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'Bank recap plan to push GDP growth to 7% in FY19'

Monday, October 30, 2017

The government's recapitalisation plan for public sector banks is likely to propel credit growth by up to 700 basis points to 15% and as consequence push up GDP numbers to 7% in the next fiscal, says a report.

The government recently unveiled a Rs 2.1 lakh crore, (representing 1.2% of GDP), recapitalisation package for public sector lenders which will be injected over two years.

The capital infusion will be funded through three sources -- Rs 18,139 crore from budgetary provisions, Rs 58,000 crore from the market as the government dilutes its stake and Rs 1.35 lakh crore through recapitalisation bonds issued by the government.

According to the report by brokerage firm Ambit Capital, lending growth at across banking system was estimated to be at 8% in 2018-19. However, with recent recapitalisation (recap) plans in play, the credit system is expected to grow to 12-15% during the time period under review.

"This in turn is likely to improve prospects of growth for the industrial sector as well as the services sector, thereby propelling headline GDP growth to 7% year-on- year in FY19 from 5.8% in FY18," the report said.

As per Ambit estimates, industry is likely to see a 7% growth in 2018-19 from 5% in the current fiscal. Services is projected to grow at 7.3% in the current fiscal and rise to 7.5% in the succeeding year.

Besides, agriculture growth is expected to get a boost from an estimated 1.5% this fiscal to 4.2% in the next financial year. Meanwhile, Ambit expects government to side-step fiscal prudence as it focuses on winning 14 elections in coming 18 months.

"The government side-stepping fiscal prudence assumes significance particularly because the government has already spent 96% of the full-year fiscal deficit, which has been the highest in the past many years," it said.

Interestingly, the report noted that contrary to popular belief among other experts, the recap plan can be viewed as being "fiscally neutral" only if central government's accounts are seen in isolation that is distinct from the PSUs it owns. "If the central government as an entity is defined as being a separate entity which is distinct from the companies it owns then by that definition disinvestment should also be excluded from the central government’s accounts," it said.

"However, if the government is defined as a larger entity, including PSUs then the bank recap bonds are clearly not fiscally neutral," it added. Moreover, Ambit observed that the bank recap plan will result in additional supply of government paper irrespective of whether it issues this directly or indirectly.

On impact of recap plan on markets, the report said the initiative has opened doors to a recovery in Sensex EPS (earnings per share) growth in 2018-19. "We expect 15% EPS growth in FY'19 and publish our FY'19-end Sensex target of 32,300 (1% below the current level of the Sensex) on the back of this," it added.

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