Dalal Street

The issue of bank consolidation has figured once again with the government saying that public sector banks would need to merge into bigger entities in order to improve upon their competitive strength as the banking industry in the country is opened more liberally to the global banks.

Finance secretary Ashok Chawla said on the issue on Tuesday that subject to synergy and reasonable similarity in culture, public sector banks really needed to look at consolidation and merger over next 5-10 years. He added that in order to support the growth of the economy at 9-10% size was a very important factor.

A number of government committees including the committee on financial systems, whose recommendations laid down the foundations of financial reforms in the country, have earlier argued in favour of greater consolidation. As India opens up its financial system on a growing basis to foreign institutions, in line with commitments made at multilateral trade negotiations and general intentions of the government itself, it has been felt by various quarters that India should have larger domestic banks that can be comparable to global majors. Government of India, Indian Banking Association and Reserve Bank of India (RBI), have all from time to time batted for greater consolidation.

Recommending the consolidation, the finance secretary said, ‘Size is important in today’s world to achieve optimum economies of scale and therefore as a general prescription it would be good for the medium size banks to look at where there are synergies where there are cultural fits and carry forward the process of mergers and acquisition which is essential something which the banks and management have to take a call on.

Despite the much hyped improvement in corporate tax receipts, the first four months of the fiscal year (April to July) have actually seen a near 40% year-on-year deterioration in the central government’s budget deficit. Dramatic falls in customs and excise duties have left total revenues down about 10% year-on-year, while government spending has risen by 13% despite the several PSU IPO disinvestments.

The shortfall of revenues over expenditure peaked in the three months to January, when it was running at an annualised rate of nearly 10% of GDP (remember this figure excludes the state governments’ deficit). There are plenty of upward pressures on spending in the form of a rising subsidy bill, possible further support to drought-hit farmers and the second instalment of the public sector pay hike recommended by the Pay Commission (40% came in 2008, with 60% still left to be paid). The pay rise is likely to come in October and is worth roughly 0.5% of GDP to the deficit.

Thus the central government budget deficit forecast to 6.9% of GDP with the general government shortfall at 11.2%.