The in-principle decision to bolster bank capital, taken at a meeting between the minister and the RBI governor Raghuram Rajan earlier in the day, is also expected to boost capacity addition and industrial production, both languishing at present.
What prompted the concerted move by the government and RBI is the fact that private consumption growth fell an annual 1.6%, a new low, to R8,50,767 crore in the first quarter of FY14. Worse still, it dropped 1.9% in the three months through June from R8,66,854 crore in the previous quarter.
Two-wheeler makers welcomed the governments move to boost consumer demand, coming right as the festive season begins with the Navratras on October 5. The expectation is that bike volumes will see a strong rise on the back of such sentiment-boosting measures. Sunil Kant Munjal, joint MD at Hero MotoCorp said it was a good and helpful move. It is clear that the economy has suffered in recent times. Consumers want to purchase new bikes and scooters, but have been constrained due to high interest rates and inflation, he said.
SK Jain, CMD, Syndicate Bank, said: Capital infusion will bring down our cost of funds, but beyond that, we do not completely understand what this enhanced capital means. The budgeted capital infusion of R14,000 crore will itself bring down the cost of funds and may impact lending rates by 0.1% or so.
According to M Narendra, CMD, Indian Overseas Bank, the new announcement could mean things like a separate base rate for retail customers. But RBI or the finance ministry have to come out with a clear guideline as the current statement by itself does not mean much.
Analysts were cautious, though, saying it remained to be seen whether banks would indeed lower rates for these segments.
Anis Chakravarty, senior director, Deloitte in India, said, The question now is whether the interest rates to be offered by banks would be attractive enough to boost demand as banks and the government are hoping for. We have to see how much of it (additional capital infusion) will translate into new loans.
Venu Srinivasan, chairman and MD of TVS Motor Company said any such move that aims to lower interest rates is welcome, because credit availability has been a problem of late. There has been very low growth and the market has been flat lately for most periods. We will watch how banks react and by how much they lower rates. Higher demand ultimately depends on economic growth and (lower) inflation, he said. Pawan Goenka, Executive Director and President (Automotive and Farm Equipment sectors, Mahindra & Mahindra said, "The tax on SUVs that was put this year has adversely affected demand. We presented out case and said that these taxes need to be lowered".
Sales in the two wheeler sector hardly grew in the April-August 2014 period about 57.5 lakh two wheelers were sold in the period compared to 57.1 lakh in the year-ago period.
The slump in consumption has already has a deleterious effect on the industry. While industrial output dropped 0.2% in April-July, consumer durables declined sharply by 12%. That consumption is hit hard is evident from the fact that in the same period last year also industrial production fell 0.2% when consumer durables had witnessed a 6.1% growth.
Though the auto industry has been asking for excise duty cuts to boost demand, there's a realisation that it would be difficult for the government due to fiscal constraints. According to Vikram Kirloskar, president of the Society of Indian Automobile Manufacturers and vice-chairman of Toyota Kirloskar Motors, since the country should maintain a good credit rating, sharp duty cuts may not be possible at this juncture. Right now, the focus is to grow GDP faster and whatever can be done for that is helpful, he said.
According to a finance ministry statement: While this (additional capital to banks) will bring relief to the consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production.
At Thursday's meeting, Chidambaram, Rajan, and economic affairs secretary Arvind Mayaram also discussed the issue of credit growth in different sectors. At the end of September 2013, growth of gross bank credit stood at about 18%, year-on-year. However, credit growth is sluggish in some sectors leading to the conclusion that demand in these sectors remains subdued, the ministry noted.
A low deposit growth witnessed by banks is constraining their ability to lend. Even as bank deposits increased only 13.96% to R73,77,000 crore in the year to September 21, 2013, the credit growth was 17.84% to R57,94,346 crore in the period. Also, the recent move by the RBI to bring down SLR requirement will help banks in releasing funds to fuel credit growth through the SLR money.