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As the years rolled by the “Twin Balance Sheet problem” morphed into a “four balance sheet challenge” — comprising banks, infrastructure, plus NBFCs and real estate companies — for the economy. Discuss.

Topic: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

1. As the years rolled by the “Twin Balance Sheet problem” morphed into a “four balance sheet challenge” — comprising banks, infrastructure, plus NBFCs and real estate companies — for the economy. Discuss.  (250 words)

Indian Express

Economic Time

Hindustan Times

Why this question:

India is facing a “Great Slowdown” with its economy headed for intensive care unit primarily due to a “second wave” of the twin balance sheet crisis at banks, former Chief Economic Adviser Arvind Subramanian has said. In a new working paper published by Harvard University’s Center for International Development last week, Arvind Subramanian, who was India’s chief economic advisor between October 2014 and August 2018, and Josh Felman, former IMF resident representative to India, give a detailed understanding of how the Indian economy lost its way.

Key demand of the question:

The question is in the backdrop of India’s Great Economic Slowdown. One must provide the details for the economic slowdown and how the twin-balance sheet is now a four-balance sheet problem. Provide measures to tackle the issue.

Directive:

Discuss – This is an all-encompassing directive – you have to debate on paper by going through the details of the issues concerned by examining each one of them. You have to give reasons for both for and against arguments.

Structure of the answer

Introduction:

In brief explain what the economic slowdown in India. TBS-1 was about bank loans made to steel, power, and infrastructure sector companies during the investment boom of 2004-11 turning bad. TBS-2 is largely a post-demonetization phenomenon, involving non-banking financial companies (NBFCs) and real estate firms.

Body:

Explain about the twin-balance sheet syndrome.

Now move on to discuss the reasons for the TBS to become four balance sheet challenge

  • Since the Global Financial Crisis, India’s long-term growth has slowed as the two engines propelling rapid growth — investment and exports — sputtered.
  • Today, the other engine — consumption — has also stalled. As a result, growth has plummeted precipitously over the past few quarters
  • Dwelling into the current problem facing the economy, he said, after demonetization, considerable amounts of cash made their way to banks, who on-lent a major part of that to NBFCs. The NBFCs, in turn, channelled this money to the real estate sector. By 2017-18, NBFCs were accounting for roughly half of the estimated Rs 5 lakh crore of outstanding real estate loans.
  • The collapse of IL&FS in September 2018 was a “seismic event” not only because of the Rs 90,000 crore-plus debts of the infrastructure-cum-lending behemoth, but also its “prompting markets to wake up and reassess the entire NBFC sector

Provide measures to tackle it.

Conclusion:

Conclude by suggesting what should be the way forward.

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