Economy Issues: (Reviving Economy)

Published on 31-Aug-2019 – Reviving Economy

Reviving the Economic slowdown (Reviving Economy)

Approx Read Time: 4 minutes
  • Recently, FDI norms had been eased more by the central government to have increased investments in the various sectors to revive and boost the economy.
  • On 30 August, Finance Minister N. Sitharaman announced the merger of 10 PSBs (Public Sector Banks) into 4 big entities. The number of banks which were 27 in number would become 12.

Committees for Banking Sector Reforms:

Narasimham Committee recommendations in the late 1990s:

  • Recommended consolidation through a process of merging strong banks only.
  • The committee also recommended was shutting down the weaker banks and not merging them with the strong ones.
  • Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks (including SBI) at the top and at bottom rural banks engaged in agricultural activities.
  • The supervisory functions over banks and financial institutions can be assigned to a quasi-autonomous body sponsored by RBI.
  • A phased reduction in statutory liquidity ratio (SLR) & Phased achievement of 8% capital adequacy ratio (CAR).
  • Abolition of branch licensing policy and proper classification of assets and full disclosure of accounts of banks and financial institutions.
  • Deregulation of Interest rates and competition among financial institutions on participating approach.
  • Setting up Asset Reconstruction fund to take over a portion of the loan portfolio of banks whose recovery has become difficult.

Note: Other committees for Banking sector reforms- Nachiket Mor Committee, PJ Nayak Committee.

Slowdown of the economy- The Analysis:

  • India’s gross domestic product (GDP) growth rate slowed to a six-year low of 5% in the first quarter of the 2019-20 financial year, led by a dramatic slowdown in the manufacturing sector.
  • According to the data with the Ministry of Statistics, the manufacturing sector grew at an anaemic two year low of 0.6% in the first quarter of 2019-20, down from 12.1% in the same quarter of the previous year.
  • The agriculture sector also saw a dramatic slowdown in growth to 2% from 5.1% over the same period.
  • The plight of the real estate sector was also highlighted by the slowdown in its growth rate to 5.7% in the first quarter of this financial year, compared with 9.6% in the same quarter of 2018-19.

Reasons:

  • The growth slowdown was led by private final consumption expenditure, which grew 3.1% only (18 quarter low).
  • Investment demand also remained lacklustre and fixed capital formation grew 4%.
  • Only government expenditure provided support to growth and increased by 8.8%.
  • The collapse of private consumption demand from 10.6% in the fourth quarter of the financial year 2017-18 to 3.1% in the first quarter of the financial year 2019-20.

Effects of Merger (Reviving Economy):

  • These bank mergers will lead to the creation of big banks with an enhanced capacity to give credit.
  • These big banks would also be able to compete globally and increase their operational efficiency by reducing their cost of lending.
  • No disruption in the banking services, and that the banks should benefit from increased CASA [current account savings account] and greater reach.
  • The merger also has the potential to lead to large cost reductions due to network overlaps.
  • Similar business cultures of the banks would also facilitate a smooth transition.

Mergers announced:

  • Punjab National Bank with Oriental Bank of Commerce and United Bank. The amalgamated entity — to be called Punjab National Bank — will become the 2nd largest public sector bank in India, after the State Bank of India and second-largest bank in India in terms of its branch network, with a combined total of 11,437 branches.
  • Second merger- Canara Bank and Syndicate Bank. The amalgamated entity — to be called Canara Bank – will become the 4th largest public sector bank.
  • Third merger- Union Bank of India with Andhra Bank and Corporation Bank. The amalgamated entity — to be called – Union Bank of India will become the 5th largest public sector bank.
  • Fourth merger- Indian Bank and Allahabad Bank. The amalgamated entity — to be called India Bank- will become the 7th largest PSB.

Also Read: Water Crisis

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