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Indian Economy

Slowdown in India: Part 2

  • 21 Dec 2019
  • 5 min read

This article is based on “A solution: Two bad banks for the Four Balance Sheet problem” which was published in The Indian Express on 21/12/2019. It talks about measures that should be taken to revive the growth in the Indian Economy.

The first part of this article showed that slowdown in India arrived in two waves. The first wave, the Twin Balance Sheet crisis, encompassing banks and corporates arrived after the global financial crisis in 2009. The second wave is centred around the crisis in NBFCs and real estate sector (because of unsustainable financing and rising inventory of unsold housing).

As a result, the economy now confronts a Four Balance Sheet (FBS) problem. This can be resolved by the following steps:

Resolving the Non-Performing Assets (NPAs) crisis

  • Two bad banks (for Real estate and power sectors) to resolve the Four Balance Sheet problem might be one critical element of the solution.
    • Creation of special resolution mechanisms for these two sectors is important because:
      • Majority of NPAs are in these two sectors.
      • These sectors are socially and commercially very important.
    • In this context, a holding company or public-sector asset rehabilitation agency (bad bank) can be created.
      • Holding company would buy stressed assets, based on the recommendations of independent parties, such as investment banks. This would allow the transaction to be seen as fair by all stakeholders.
      • This would free up balance sheets and management attention of banks and allowing them to focus on their core business of supporting economic growth.
      • The holding company can be mandated to sell off the assets within five years, after which it would be dissolved.
  • A New asset quality review will be needed to get a more honest recognition of the magnitude of stressed assets.
  • Efficient implementation of policies like Project ‘Sashakt’ should be done to effectively tackle the problem of rising NPAs.
  • Insolvency and Bankruptcy Code (IBC) needs further strengthening.

Competitive Financial Market

  • The government must ensure that banks run in the larger national interest but commercial decisions are best left to bank boards.
    • Banks’ Boards must be empowered to decide on capital raising plans from the market within a well-defined framework.
  • The promotion of corporate debt markets both for performing loans as well as distressed loans needs special attention.

Raising Exports and Demand in Economy

  • Government intervention should comprise steps to spur demand in the economy, by raising the purchasing power of the masses, especially in rural India.
  • India still has nearly half of its workforce engaged in agriculture. Therefore, investment in agriculture will serve twin benefits:
    • One, of raising rural demand and purchasing power.
    • Two, agricultural exports can check India's unfavourable balance of payment and can emerge as an important source of foreign exchange.
  • Liberalised foreign direct investment norms in the manufacturing sector, will result in the generation of employment in India and increase the competitiveness of India's exports.

India should view current slowdown, not as a crisis but as an opportunity to carry out much-needed reforms, only then it can achieve the goal of becoming a $5 trillion economy.

Drishti Mains Question

India should view current slowdown, not as a crisis but as an opportunity to carry out much-needed reforms, only then it can achieve the goal of becoming a $5 trillion economy. Discuss.

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