Capital infusion will boost market sentiment

Nirupama Soundararajan 27th October 2017

DemonEtisation and GST have been touted as disruptive reforms and like any disruptive reform, it has affected economic growth. In most cases the slowdown in growth is temporary, one that recovers within one or two quarters. To that extent the drop in GDP growth rate is not surprising and was to be expected. Yet, the slowdown has been taken a lot more seriously resulting in the government announcing its big stimulus package.

The slowdown in growth, had it been only the effect of demonetisation and GST, would have bounced back. However, combined with the effects of the twin balance sheet crisis, the problem seems to have escalated. With elections around the corner, the government has to address their shortcomings in job creation. Employment generation is a clear priority, but employment cannot be created with economic growth, and economic growth requires private investment.

India's growth has predominantly been financed by banks. The role of capital markets in capital formation has been negligible. Banks have in the past been under tremendous pressure to fund large-scale infrastructure projects, many of which have not taken off for various reasons. The bullish period preceeding the economic crisis also meant indiscriminate lending by banks not backed by suitable credit checks and risk management measures. The result is the full blown NPA crisis at hand.

Up until such a time that India's capital markets plan an important role in financing growth, industry will have to turn to banks. There have many discussions around a one-time large capital infusement for recapitalisation, but this decision has been staged off for many months and rightly so. As things stand today, circumstances have changed making it an opportune time for a large capital infusion.

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Note: Views expressed in this blog are those of the author.