The Hindu : New Delhi News : FDI up to 74 per cent in private banks soon

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Sunday, Jan 16, 2005

New Delhi

New Delhi

FDI up to 74 per cent in private banks soon

By Our Special Correspondent

NEW DELHI, JAN. 15. After scrapping Press Note 18 to facilitate the inflow of foreign direct investment (FDI) into India, the Government is all set to announce the formalities for allowing up to 74 per cent FDI in private banks. The announcement could come as early as next week.

To finalise the proposal, the Union Finance Minister, P. Chidambaram, today had a two-hour meeting with the Reserve Bank Governor, Y.V. Reddy. "The RBI Governor has come for this purpose. The policy is being fine-tuned. We are dotting the i's and crossing the t's,'' he told presspersons after the meeting. Dr. Reddy later met the Economic Affairs Secretary, Rakesh Mohan, to go into the fineprint of the policy.

At present, foreign banks are allowed to pick up 49 per cent equity in Indian private banks. Though the Government had announced in May last that the FDI cap would be raised to 74 per cent, the guidelines had not been worked out. Many private banks are looking forward to capital infusion by foreign partners in order to facilitate their growth. The RBI had also circulated draft guidelines for this purpose in July last.

The guidelines, which will be unveiled after the Prime Minister, Manmohan Singh, approves them, are also expected to spell out the terms for consolidation of public sector banks. Some of these banks have already indicated their plans for mergers in the next few months. The banking sector is crowded with nearly 100 state-owned, private and foreign banks, besides over 200 regional rural banks.

Mr. Chidambaram had another meeting with the Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, and the Commission Secretary, Rajiv Ratna Shah, where budget-related issues came up for discussions. "We had a very successful meeting. It was part of the budget discussions. Both gross budgetary support (GBS) and utilisation of foreign exchange reserves for infrastructure were discussed," Mr. Ahluwalia said after the meeting. "I cannot say anything more now." He indicated that the budget might have details for utilising forex reserves, which now stand at about $130 billion.

As for the GBS, the Planning Commission had asked for an allocation of Rs. 1,95,000 crores, but indications are that it may get about Rs. 1,76,000 crores. In the last budget, the GBS allocation was Rs. 1,45,000 crores.

The idea of utilising the bulging foreign exchange reserves for infrastructure development was mooted by Mr. Ahluwalia some months ago, but there was some reluctance on the part of the RBI. The bank's view was that using foreign exchange reserves for building infrastructure would lead to increased money supply, thereby adversely impacting inflation, apart from widening the fiscal deficit.

Monetisation

In support of his proposal, Mr. Ahluwalia suggested monetisation to tackle an increase in fiscal deficit, going to Parliament to amend the Fiscal Responsibility and Budget Management Act which puts down fiscal deficit targets and increasing imports to negate the inflationary pressures.

The Prime Minister's Trade and Industry Advisory Council also favoured the Planning Commission proposal and suggested the use of five per cent of forex reserves for development of infrastructure. These funds will be necessary if India is to have world-class infrastructure such as modern airports, roads and ports.

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