ARC not the Most Ef­fi­cient So­lu­tion

The Economic Times - - Companies: Pursuit Of Profit -

The Eco­nomic Sur­vey for 2016-17 was re­as­sur­ing as it em­pha­sised on fis­cal pru­dence and talked about signs of nor­malcy re­turn­ing con­se­quent to re­mon­eti­sa­tion of the econ­omy: our ex­pe­ri­ence also in­di­cates that most in­dus­tries are re­vert­ing to busi­ness as usual. What echoed with me was the more re­al­is­tic as­sess­ment of growth and its cor­rect iden­ti­fi­ca­tion on po­ten­tial drag on fu­ture growth -the Twin Bal­ance Sheet prob­lems of stressed cor­po­rate and banks’ bal­ance sheets. To­day, some cor­po­rate are heav­ily lever­aged and re­flect as stressed as­sets on banks’ bal­ance sheets. Most of these are on pub­lic sec­tor banks’ books, which ac­count for nearly 70% of to­tal bank credit to in­dus­try.

The Sur­vey rightly ar­gues that eco­nomic growth will not solve the prob­lems of stressed firms: banks’ non-per­form­ing as­sets (NPAs) are es­ti­mated to be as high as 16.6% of to­tal loans, and 8.4% of GDP. Can di­ver­sion of wind­fall gains from re­mon­eti­sa­tion to an As­set Re­con­struc­tion Com­pany (ARC), as rec­om­mended by the sur­vey, help re­solve the Twin Bal­ance Sheet prob­lem?

In my view, ARC is a noble idea but it might not be the most ef­fi­cient so­lu­tion at this junc­ture -- the banks have been deal­ing with NPAs for the last 3-4 years. Set­ting up a new in­sti­tu­tion is al­ways an ex­pen­sive task, fraught with risks and can take very long. And, as aptly quoted by the Sur­vey, “the most costly out­lay is time”.(An­tiphon the Sophist). Will the com­bi­na­tion of chal­lenges and un­cer­tain global eco­nomic con­di­tions be­come a se­ri­ous damp­ener for In­dian growth prospects? Not nec­es­sar­ily. There may be other ways that the gov­ern­ment, banks and the cor­po­rate sec­tor could bring about a re­vival in GDP growth even in the con­text of the above con­straints.

For one thing, listed pub­lic sec­tor un­der­tak­ings (PSUs) could de­ploy ap­prox­i­mately ₹ 3 lakh crore of cash and cash equiv­a­lents sit­ting in their bal­ance sheets. This amount could be lever­aged to ap­prox­i­mately ₹ 9 lakh crore (as­sum­ing debt to eq­uity of 2:1). This in turn could seed an in­crease in the in­vest­ment to GDP ra­tio back to 35%, which would re­quire roughly ₹ 13 lakh crore.

Se­condly, the gov­ern­ment should con­tinue its fo­cus on boost­ing cap­i­tal in­vest­ment in sec­tors with higher mul­ti­plier ef­fects on GDP growth: the rail­ways, roads and hous­ing are three such sec­tors.

A re­view of in­vest­ment in rail­ways in­di­cates over the last 65 years that the rail­ways have a mul­ti­plier ef­fect of 5X. The road sec­tor also of­fers a sim­i­lar op­por­tu­nity in terms of growth gains. The per­for­mance in this sec­tor in the last two and half years is very en­cour­ag­ing. Com­pounded an­nual growth rate of projects awarded was at 67% over FY14-16! Projects com­pleted in­creased from close to 4000 km in FY14 to over 6000 km in FY16.

Sim­i­larly, hous­ing is an­other sec­tor with sig­nif­i­cant mul­ti­plier ef­fects. Gov­ern­ment’s fo­cus on af­ford­able hous­ing has the po­ten­tial to boost res­i­den­tial con­struc­tion, and in turn fuel the de­mand for ce­ment and steel sec­tors: the hous­ing sec­tor con­trib­utes ap­prox­i­mately 60% of ce­ment and 35% of steel de­mand.

Lastly, the Gov­ern­ment has stayed the course in its ef­forts to ad­dress ex­e­cu­tion chal­lenges even if gains might come with a cer­tain lag. The push to­wards dig­i­tal econ­omy post re­mon­eti­sa­tion, likely im­ple­men­ta­tion of GST, and con­tin­ued ex­pan­sion of Di­rect Ben­e­fit Trans­fer has the po­ten­tial to pro­pel us to a higher growth tra­jec­tory.

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