The Hindu Business Line : Well-tuned stimuli

Indian economy remained largely insulated from the global financial meltdown due to the well-calibrated measures taken by the Government of India and the Reserve Bank of India. The economy posted an impressive 6.7 per cent growth in 2008-09 when other economies crumpled.

The banking system in India is financially sound and well capitalised. Foreign exchange reserves remain comfortable, external debt is in comfort zone, and agriculture and rural demand is strong coupled with benign inflation. The challenges before the Government are to eradicate poverty, improve infrastructure and create productive employment opportunities. In this direction, the Union Budget aims at carrying forward the stimulus to lead the economy to 9 per cent GDP at the earliest, broaden the agenda for inclusive development and improve delivery mechanism.

The only concern is the surmounting fiscal deficit, but unprecedented times call for unprecedented action. Budget 2009-10 has been prepared by the Finance Minister at a time when the country is battling the impact of the global economic meltdown and the Minister has to be commended for a great balancing act.

The budget recognises the need to continue the fiscal stimulus and the Minister has indicated his resolve to take forward the FRBM goals at the earliest.

Importance of infrastructure: The announcement on giving flexibility to IIFCL will go a long way in accelerating finances for infrastructure projects. Takeout finance and refinance up to 60 per cent of loans will create more opportunities for banks in the infrastructure sector without the worry of asset-liability mismatches.

Agriculture: The focus on farm sector, especially on increasing agriculture credit and providing interest subvention along with debt waiver, would stimulate agriculture growth. Additional 1 per cent interest subvention on short-term production loans to farmers repaying on time will create a healthy credit culture.

Inclusive growth: The increased spending on social infrastructure will create, besides infrastructure in rural areas, employment opportunities leading to increase in income and demand.

The aim to provide adequate banking facilities in under-banked/unbanked areas in the next three years, with provision of at least one centre for banking services in each of the unbanked blocks, will help banks plan branch expansion in such areas.

Exports: Extension in time limit up to March 2010 for increased ECGC cover and interest rate subvention would provide the much required relief to the export sector. Special fund of Rs 4,000 crore to SIDBI to refinance up to 50 per cent of incremental lending to MSEs will help credit flow at reasonable rates to this segment.

A revival of growth prospects is necessary and the various budgetary measures outlined will leave more money in the hands of consumers, leading eventually to higher consumption and investment demand.

As an important growth inducing segment, the banking sector in India will continue to play a key role in resource allocation to productive sectors and extending support to private sector by way of extending support to SME, agriculture, infrastructure and other productive segments.
(The author is Chairman, Union Bank and IBA.)

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