India’s strongest economic reforms may be the ones that quietly rebuilt the foundations of growth
NEW DELHI: There are policy achievements that arrive with fanfare and there are ones that unfold quietly over a decade, showing up only in numbers that most people never read. India’s transformation of its banking sector and its fiscal framework belongs firmly in the second category, and it deserves considerably more attention than it gets.
Consider where India stood a decade ago. Public sector banks were groaning under bad loans that had been dressed up through years of what regulators later called ever-greening, quietly extending and restructuring loans rather than admitting they had gone bad. By 2018 the picture became undeniable, gross non-performing assets across the banking system had climbed past 11%, an alarming number for any economy. Today that figure stands at 2.1%, a level not seen in decades. This is not a modest improvement. It is a turnaround.
Getting the Sequencing Right
What makes this achievement particularly impressive is how deliberately it was executed. The Reserve Bank’s 2015 Asset Quality Review forced banks to stop hiding stress and recognise it honestly, even though doing so meant reported bad loans would initially look worse before they could get better. That took institutional courage. Following through with the Insolvency and Bankruptcy Code in 2016 gave India, for the first time, a credible time-bound mechanism to resolve corporate defaults rather than letting them fester indefinitely in negotiation limbo.
The addition of Section 29A in 2017, barring defaulting promoters from buying back their own companies at a discount, was a particularly sharp piece of policy design. It fundamentally changed the incentive structure for corporate India. Suddenly defaulting on a loan carried real consequences, the genuine risk of losing your company altogether. The result was striking, borrowers began settling debts before formal insolvency proceedings even began, with over ₹2 lakh crore resolved this way across more than 4,400 cases. That is a culture shift, not just a policy tweak.
Pairing all of this with a ₹3.2 lakh crore recapitalisation of public sector banks and consolidating 27 fragmented banks into 12 stronger institutions gave the sector both the balance sheet and the scale to recover properly rather than merely survive.
The Payoff Is Real and Measurable
The numbers today speak for themselves. System-wide bank capital adequacy sits at a healthy 17.2%, comfortably above regulatory minimums. Aggregate bank profits have surged to over ₹4 lakh crore for the financial year, a dramatic reversal from the losses banks were posting less than a decade ago. Credit growth has normalised into sustainable territory and banks are now well positioned to fund India’s next phase of private investment, exactly the kind of “twin balance sheet advantage” that policymakers had been working toward for years.
A Parallel Story on Fiscal Discipline
Running alongside this banking transformation is an equally important, equally underappreciated fiscal story. India’s original 2003 fiscal responsibility law was well intentioned but structurally weak, offering no credible path back to discipline once deviations occurred and no real check on governments quietly pushing borrowing off the books through entities like the Food Corporation of India or National Highways Authority.
The 2018 amendments, built on the N.K. Singh Committee’s recommendations, fixed this properly. Rather than an arbitrary annual deficit number, India adopted a debt-to-GDP anchor with clearly defined, narrowly capped escape clauses, only usable under specific conditions like war, calamity or a genuine growth shock. Off-budget borrowing was brought fully onto the government’s books, ending years of accounting sleight of hand that had obscured India’s true public debt position.
This framework then faced its sternest possible test, a global pandemic that forced the fiscal deficit up to 9.2% of GDP in FY21. Rather than abandoning fiscal discipline altogether, as India had effectively done after the 2008 financial crisis, the government charted a credible, transparent consolidation path back down. It delivered on that promise too, bringing the deficit down to a budgeted 4.4% by FY26, precisely as planned.
Spending Smarter, Not Just Less
What’s especially encouraging is not just that the deficit came down, but how it came down. The composition of government spending has shifted meaningfully toward capital expenditure, infrastructure, transport, energy, rather than pure consumption spending. Effective capital expenditure has climbed to around 4% of GDP, the kind of high-multiplier investment that compounds economic returns over time rather than simply keeping the lights on.
Acknowledging What Remains
None of this is to suggest the job is finished. Insolvency resolutions still routinely blow past their statutory timelines due to judicial backlogs. Unsecured retail and microfinance lending has shown fresh signs of stress that regulators are now actively managing. Aggregate general government debt, when combining central and state figures, still sits above the long-term 60% target the N.K. Singh Committee had recommended, meaning there is further work ahead, particularly at the state level where fiscal discipline remains uneven.
A Decade Worth Recognising
But acknowledging unfinished business shouldn’t overshadow what has genuinely been accomplished. Fixing a banking system loaded with hidden bad debt while simultaneously rebuilding a credible fiscal anchor is not easy under any circumstances and doing both while absorbing a once-in-a-century pandemic shock in the middle of it makes the achievement considerably more remarkable. India’s banks are stronger, its fiscal accounting is more honest and its public investment is more productive than at almost any point in recent memory. That is an institutional legacy, and one that has earned far less public credit than it deserves.
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