EDITORIAL | From one economic crisis to another
According to former chief economic advisor Arvind Subramanian, a second twin balance sheet crisis has emerged in India where shadow banks have on-lent money to risky realty projects that are unable to return the moolah—putting at risk not only lenders and borrowers but also regular banks that had lent money to the shadow lenders as well as the ordinary citizens who had parked their money in banks.
A twin balance sheet crisis is not new to India. The failure of the infrastructure sector to reap the returns they thought they could get had compromised their balance sheets in the last decade as well as that of banks that had paid for those projects. India’s response then was a splurge on recapitalising banks. While it saved the banking sector, it did little for the real economy. The projects—in power, roads, steel—remained bad eggs unable to pay their way through.
Attempts to cut down losses by selling off the losing businesses have had mixed results so far. What is more worrying than the fact that India has woken up to a new problem is our economic policymaking tsars are lurching from one crisis to another without a clear roadmap on how to set the economy right. Will it be enough to do a bit of financial jugglery by pumping in money into shadow banks as the government has tried to do over the last few months? Or will this merely delay the ticking time bomb? Will sops for realty be able to sell flats and offices in the face of absent consumer demand? Many economists feel mere financial tinkering and offering the odd sop will not work any longer.
A major rescue package that addresses the basics and tries to revive demand by splurging money on both physical and social infrastructure may be needed along with hard-nosed reforms in labour, land and ease of doing business. Reforms in the manner in which our financial regulators carry out oversight of banks and other financial sector players should at the same time be part of this package. Once demand is resuscitated, the rest of the solutions, these economists say, will follow.