Interest burden of recap bonds to be about Rs 9,000 cr: CEA

New Delhi: Chief Economic Adviser Arvind Subramanian on Wednesday said interest burden of recapitalisation bonds on the government would be around Rs 9,000 crore and the move may not have an inflationary impact.

This cost can be offset by growth in economic activity, credit supply and private investment, he said in a lecture at SGTB Khalsa College here.

"First, the true fiscal cost of issuing the Rs 1.35 lakh crore recapitalisation bonds is the interest payment of about Rs 8,000-9,000 crore. But cost can be offset by the confidence impact of addressing the critical economic bottleneck, thereby increasing credit supply, private investment and growth," he said.

He illustrated the point, saying that under standard international and IMF accounting, recap bonds do not increase deficit and they are "below-the-line" financing. However, in India's case, these bonds are expected to add to deficit.

On Tuesday, Finance Minister Arun Jaitley unveiled an unprecedented Rs 2.11 lakh crore two-year road map to bolster NPA-hit public sector banks, which includes re-capitalisation bonds, budgetary support, and equity dilution. Such bonds were first introduced by the government in the 1990s to recapitalise PSU banks.

The capital injection, Jaitley had said, will be accompanied by reforms to enable the state-owned banks to play a major role in the financial system and give a strong push to the job-creating MSME sector.

The programme entails mobilisation of capital, with maximum allocation in the current year through budgetary provisions of Rs 18,139 crore, and recapitalisation bonds to the tune of Rs 1.35 lakh crore over the next two years.

The balance will be raised by banks from the market by diluting government equity. The government's equity dilution will help banks raise about Rs 58,000 crore. The government equity, as per the current policy, can come down to 52 per cent in state-owned banks.