Recapitalisation, infrastructure and the excess capacity in the economy...

The FM announced big packages for PSBs and infrastructure few days back which received overwhelming response from all sides and the stock market too saw jump in the index buoyed by the bank stocks.

The Rs 2.11 trillion bank recapitalization through bonds, public money and equity are likely to push lending which has dropped to multi years’ low and there is a Rs 9 trillion push for the infrastructure mainly, roads, that might revive the slow private and public capex, both, which might instigate multiplier effect on investment, employment, demand and growth of the economy.

The measures taken by the government were due due to falling growth and growth expectation in the preceding several quarters mostly owing to rising NPAs of the commercial banks and the corporate also due to excess capacity of firms and low demand in the economy.

Both, recapitalisation and push for infrastructure are crucial for investment, employment and demand since infrastructure consumes unskilled labour and is labour intensive too.

INDIA has a vast unskilled labour force which is mostly consumed by agriculture and construction that employ more people than other sectors, however, construction has been saddled with loads of NPAs which is worrisome because it creates a lot of employment and is one of the engines of growth.  

The excess capacity and low demand in the economy reinforce low price and price expectations in the economy as case with the economy, nevertheless if the lower prices are passed on to the consumers by different sectors it would help increase demand in the economy. For example, INDIA has an excess capacity in the real estate and if the suppliers lower prices it might help achieve market share, demand and growth.

Banks, apart from sick PSBs, oil, cement and real estate are among industries that have excess capacity which might be used to increase demand in the economy if they reduce their prices.

INDIA has a huge population and demand, but income levels are low, notwithstanding if we try to increase real wages/incomes by keeping the prices low it would also help increase market share and demand and the economic growth rate.  

However, the lower level of investment and competition might affect the outcome.