RAS question
The 'Twin Balance Sheet Problem' in India refers to:
Correct answer: (A) Stressed balance sheets of banks (NPAs) and over-leveraged corporates.
In India, the Twin Balance Sheet problem refers to the simultaneous stress of overleveraged companies and banks burdened by bad loans or NPAs.
Explanation
The Twin Balance Sheet problem is not a general macroeconomic pairing; it is a balance-sheet stress cycle linking corporates and banks. The Economic Survey 2016-17, as reported by the Press Information Bureau, described India as trying to resolve overleveraged companies and bad-loan-encumbered banks, a legacy of the boom years around the Global Financial Crisis. When companies carry excessive debt, they struggle to repay. Banks then accumulate NPAs, especially in public sector banks, which weakens their ability to lend. The PIB release notes that this squeeze slowed credit to crucial sectors and coincided with falling private and overall investment. That is why the issue was treated as a major drag on investment and growth.
Why the other options are wrong
- (B) High inflation combined with high unemployment describes stagflation, whereas the Twin Balance Sheet problem is about stressed bank and corporate balance sheets.
- (C) Fiscal deficit and current account deficit form the twin deficit problem, not the bad-loan and overleveraged-corporate stress identified as TBS.
- (D) Trade deficit and budget deficit are external and fiscal gap concepts, while TBS specifically links bad-loan-encumbered banks with overleveraged companies.
Concept
This tests the Indian Economy concept of banking-sector stress and corporate deleveraging. It recurs in RAS because NPAs, credit growth and investment are central to understanding post-2010s economic policy debates.