ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Indian Economy and COVID-19 pandemicSubscribe to Indian Economy and COVID-19 pandemic

Asset Reconstruction Companies and the Bad Debt of Indian Banks

The finance minister’s Budget speech 2021 revealed the government’s plans to establish an Asset Reconstruction Company to take over bad debt from the books of public sector banks for eventual disposal. That suggests that the ARC route rather than recapitalisation would in the coming months be the main means of refurbishing capital in the public banking system. Since there are as many as 28 ARCs already in existence, the reason why the creation of one more would resolve a problem that is expected to worsen over the coming year is unclear. In fact, past experience indicates that ARCs have not helped enhance the actual recovery of lock-up in stressed assets. This suggests that the move is a means to postpone the problem of bad debt resolution so as to avoid having to recapitalise the banks with budgetary resources, which would widen the central fiscal deficit.

Garnering the Fiscal Stimulus

The share of resources distributed in the stimulus package to the farmers and labourers is very less as compared to other stakeholders of the economy. As public policy is influenced by bargaining power through intense lobbying, low distribution of resources towards farmers and labourers could be due to their low bargaining power. Collective action is required to bargain or lobby for resources. The farmers are adversely placed with regard to collective action because the transaction cost of organising collective action is higher but their ability to bear the cost is lower. The industry is placed in a much better position on both these counts. The inability of farmers to provide critical minimum resources for collective action may further weaken their bargaining position.

Paradox of a Supply Constrained Keynesian Equilibrium

The Indian economy, which was facing demand defi ciency and slowdown prior to the Covid-19 outbreak, plunged further with the lockdown. The present exercise represents the current problem as a typical demand constrained Keynesian equilibrium, affl icted further by demand and supply failures generated by transaction costs. The resulting scenario resembles a “supply constrained” Keynesian equilibrium. The article looks at the possible impact on prices and discusses the implications of select policy interventions for such an economy.
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