The fiscal pressures facing the government showed through clearly in the measures announced for the financial sector, where the priority was on raising money rather than spending it.
In the budget announced over the weekend, Prime Minister Narendra Modi’s administration skipped injecting fresh capital into lenders for the first time since it came to power in 2014. Instead, it will sell stakes in two financial firms to raise cash. It will also increase deposit insurance to reassure savers in a banking sector that’s grappling with the world’s worst bad-loan ratio.
The decisions show the limitations PM Modi faces as he balances a widening budget deficit with a financial industry that’s struggling to provide much-needed credit for a weakening economy. Loans to Indian companies and consumers are set to grow about 6.5 per cent in the year through March, the slowest pace in 58 years.
“The government is trying to raise funds from financial institutions and also save on the other hand by not infusing capital into banks,” said Karthik Srinivasan, group head of financial sector at ICRA Ratings, the local unit of Moody’s Investors Service.
At a briefing in New Delhi after presenting the budget on Saturday, Finance Minister Nirmala Sitharaman said her government would consider recapitalizing banks if the need arises. The sector will become more efficient and self-sufficient after a string of mergers last year, said Finance Secretary Rajiv Kumar.
The government is relying on sales of its holdings in IDBI Bank Ltd. and Life Insurance Corporation of India to meet the bulk of its record Rs 2.1 lakh crore ($29 billion) divestment target for the year starting April 1.
Last year, Ms Sitharaman got state-run LIC to buy 51 per cent of IDBI Bank when the lender was reeling under rising soured credit, leaving the government with 47 per cent. This year, she’s looking to sell a stake in LIC itself, though the government didn’t disclose more details.