How Can The Fiscal Windfall Be Used To Solve The Problem Of Twin Balance Sheet?

By using the finances in the windfall for strengthening the government's balance sheet rather than for government consumption.

The Chief Economic Advisor suggests that:
"The best use of windfall would be to create a public sector asset reconstruction company so that it can addresses the twin balance sheet problem and facilitate credit which will eventually lead to investment revival in the economy"

First, let's understand what the terms actually mean,

Fiscal windfall: These are the extra earnings of the Government through some unusual means like the demonetization (this also included the deposits made by black money holders in the PMGKY account), fall in the oil prices globally etc. These add to the revenues of the government.

Twin balance sheet problem :

In simple terms :

• Banks gave loans to corporates.

• Corporates invested in commodities and infrastructure.

• Both the sectors faced slump years and thus corporates couldn't get enough profit.

• Corporates unable to pay back the loans.

• The assets of banks, viz. Loans, turn into Nonperforming assets or NPA.

• Thus we have two problems here:

1.     Banks are in terrible condition with mounting NPAs.

2.     Corporates are debt laden and thus unable to invest, thus slowing down the growth.

This is what is the twin balance sheet problem in short:

The twin balance sheet problem of India is huge and by no means seem to be able to solve the issue. The banks have been giving the corporates loans again and again so that they could invest and thus make profits if growth picked up, eventually to pay back the debts. But this is not happening and as a result, the NPAs are rising ever since the twin balance sheet problem was brought to notice.

Also for banks, it becomes cumbersome to look after the rising NPA problem and their usual business. The loans cannot default as this would mean favoritism on the part of banks and government. So one way to get rid of the problem is to constitute Asset reconstruction companies (ARCs have their own problems and issues. But this seem to be the only way out according to the CEA as mentioned in ES).