My big lesson from recent years in journalism is that things are never so bad that they cannot get worse. A case in point, the appointment of Shaktikanta Das as governor of the Reserve Bank of India. An event which resulted in this disbelieving little commentary.
What India’s Finance Minister says…
The finance minister this week criticised the central bank for failing to check indiscriminate bank lending from 2008 to 2014 which has now ripened into a bad loan crisis. The attack was accompanied by the government invoking never-used powers under the Reserve Bank Act to issue directions to the bank’s governor, Urjit Patel.
What he stays mum on…
If the MSME sector was tottering by the time Arun Jaitley became India’s finance minister, the next four and a half years felled it.
First came demonetisation. On November 8, 2016, the government suddenly announced that Rs 500 and Rs 1,000 notes were no longer legal tender. This created an unprecedented cash shortage in the country. As economic activity dropped, households and small businesses took a beating.
Less than a year later, on July 1, 2017, came another shock. The Goods and Services Tax was introduced even before the MSMEs’ turnovers had returned to pre-demonetisation levels. As Scroll.in reported from Gujarat at the time, India’s new tax regime for businesses favours formal economy players more than those in the informal economy – which is entirely made up of MSMEs. In South India, high tax slabs pushed MSMEs in the automotive cluster of Hosur into the red, forcing them to take bank loans to pay taxes.
While firms were still grappling with the new tax regime and figuring how to survive, there came the cash crunch of December 2017. As Scroll.in reported, multiple reasons were at work, including a collapse of the government’s cash distribution protocols.
From a quick comment published today on the government’s attempt to pin blame on MSME distress on the RBI.
India’s crackdown on companies that have defaulted on loan repayments is reshaping the country’s economy in fundamental ways. As the first three articles in this series detailed, competitive advantage is being tilted towards larger firms because only a handful of buyers is picking up most of the insolvent firms on sale. Between the resulting consolidation and the fact that most of these firms are changing hands at low rates, existing companies will struggle to compete. In addition, regional companies are being pushed into businesses beyond their core strengths.
These processes have been in motion since January 2016, when India’s banks, prompted by the Bharatiya Janata Party-led government and the Reserve Bank of India, started taking defaulting firms to the National Company Law Tribunal in an attempt to recover outstanding loans.
These structural transformations have been caused by the curious inflexibility that characterises India’s insolvency proceedings, which place the blame for bankruptcy entirely on the firm’s promoters, experts said. “The government is not making any concessions,” complained the chief financial officer of a steel plant in Chhattisgarh which has slipped into insolvency proceedings. “It is just putting the project up for sale.”
Inflexibility also shows in how these distressed projects are being rehabilitated. This is obvious from the way the proceedings have unfolded for a thermal power plant set up some 10 years ago by a well-regarded business group in North India. The group’s chief financial officer, who is in his mid-50s, said in his 35-year career, he has never seen anything similar to India’s bankruptcy proceedings that his unit is now facing.
We have the fourth — and concluding — part of our series on India’s insolvency proceedings out today. The first part, to recap, had flagged some curious patterns showing up as companies change hands to argue we need to pay more attention to these proceedings. The second looked at the handful of buyers picking up most of these stranded assets. The third looked at what this means for local capital as global capital (and big capital) comes in. Today’s piece builds on those observations, using them to point out the self-damaging inflexibility that characterises India’s insolvency proceedings, tries to understand its origins, asks if there was a better way to handle all this, and then ends.