RBI's new rules could disrupt Modi's key economic plan

09 May 2024 CW Team

The Reserve Bank of India is considering enforcing a rule that may dampen the spirits of India?s capital expenditure momentum, a highlight of the tenure of the Narendra Modi government at the Centre.

It has been reported that the RBI has issued draft guidelines asking lenders in India to increase their provisioning for infrastructure projects which are under construction and to ensure strict monitoring of any emerging stress.

Provisioning essentially involves lenders allocating a specific portion of their balance sheets as reserves to cover expected future losses.

However, there are concerns among banks and experts that these guidelines could affect the momentum India?s infrastructure projects have witnessed in recent years. They fear that a higher provisioning rate could lead to increased interest rates and negatively impact India's capital expenditure momentum.

The drive for capital expenditure has emerged as one of the major talking points of the Modi government?s second tenure, with heavy investments made in projects that are believed to have positive multiplier effects on the economy. Finance Minister Nirmala Sitharaman allocated Rs 11.11 trillion towards capital expenditure for FY25, which is up 17 per cent from the revised capex estimate of Rs 9.5 trillion for FY24.

RBI?s draft norms will be put into effect after lenders provide their feedback to the central bank by June 15.

There are concerns that India?s private sector revival could be under threat. Banks are reportedly poised to advise the central bank against the sharp rise in provisions, arguing that it could impede the momentum that has propelled India to become the fastest-growing major economy in recent years amidst global uncertainty. They contend that higher provisions for ongoing projects could increase costs, leading to delays and stressed loans.

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