The US government has made $88 billion on the bailout of US banks and corporations. According to Propublica.org, an outfit that tracks the taxpayer money gone for bailout of the financial system, of the total 974 recipients that received financial help from the US government adding up to $625 billion (as on 17 July 2017), the government received a total of $713 billion, of which $323 billion was in form of revenues received in form of dividends, interest and other fees.
So the question arises: Can the Indian government can do what the US government did 10 years back after the 2008 global financial crisis? What US government then did was politically a bad move of buying equities in companies being bailed out. But economically it was a good move and it helped the US economy recover better than expected.
With the Indian banks struggling to stand on their feet, can the Indian government buyout the bad assets or buy equity in them, particularly the state-run?
After all Indian government's previous track record of bailout has been a huge success where the government has made loads of money on their investments. Way back in 2002, the Indian government bailed out Unit Trust of India by infusing over Rs 14,500 crore and repaid the investors that had invested in UTI schemes. After 15 years Indian government can recover its capital by just selling its stake in Axis Bank. As on July 19 2017, the government holding in Axis Bank was valued close to Rs 14,300 crore. Through UTI, the Indian government has holding in other listed giants - L&T and ITC.
The bailout of UTI worked in 2002 but today it doesn't seem to be working. To destress banks, there is an expectation that some Rs 91,000 crore is needed in the immediate two years. While the government has agreed to infuse Rs 20,000 crore this year it nowhere close to helping banks come out of their troubles. The Indian government doesn't have the money for a bailout. Looking at the government finances, revenue to GDP of the government is abysmally low at 21.4 per cent while the general debt to revenue stands at 317 per cent.
This means that the government isn't generating large revenues to support a bailout. Meanwhile a quarter (general government interest payment to revenue stands at 23.4 per cent) of the money raised by the government goes in repaying debt and with India Inc not in the position to spend, the government has to also keep the investment going for nominal growth to remain at good levels.
Today the nominal GDP growth of India is at 9-10 per cent compared to 14 per cent three years back. Both inflation and GDP has been falling which has seen the government ability to spend also coming down. If the nominal GDP was climbing with inflation at lower levels the government would have been in better position to manage its fiscal space.
Already a large part of the targeted spending has been undertaken by the government in form of interest payment, salary to government employees, pension and subsidies and therefore it has to find ways to increase its revenue. With the script already written of not breaking away from the fiscal deficit target of 3 to 3.2 per cent, the government has very little option unless it goes for a selling spree by going for disinvestment but it has its own political challenges.
Currently the government will manage to get its revenue from oil and gas companies. It has already approved the merger of ONGC and HPCL. As on July 19 2017, the government stake in HPCL was valued at around Rs 25,000 crore. In future, it may also go through the ETF route for offloading stakes in PSU companies.
Meanwhile, it's anyone's guess what it would take banks to move from ICU bed to the general hospital bed. Estimates are that if there is status quo for banks with no more delinquencies, then around Rs 1.8 to 2 lakh crore of capital could help them breathe on their own. Even considering that the government will go out to get the banks out of trouble, one has to analyse if it's worth the effort.
One of the options for the government is to increase its stakes in banks by infusing more capital. However, this may have a regulatory hassle as the government has to keep a minimum promoter shareholding and can't go beyond a stipulated limit.
While the second option is to buy the bad bank assets, but then what is the guarantee that the banks even after starting on a clean slate won't go back to their previous flawed methods of lending. Second, in buying debt, the government will have to take a substantial hair cut for disposing the bad debts. At this juncture it's not fair for the government to use tax payers' money for purchasing bad debt.
Then, with lower inflation asset prices have plummeted and until inflation rises, prices aren't going up which means debtors can't get the most from sale of assets. Also with capacity utilization at 70-72 per cent, growth may not come back quickly as corporates will not be on a spending spree.
Even if the Indian government bites the bullet for ending the woes of the banks, the current government finances stops it from doing it. Also, the effort doesn't seems to be worthwhile as it would not yield any great benefit with many in India Inc losing interest in resolving the debt problem.
Many corporates have given up and are waiting for the banks to act for removing them from the debt trap. In fact, some are complacent and aren't bothered even if they lose their business. However unlike the bailout of UTI this time the quantum of money involved is much more that can topple the ship if not steered carefully out of the storm. While the government would want to bailout the banks they aren't in a position to do so unless they are able to increase their revenue kitty.