ensure that adequate provision is made for recapitalisation of banks so that they are able to support India's growth in the years to come.