India embarks on $32.4 billion state bank recapitalisation to boost economy

NEW DELHI (Reuters) - India’s cabinet approved a $32.43 billion plan on Tuesday to recapitalise its state banks over the next two years, in a bid by Prime Minister Narendra Modi to tackle a major drag on the economy that has frustrated his attempts to boost growth.

FILE PHOTO: An India Rupee note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration/File Photo
Once the world’s fastest-growing major economy, India has seen its growth rate plummet to the lowest in three years, far below levels needed to create enough jobs to absorb the million Indians joining the work force every month.

Modi’s government has tried to respond by stepping up public spending, but the slowdown has stressed its finances, making it imperative that private investment picks up the slack.

Officials privately admit they have struggled to revive private investment because state-owned banks, which provide much of the credit in the economy, are saddled with a mountain of bad debt that has crimped their ability to extend new credit.

The huge capital injection into the banks is meant to clear that bottleneck, Finance Minister Arun Jaitley said at a press conference in New Delhi.

“The decision to recapitalise public sector banks with 2.11 trillion rupees will address the bank balance sheet problem and push growth forward,” Jaitley said.

By some estimates, banks need as much as $65 billion in additional capital by March 2019 to fill the hole left by soured loans and to meet new regulatory requirements.

The official announcement, which was followed by a series of tweets from government ministers holding it up as “unprecedented”, comes after a flurry of activity in the government over the past few weeks, driven by the prime minister’s office.

Modi, who swept to power in a landslide victory for his Bharatiya Janata Party (BJP) in 2014 promising a reform agenda to revive economic growth, faces state elections later this year and a re-election bid by 2019.

He has faced criticisms after a surprise scrapping of high-value bank notes last November and a new goods and services tax effected earlier this year disrupted businesses across the country.

People close to Modi have previously told Reuters he wants to control the political damage and ensure the economic slowdown remains temporary.

Mohan Guruswamy, an economist in New Delhi, said the government should have taken action three years ago to revive the banking sector.

“Now it’s more expensive, and we will not see results soon,” Guruswamy said.