Economy on a strong wicket; fundamentals sound: Jaitley

Economic Affairs secretary S C Garg said inflation has consistently come down since 2014 and will not cross 4 per cent this fiscal.

Seeking to boost note ban and GST-hit economy, Finance Minister Arun Jaitley on Tuesday announced a massive Rs 6.92 lakh crore infrastructure spending and another Rs 2.11 lakh crore for bank recapitalisation to revive investments as well as growth.

Flanked by all his five secretaries and Chief Economic Advisor, Jaitley reeled out economic indicators to support government contention that GDP growth slowdown has bottomed out and economy is turning around.

To boost job creation, the government granted enhanced access of funds for MSMEs, including by way of customising Mudra loans.

A presentation was made at a briefing titled 'The India Story: Speeding Up For Take Off!' which highlighted that the economy grew by 7.5 per cent per annum in the three years of BJP-rule since 2014.

For the last three years India has been fastest growing major economy in the world, Jaitley said. "And our intention is that the high growth economy that India has become, we continue to maintain that position."

Economy slowed to 5.7 per cent in the April-June quarter of the current, the weakest pace since 2014 as demonetisation sucked out 86 per cent of the currency in circulation throwing cash-dependent businesses in disarray and the implementation of GST from July 1 hit small and medium enterprises.

"There was a temporary slippage in growth in the last two quarters thanks to transitional effect of demonetisation (of old 500 and 1000 rupee notes) and GST," an official statement issued at the briefing said.

That effect, it said, is now over with all indicators -- industrial production, core sector, automobile and consumer spending -- pointing towards "a strong growth pick up".

"There is expectation of very good growth from second quarter of current year itself."

The finance minister said it is natural that when structural reforms happen there is some impact for limited time. "But medium to long term, there is huge benefit."

The Cabinet, headed by Prime Minister Narendra Modi, today approved a Rs 6.92 lakh crore investment in building 83,677-km of road over the next five years, which will create 14.2 crore mandays of jobs.

With this, the total infrastructure spending cleared by the government touched Rs 14 lakh crore, Finance Secretary Ashok Lavasa said.

Also, a massive bank recapitalisation programme has been approved. Of the Rs 2.11 lakh crore, recapitalisation bonds will account for Rs 1.35 lakh crore and another Rs 76,000 crore will come from budgetary support and equity issuance.

Jaitley said the recapitalisation of PSU banks would be followed by a series of reforms. He, however, did not elaborate.

"When you give such a big push to infrastructure, it helps in job creation. And job creation is the intention to push private sector investment and MSME funding," he said.

Public sector banks, which remain the main source of funding, have seen NPAs or bad loans swell from Rs 2.78 lakh crore as of March 2015 to Rs 7.33 lakh crore in June this year, primarily because of reclassification of loan, Department of  Financial Services Secretary Rajiv Kumar said.

Of that, Rs 1.75 lakh crore relates to just 12 cases which have been referred to NCLT.

The recapitalisation besides repairing their balance sheets would help banks meet the Basel III banking rules.

"The net impact of all these is, private investment will be further strengthened. Infrastructure instantaneously creates job, lending to small and medium enterprises creates job," Jaitley said.

Macro economic fundamentals are strong, he said, adding that there was a need to increase public spending.

"Infrastructure expenditure is unprecedented in the country. Efforts are on to increase public expenditure in various sectors of economy -- rural roads, highways, Bharat Mala, housing, railways."

Also, the intention is to increase private investment in economy. "It was one area which had its own challenges. So far we believed that public sector banks have done indiscriminate lending at one stake. Between 2008-2014, because of indiscriminate lending, a bigger chunk is NPAs," he said.

On reforms that will follow in banking sector, he said, "I'm only indicating that more reforms will happen so as to ensure that there is no repetition of the situation that was there in 2014 where in you lend indiscriminately while hiding the real conditions of those loans. Its only after March 2015 the actual position of banks became clear."

Asked if the bank recapitalisation plan will impact fiscal deficit, he said: "It will depend on the nature of bonds and the manner in which it is dealt with.

"The money which has been deposited in banks post demonetisation that is available for lending, but availability of money doesn't ensure that it can be lent. For that capital adequacy is needed. And that capital adequacy was eroded because of excessive NPAs and because of situation of banks between 2008-2014."

Jaitley said the Cabinet decided that a "bold step" should be taken by the government to address this problem through Rs 2.11 lakh crore recapitalisation.

"This will be accompanied by a series of banking reforms which you will hear from us in the course of next few months."

"Of this money, part of money will come from banks raising their own capital where government equity can come down to 52 per cent," he said.

"There is another Rs 18,000 crore from budgetary resources which will be put into banks under Indradhanush. So that makes it a total of Rs 76,000 crore."

In a presentation made at the briefing, Economic Affairs Secretary S C Garg said inflation has consistently come down since 2014 and will remain below 4 per cent this fiscal.

Detailing macro-economic fundamentals, he said that current account deficit will be less than 2 per cent this year and foreign exchange reserves have crossed $400 billion.

On fiscal deficit, he said the government is committed to sticking to the target of 3.2 per cent of GDP for the current fiscal but a review would be done in December.

Stating that the GDP growth slowdown has bottomed out and the economy is turning around, he said the International Monetary Fund (IMF) had recently projected that the country would achieve a 8 per cent growth rate soon.

Photograph: Rupak De Chowdhuri/Reuters