While these are encouraging numbers, they don't tell the full story. As the RBI itself has indicated, there is just no room for complacency; rather, there may be more pain ahead as the risks to the banking industry's stability have increased sharply. That's because gross non-performing assets of banks jumped to 7.6 per cent in March from 5.1 per cent in September. The top 100 borrowers accounted for nearly a fifth of these NPAs and total stressed assets increased slightly to about 11.5 per cent of banks' combined loan book. Capital levels of lenders also remain under stress. And what's worse, according to the FSR, public sector lenders may see their capital adequacy ratio drop to 10.3 per cent by March, 2017, down from 11.6 per cent in March, 2016. The capital adequacy of the banking system as a whole may slip to 12.1 per cent by September under the baseline case and to as low as 11.7 per cent under extreme stress.
What this means is that a faster recovery in corporate and banking health is going to be a tough challenge because companies are still highly leveraged, they are short of cash to invest and the banking sector is far from being out of the woods. So, while a large number of companies are in no position to make fresh capital expenditure in an unfavourable business environment, not many banks are in a position to make fresh lending for large private sector-led projects as the level of stressed assets in the system remains quite substantial. For any investment recovery to happen in this context, the government has no option but to step in and keep increasing public investments as enhanced spending on physical and social infrastructure could have significant backward and forward linkages producing a multiplier effect through various sectors and manifesting in higher overall growth.
Many economists have opined that at present, infrastructure spending is about six per cent of the gross domestic product (GDP), which needs to be increased to at least nine per cent to make a yearly growth rate of eight per cent sustainable over the long term. The current year's Budget has moved in that direction, but more sustained work is needed going forward. After all, India has to not only improve the investment rate, but also enhance the utilisation of capital so that the most productive and priority sectors get the requisite level of capital funding.