Budget’21 — Reforms for Recovery

Disinvestment: Away from business

It is not the government’s business to be in business.

These announcements in the budget are a fillip of the Prime minister’s philosophy.

  1. Disinvestment of two public sector banks and a general insurance company.
  2. Asset monetization of Air India, BPCL, Container corporation of India, Pawan Hans and IDBI bank among others in the coming financial year.

3. Government to sell its stake in LIC through an IPO.

The union budget for the year 2021–22 proposed by the Finance minister Mrs. Nirmala Sitharaman on 1st February backed the Prime minister’s philosophy to get the government away from businesses.

The minister estimated receipts of 1.75 lakh crore by disinvestment & asset monetization in budget.

It is obvious that the disinvestment agenda brought forth by Mrs. Sitharaman is clearly to ensure that the government has enough money to give a push to the slothering economy.

Finance minister highlighted that, “Four areas which are strategic with bare minimum CPSEs will be maintained and the rest will be privatized.” Clearly the government is in no mood to retain anything except its presence in atomic energy, defense, banking space and few more.

It is a strategic decision in terms of both cutting away losses and obtaining capital for pushing the economy. The government believes that it is high time to get away with idle assets. It aims at launching a “National monetization pipeline” to provide visibility to the investors. But it is to be noted that disinvestment to merely fetch capital would be an uneconomic idea and hence experts suggest that privatization deals should earn capital and make business sense as well. There are some very good assets in the government’s portfolio, and they can be encashed fruitfully and at the same time interests of various stakeholders can be advanced.

Since at the end of the day it is a business, legacies should not be imposed as they do not make commercial sense. Amidst ambitions rising and allegations being brought up, it will be interesting to witness the privatization of assets and how it turns up in terms of business.

BAD BANK AND RECAPITALIZATION

Boom in Bank Nifty

After the presentation of the Union budget for FY22, we all can see a big rally in the bank nifty, the main reason being the announcement of BAD BANK and to recapitalize public sector banks for Rs.20,000crore. This announcement has also generated hope for further setup of AIF and AMC by the government.

Bad banks are established to address challenges arising during this economic credit crunch to allow public-sector banks to take stressed assets off their books.

The thought of implication of a bad bank is not new, it was earlier aroused by the non-executive chairman of Punjab National Bank in 2018.

The number of bad assets has deliberately increased after covid 19. Also, in recent years we have seen many big defaults from the diamond merchant Mehul Choksi’s Rs 8,048 crores to Vijay Mallya’s INR 1,943 crores Which has created a hole in the books of Public Sector banks. Also, state-owned banks have shown poor recovery rates, over the past three years, state-owned banks have recovered only INR 10,107 crore from willful defaulters. The bad loans of public-sector banks have surged from INR 2.8 lakh crore in March 2015 to INR 7.2 lakh crore in March 2020.

According to the Reserve bank of India’s estimates, non-performing assets will rise to 13.5% of total advances by the end of September from 7.5% a year ago.

This step taken by our Finance minister Mrs. Nirmala Sithraman was very important for the future of the banking sector in India and this bank would help to reduce the provisioning requirements and enhance the lending power of banks which is required for the growth of the economy.

According to the former RBI Governor Mr. Raghuram Rajan, the introduction of bad bank was not a nice move. The idea of a bad bank, funded by the government, that would take the loans off their books, kept cropping up. it is just shifting loans from one government pocket (the public sector banks) to another (the bad bank). Every banking sector stress was fixed only by admitting the problem, resolving the bad loans, and recapitalizing the banks.

Written by- Priya Chaturvedi & Dheeraj Nahar

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Finance & Economics Club, IIT Guwahati

Finance & Economics Club, IIT Guwahati

The Finance & Economics Club (FEC) functions as a platform for enthusiastic students to come together and learn the intriguing and fun world of finance.

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