Budget 2018: Fixing Public Sector Banks to Ensure Job Growth
One of the top agendas for the newly elected government back in 2014 was to address the growing concern of joblessness within the country. Undoubtedly, schemes and policies, even outside the ambit of fiscal budgets, have attempted to remedy the issue. The policy makers resorted to allocating heavy sums of money towards upgrading existing employment schemes and strengthening schemes that helped develop skills and promote entrepreneurship capabilities by centralizing them and stratifying their chain of operations. There is a visible attempt to rejuvenate such policies and to ensure that policies on paper translate into effective on-ground implementation.
But the problem of joblessness still remains a significant issue for the government to tackle. Over the last few years, the problem has been compounded by the changing nature of work and the increasing number of workforce entering the job market each year. In addition to this, the short-term transitory impact of policies like GST and demonetization has been significant in making the problem more severe; the unorganized sector bore the maximum brunt of disruptive economic and financial policies.
In the last one year, the government has been working overtime to provide stimulus for the economy to pick up speed. Decisions with a pointed aim of reviving flagging sectors (like manufacturing for instance) have resulted in bringing investments, both private and public, and this is expected to boost the overall growth and increase the productivity of the economy. However, the government has been under fire for its relative inaction over the deteriorating health of the public sector financial institutions in the past few years. With a crisis ready to knock at the door, and Public Sector Banks (PSBs) recording record losses, the government recently announced its intentions of improving the financial conditions of the Public sector Banks by infusing a capital of about Rs. 2, 11, 000 crore over the next two years. This would partly be done by through budgetary provisions of Rs. 76,000 crore, and recapitalization bonds to the tune of Rs. 1.35 lakh crore.
With the Financial Budget being announced on the 1st of February, it will be imperative for the government to continue forward with its stance on revamping the banking sector, specifically those within the ambit of the public sector, as their performance is taking a hit, owing to accumulating Non-Performing Assets. This might put severe financial restrictions on such banks to ensure the flow of credit and support a growing economy.
Impact of NPAs
NPAs or Non-Performing Assets, according to their latest definition within Indian markets, refer to those assets for which interest remains unpaid for a period of ninety days. Their increased accumulation means that banks have to (year-on-year) write them off, adversely impacting profitability and overall financial performance. They also have a detrimental effect on various other fields. But chief to this discussion is their negative impact on the ability of PSBs to promote and sustain the momentum needed for a growing economy.
In a developing country like India, PSBs play a great role in supporting government initiatives that are aimed at boosting economic productivity. And since the Indian economy has been growing at significantly high pace over the last few years, credit flow to various sectors are indispensable. This sporadic growth, without proper risk management, in turn, fuels the creation of NPAs. This hampers the PSBs’ ability to ensure government schemes have access to credit.
Policy Interventions to Check Financial Ailments
One of the chief expectations from the Union Budget of 2018, from a jobs perspective, would be, for it to address the gaps within the banking sector, as it has a direct relation to the performance of various schemes that seek to promote job growth and skill building. Today, a major share of stressed assets lies with the Public Sector Banks, and policy intervention aimed at their steady revival would create a positive environment and bring in the much-needed confidence in investments towards the development of human capital.
In addition to creating a good flow of credit by addressing the gaps in the banking sector, the budget should also seek to enable PSBs to create the scope of funding social security schemes and provide more focused loans. This will strengthen schemes like the Pradhan Mantri MUDRA Yojana (PMMY) that depend on credit from PSBs and financial institutions. Even schemes like Startup India and Make In India which indirectly contribute to the growth of jobs would be more effective with a financially sound banking sector at its back. Improving the condition of the banking sector at large would also boost private investments into improving the efficacy of skilling programs. It could help stimulate both private and public investments to boost sectors like manufacturing that they can, in turn, provide jobs and economic stability. It might also help create a larger bandwidth to include more workers under skilling schemes.
A healthy financial system that can ably fuel the growth of the Indian economy will also help shift the burden of job creation from select-sectors like IT. Furthermore, the palpable distraught that has manifested among the workers off late, owing to changing market conditions and the effects of technological adoption becoming more pronounced, can also be undone by reinforcing confidence and optimism in the economy. In order to jump-start investment in sectors such as manufacturing, healthcare, and BFSI, textiles etc. and to ensure the maximum result of policies like Make In India, a healthy and thriving public financial sector is imperative.
As growing NPAs have a far-reaching impact in today's globalized world, the budget should aim to find remedies for the present situation, while also putting in safeguards to avoid similar traps in coming years. There have been reports on the government considering the decision of merging PSBs, while also looking at bringing in better risk management practices that will help PSBs become responsible and efficient.
In the backdrop of disruptive reforms like demonetization and the passing of GST, it would be helpful if the budget, this time around, focuses on policy intervention to bring back on track the public financial sector. This will create the necessary shift in mindset, which will integral to the coming financial year. Although there are high expectations of a continued fiscal push on behalf of the government, supporting it with a clear roadmap on how it addresses key challenges within the Indian economy is crucial. And, a part of setting the right tone for the coming financial year would be to address the issue of ailing PSBs within the country.
(This is the first of an eight-part series of the People Matters: The Budget Series)