Government in discussions with Finance Commission on bank recapitalisation for five-year period: NK Singh

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The government is in discussions with the 15th Finance Commission on the issue of bank recapitalisation and will decide on the requirements of the sector for a five-year period, said the chairman of the commission NK Singh.

India will see a sharp V-shaped recovery in the third and fourth quarter of this financial year, but GDP growth for the fiscal will be in negative territory as the lockdown forced by Covid-19 led to serious demand and supply dislocations, he said.

“The Finance Commission is having a separate presentation by the banking secretary and we are in consultation with banks on the needs of the banking recapitalisation for the next five years or so,” Singh said during a virtual conference on Monday.

However, recapitalisation is not a panacea for the banking sector and much deeper reforms are needed, he said.

“Bank recapitalisation is not a panacea for the more serious ills which afflict our banking system and much deeper reforms are needed. Post-1991, one sector that has remained comparatively closed has been the banking and insurance sector,” said Singh.

Banking reforms are the “centrepiece of economic revival and the catalyst for economic change”, according to the 15th Finance Commission chairman.

Singh said liberalising the banking and insurance sectors should be a high priority for the government. “Banking and insurance continues to be definitely an overprotected sector in the economy,” he said.

Without outright privatisation, the government should think of ways to improve the quality and predictability of financial intermediation, he said.

While the commission was tasked with recommending a fiscal consolidation road map to the government for the next five years, Singh said this was not a year to be concerned with consolidation. “This is not a year in which we should look at any kind of path of fiscal (consolidation). This is a year to concentrate on whatever it takes to deal with this pandemic,” he said.

The challenge facing the government is to balance three objectives of managing the pandemic, managing the economic revival process and buttressing defence capability while being “straitjacketed” by not wanting to abandon the norms of overall macroeconomic stability, said Singh.

V-shaped recovery

Singh said the global economic depression will continue to cast a shadow on growth prospects next fiscal. He said the economic expansion in 2022-23 would determine whether or not the initiatives to revive growth are sustainable.

“This pandemic has led to enormous economic consequences by way of lockdown which brought serious dislocation both on demand and supply sides,” he said.

“Q1 and Q2 will not be lofty performances to say the least. I think in Q3 and Q4 of the current fiscal year, there would be a very sharp V-shaped recovery, not necessarily that anything fundamental will happen or may happen but because of a lower base. Nonetheless, fiscal year as a whole would end on a negative trajectory,” said Singh.

Most agencies have projected contraction for India, with ICRA revising it downwards to minus 9.5% from 5% forecast earlier.

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Tagged bank recapitalisation, NK Singh, pandemic, the 15th finance commission, the Finance Commission

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