Addressing the twin balance-sheet (TBS) challenge through effective resolution of stressed assets and bank recapitalisation should remain on the top agenda of the government next year, said the Economic Survey report on Monday.
The TBS refers to stress in the balance sheets of companies and the resultant stress on the balance sheets of banks that had lent to these companies. The government and the Reserve Bank of India (RBI) have stepped up efforts to address the issue by recapitalising banks and forcing defaulting companies to undergo liquidation. However, liquidating firms and forcing the management to leave won’t be enough, the survey said.
“The TBS actions, noteworthy for cracking the long-standing ‘exit’ problem, need complementary reforms to shrink unviable banks and allow greater private sector participation,” the report said.
Exit from stressed accounts has proven “particularly intractable because the objectives are many, conflicting, and politically difficult,” and “policymakers have had to find a way to reduce the debts of stressed firms to sustainable levels,” the survey said. It stressed the need for minimising the bill to taxpayers, limiting moral hazard, and avoiding perception of favouring promoters.
The TBS challenge is “arguably the festering, binding constraint on Indian growth prospects”. “On the 4 Rs of the TBS — recognition, resolution, recapitalisation, and reforms — recognition was advanced further, while major measures were taken to address two other Rs,” the survey said.
The bankruptcy code has provided a resolution framework that will help corporates clean up their balance sheets and reduce debts. The government has also announced a Rs 2.11 trillion recapitalisation plan for state-owned banks.
“As these twin reforms take hold, firms should finally be able to resume spending and banks to lend, especially to the critical, but currently stressed sectors of infrastructure and manufacturing,” the report said.
According to the report, private sector investment -- which has fallen to a 13-year low in the December quarter -- will rebound in the coming months as many of the factors exerting a drag on growth over the past year finally ease off. A lot will depend on resolution of these companies and recapitalisation of the banks, it said. “If this process moves ahead expeditiously, stressed firms will be put in the hands of stronger ownership, allowing them to resume spending,” the report said.
It, however, warned that if resolution is delayed, the return of the private capex cycle will also be delayed. And, in such a case, public investment will not be able to step into the breach, since it will be constrained to maintain fiscal consolidation.
CEOs said instead of resolution of IBC (Insolvency and Bankruptcy Code) process, their investment decisions will depend more on pick-up in demand, which was hit severely by the rollout of the goods and services tax (GST) in July last year and demonetisation of currency notes in November 2016. The resolution of IBC process of a few companies will not make much difference to private sector capex anyway, they said.
The slowdown in investments by India Inc fell to an alarming 13-year low to new investments worth only Rs 768 billion announced in the December 2017 quarter, as per statistics collated by the CMIE.