NEW DELHI: India’s cabinet approved a $32.43 billion plan on Tuesday to recapitalise its state banks over the next two years, in a bid by Prime Minister Narendra Modi to tackle a major drag on the economy that has frustrated his attempts to boost growth.

Once the world’s fastest-growing major economy, India has seen its growth rate plummet to the lowest in three years, far below levels needed to create enough jobs to absorb the million Indians joining the work force every month.

Modi’s government has tried to respond by stepping up public spending, but the slowdown has stressed its finances, making it imperative for private investment to pick up the slack.

Officials privately admit they have struggled to revive private investment because state-owned banks, which provide much of the credit in the economy, are saddled with a mountain of bad debt that has crimped their ability to offer new credit.

The decision to recapitalise the banks is meant to clear that bottleneck, Finance Minister Arun Jaitley said at a press conference in New Delhi.

“The decision to recapitalise public sector banks with 2.11 trillion rupees will address the bank balance sheet problem and push growth forward,” Jaitley said.

By some estimates, banks need as much as $65bn in additional capital by March 2019 to fill the hole left by soured loans and to meet new regulatory capital requirements.

The official announcement, which was followed by a series of tweets from government ministers holding it up as “unprecedented”, comes after a flurry of activity in the government over the past few weeks, driven by the prime minister’s office.

Modi, who swept to power in a landslide victory for his Bharatiya Janata Party (BJP) in 2014 promising a reform agenda to revive economic growth, faces state elections later this year and a re-election bid by 2019.

Published in Dawn, October 25th, 2017