Private investment to rise with NPA resolution, PSBs recap

New Delhi: Private investment seems poised to rebound with efforts being made for expeditious resolution of bad loans and adequate recapitalisation of public sector banks (PSBs), the Economic Survey said.

The government announced a large recapitalisation package of about 1.2 per cent of GDP to strengthen the balance sheets of the PSBs, the Economic Survey 2017-18 tabled in Parliament said on Monday.

Last week, the government announced a slew of reforms for the banking sector and said it will infuse an unprecedented Rs 88,139 crore capital in 20 PSBs before March 31 to boost lending and revive growth.

"As these twin reforms take hold, firms should finally be able to resume spending and banks to lend especially to the critical, but currently-stressed sectors of infrastructure and manufacturing," the pre-Budget survey said.

It noted that the private investment seems poised to rebound, as many of the factors exerting a drag on growth over the past year finally ease off.

"Translating this potential into an actual investment rebound will depend on the resolution and recapitalisation process. If this process moves ahead expeditiously, stressed firms will be put in the hands of stronger ownership, allowing them to resume spending. "But if resolution is delayed, so too will the return of the private capex cycle. And if this occurs, public investment will not be able to step into the breach, since it will be constrained by the need to maintain a modicum of fiscal consolidation to head off market anxieties," it said.

Observing that another key determinant of growth will be the implementation of the Insolvency and Bankruptcy Code (IBC) process, it said timeliness in resolution and acceptance of the IBC solutions must be a priority to kick-start private investment.

The greater the delays in the early cases, the greater the risk that uncertainty will soon shroud the entire IBC process, it said.

"It is also possible that expeditious resolution may require the government to provide more resources to PSBs, especially if the haircuts required are greater than previously expected, the ongoing process of asset quality recognition uncovers more stressed assets, and if new accounting standards are implemented," it said.