In a stimulus package aimed to boost flagging economic growth, create jobs and increase credit flow, the Union Cabinet on Tuesday approved a Rs 2. 11 lakh crore recapitalisation plan for state - run banks and massive road infrastructure investment of nearly Rs 7 lakh crore over five years.
Indian industry warmly welcomed the steps.
Of the support to banks, Rs 1. 35 lakh crore will be raised through recapitalisation bonds and the remaining sum through budgetary support and market borrowings, Financial Services Secretary Rajiv Kumar told the media in the presence of Finance Minister Arun Jaitley and a battery of Ministry Secretaries.
Under the road connectivity programme, the government will construct 84, 000 - km highways in five years.
Of this, the Bharatmala project component will involve an outlay of Rs 5. 35 lakh crore and generate 14. 2 crore man - days of work.
Its funding will be raised as debt from the market (Rs 2. 09 lakh crore), private investments through PPP (Rs 1. 06 lakh crore) and from accruals to the central road fund and toll collections (Rs 2. 19 lakh crore).
Jaitley said the economic blueprint to revive growth being presented follows extensive recent discussions on the state of the Indian economy.
"You will recall the press conference last time, where I mentioned we will respond appropriately to the situation as it develops, " he said.
"We have conducted an analysis within the Ministry and held detailed consultations with the Prime Minister on the state of the economy.
We have decided on the steps needed to sustain the growth momentum, " the Finance Minister said.
"The unprecedented recapitalisation and the initiatives announced today (Tuesday) are expected to have a noticeable impact in the near term, contributing to accelerated economic activity, employment, and growth of the economy, " he added.
The public sector banks' recapitalisation comes amid increase of their non - performing assets (NPAs), or bad loans, to 82 per cent of their stressed assets, Kumar said.
"The NPAs of government banks have increased to Rs 4. 55 lakh crore between 2015 and 2017, " he said.
"Of this, 12 cases, since referred to the NCLT (National Company Law Tribunal), account for Rs 1. 75 lakh crore, or 25 per cent of all NPAs, " he added.
Pointing out that the accumulated NPA figures reflect the result of "aggressive lending" in the past, Jaitley said the government's move to fund banks comes at a time when private sector investment has dwindled.
Chief Economic Advisor Arvind Subranmanian, who was also present at the briefing, clarified that the recapitalisation bonds would count as debt, while their exact nature would be made available in due course.
The government, however, denied that this support to banks would affect fiscal consolidation.
The Finance Minister said the banks would get Rs 18, 000 crore under the Indradhanush plan.
Under the Indradhanush roadmap introduced in 2015, the government had announced infusion of Rs 70, 000 crore in state - run banks over four years to meet their capital requirement in line with global banking risk norms known as Basel - III.
This stimulus package comes after data from various sources showed India's GDP growth flagging under the twin impact of demonetisation and Goods and Services Tax.
Commenting on the development, State Bank of India Chairman Rajnish Kumar said in a statement: "This milestone announcement on recapitalising banks in one go is a bold and courageous move and the need of the hour. "
"It will generate balance in overall demand and supply by bringing more investments in sectors like infrastructure.
These funds will also help in efficiently managing risk and credit capital related requirements of the banks. "
The Confederation of Indian Industry (CII) welcomed the move, saying it will kick - start the credit cycle and facilitate private investments.
"The Cabinet decision to address a vital issue is very timely and welcome.
We are especially pleased with the announcement of recapitalisation bonds, which CII had recommended strongly, among other measures, " said Chandrajit Banerjee, Director General, CII.
Industry chamber Ficci said it hoped the Reserve Bank of India will also pro - actively seek to boost investment and consumer demand through an easing of the repo rate.
The decision to invest in PSU (public sector undertaking) bank recapitalisation should result in increased lending, especially to the MSME (micro small and medium enterprises) sector, " said Pankaj Patel, President, Ficci.
The day's announcement of recapitalisation along with a booster dose of Rs 14 lakh crore expenditure will prove to be a mega turnaround point for the Indian economy which was tackling issues out of GST and demonetisation, said D. S. Rawat, Secretary General, Assocham.
"These measures would surely set the stage for revival of private sector investment, " he said.
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