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ECONOMY

even more. Real exports and imports have fallen by turing companies (“bad banks”), one each for the real
more than 12 percentage points. What explains these estate and power sectors (Resolution)
developments? Strengthen oversight, especially of NBFCs
Why did India first enjoy a boom and then ex- (Regulation)
perience a bust? Three broad factors have been at Link recapitalization to resolution (Recapitalization)
work: cyclical, global, and structural. Initially, all Shrink public sector banking (Reform)
three helped buoy the economy. But more recently
they have been dragging it down. As a result, India RECOGNITION
was saddled with a serious structural problem, a After the first Asset Quality Review (AQR) in 2016, we
Twin Balance Sheet (TBS) crisis. Many corporates had thought that the first “R” had been accomplished,
were no longer in a financial position to undertake that all stressed assets had been fully recognized by
new investments, and those that were still in good the banks.
shape found it difficult to obtain loans from banks, Clearly, action must be taken to stabilize the econ-
as the latter were financially impaired. As a result omy and get it back on the path of rapid growth. But
of these global and structural problems, two of the in the current circumstances the standard macroeco-
engines of India’s growth shut down. Investment nomic tools are not very useful. There are actions that
growth decelerated sharply beginning in 2010, while the government cannot do (further significant fiscal
exports slowed. stimulus); must not do (reducing personal income tax
Consider the big picture. Only 2 lakh crore has rates or raising GST rates); can do with only limited
been resolved through the The Insolvency and effectiveness (easing monetary policy).
Bankruptcy Code (IBC) so far (with recoveries of just
83,000 crore), a small fraction of the initial stock of WHAT IS TO BE DONE?
NPAs. At this rate, it will take a very, very long time to First, can anything be done quickly? A major first
solve the bad debt problem. Summing up the story so action — almost a pre-condition for righting the
far, the structural underpinnings of India’s growth economy — could be a Data Big Bang, both instill
have been damaged. As this occurred, stress on banks confidence and produce a reliable basis for
began to rise. They were already vulnerable from the policymaking.
unresolved bad loans. This must comprise the publication of unreleased
reports together with a strategy for improving official
THE WAY OUT statistics in at least three areas: the real sector (GDP,
The standard tools to revive an economy in the short consumption and employment), fiscal accounts, and
run are monetary and fiscal policy. On monetary stressed assets in the banking system.
policy, the current debate revolves around whether The study proposes several strategies to halt the
the RBI has scope to lower interest rates further, with current vicious economic spiral, the most critical one
some arguing that the central bank needs to give the being to address the Four Balance Sheet challenge —
sluggish economy more help, while others worry the stress in banks and NBFCs on the financial side,
more about the recent revival in inflation. If monetary and infrastructure companies and real estate on the
policy won’t work right now, then what about a fiscal corporate side.
stimulus? In fact, there are also problems with this
strategy, many problems. Consider first the structural POLICIES NEED TO ACT ON THE 5 RS
issues surrounding the proposal to cut individual Conducting a new Asset Quality Review to cover
income taxes. Tax cuts are easy to make, as they are banks and NBFCs (Recognition)
politically popular. Making changes to the IBC to ensure that partici-
Structurally , India should be thinking of ways to pants actually have incentives to solve the problem
bring more taxpayers into the income tax net. The (Resolution)
centerpiece of the effort to overcome the current Create two executive-led public sector asset restruc-
slowdown needs to be a decisive attack on the Balance turing companies (“bad banks”), one each for the real
Sheet problem. We envisage six major actions, each of estate and power sectors (Resolution)
which is associated with one of the five R’s — the five Strengthening oversight, especially of NBFCs
main aspects of the problem: (Regulation)
Launch a new asset quality review to cover banks Linking recapitalization to resolution
and NBFCs (Recognition) (Recapitalization)
Make changes to the IBC to better align incentives Shrinking public sector banking (Reform).
(Resolution)
Create two executive-led public sector asset restruc- LETTERS@TEHELKA.COM

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