Back Boost to booming economy
K. Cherian Verghese
| Added emphasis on infrastructure, both rural and urban, will support the growth momentum. Higher budgetary support to irrigation, education, health, and sanitation will ensure equitable and sustainable mode of economic growth. |
A number of initiatives have been taken to improve the quality of life in the rural areas. Higher budgetary support is envisaged in such segments as irrigation, water supply, education, health, and sanitation to ensure that we have an equitable and sustainable mode of economic growth.
The Budget also attempts to introduce social security for senior citizens who are destitute by increasing the old age pension to Rs 200 per month and exhorting State governments to contribute an equal amount towards this cause.
More emphasis is given to agricultural credit by setting a target of Rs.1,75,000 crore in disbursement and addition of 50 lakh farmers who would become beneficiaries of bank credit. It is proposed to make available short-term credit up to Rs3 lakh to farmers at a low rate of interest of 7 per cent. Nabard is expected to provide refinance to banks at an economical rate to enable banks to lend at this rate. Details are to be clarified later and it is expected that the refinance rate will be attractive and rural lending become a viable commercial proposition to banks rather than a social obligation as mentioned in the Economic Survey.
The money-lender is still able to run a thriving rural lending portfolio at exorbitant rates of interest because of the flexibility and ease that he offers in the credit delivery system. If the institutional lenders are able to match the degree of ease and flexibility of the money-lender, pricing need not be an impediment. We need to address these issues and the subventions proposed for agricultural credit could be a temporary measure.
The proposal to reduce the credit guarantee fee from 2.5 per cent to 1.5 per cent may encourage more lending to the small-scale sector. A roadmap has been laid for increasing power generation by 15,000 MW by 2007 and 36,500 MW in three years. The allocation for National Highways has been increased from Rs 9,320 crore to Rs 9,945 crore in 2006-07.
The infrastructure sector has been drawing increasing loans from the banking system. Banks had the advantage of the benefit under Section 10(23G) on the interest earned from such lending. Now, it is proposed to be removed. This may result in banks pricing such loans at marginally higher levels. However, this may not have a significant impact on such loans as interest rates are quite moderate now.
In view of the growth in credit outstripping the accumulation of deposits, banks have been requesting the Government to extend the benefit under Section 80C to bank deposits. This has been positively responded to by including bank deposits for a tenor not less than five years as investments eligible for 80C benefit. This may enable banks access long-term deposits to fund their expanding credit portfolio, particularly in the context of the substantial demand for project lending.
More liquidity may be introduced to the banking system by conversion of non-tradable special securities issued by banks in lieu of re-capitalisation funds into tradable SLR Government securities. Increase in FII investment in government securities from $1.75 billion to $2 billion and in corporate debt from $0.5 billion to $1.5 billion may infuse additional liquidity of around Rs 6,000 crore.
The Budget proposals are expected to support the robust growth of the economy and infuse confidence in the entrepreneurs as no major deviation from the existing policies is made.
(The author is Chairman and Managing Director, Union Bank of India.)
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