The fiscal pressures facing Narendra Modi’s government showed through clearly in the measures announced for the financial sector, where the priority was on raising money rather than spending it.

In the Budget announced over the weekend, Modi’s administration skipped injecting fresh capital into Indian lenders for the first time since it came to power in 2014. Instead, it will sell stakes in two financial firms to raise cash. It will also increase deposit insurance to reassure savers in a banking sector that’s grappling with the world’s worst bad-loan ratio.

The decisions show the limitations Modi faces as he balances a widening Budget deficit with a financial industry that’s struggling to provide the much-needed credit for a weakening economy. Loans to Indian companies and consumers are set to grow about 6.5 per cent in the year through March, the slowest pace in 58 years.

“The government is trying to raise funds from financial institutions and also save on the other hand by not infusing capital into banks,” said Karthik Srinivasan, group head of financial sector at ICRA Ratings, the local unit of Moody’s Investors Service. The S&P BSE Bankex index fell 0.3 per cent as of 9:40 am in Mumbai on Monday after declining the most in almost four years on Saturday following the Budget announcement.

Divestment target

The government is relying on sales of its holdings in IDBI Bank and Life Insurance Corporation of India to meet the bulk of its record ₹2.1-lakh crore ($29 billion) divestment target for the year starting April 1.

Last year, Sitharaman got state-run LIC to buy 51 per cent of IDBI Bank when the lender was reeling under rising soured credit, leaving the government with 47 per cent. This year, she is looking to sell a stake in LIC itself, though the government did not disclose more details.

“The LIC sale is unlikely to go through next fiscal year given statutory challenges,” said Suresh Ganapathy, head of financial research at Macquarie Capital Securities.

The insurance behemoth is so large that the market would struggle to absorb even the minimum mandatory 10 per cent sale, according to Aditya Cheriyan, Partner at Khaitan & Co.

“The increase in deposit insurance is to reduce risks of potential panic deposit withdrawals given recent incidents,” said Vishal Goyal, an analyst at UBS Group in Mumbai. Banks are likely to have to pay the extra premiums, which could prompt them to pass on extra costs to customers, Goyal wrote in a note.

Last year, depositors at Punjab & Maharashtra Co-operative Bank swarmed branches to withdraw their savings following reports that it had extended outsized loans to an insolvent developer. The RBI took the rare step of limiting withdrawals at the regional lender.

While the higher deposit insurance may help to assure savers, analysts weren’t impressed by the overall measures for the banking industry. “The Budget had nothing to do to help resolve issues on asset quality, slow credit growth,” said Macquarie’s Ganapathy. “The Budget does nothing for the financial services sector.”

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