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.inreported, 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.
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.
After a long break, I finally — and rather sulkily — resumed work in the middle of August. Out today, the first of my trademark long-winded and tremendously depressing series: on how India’s business insolvency cases are coming along. The series — it is a four-parter — essentially argues that India needs to pay far closer attention to how these insolvency cases are faring, that these are taking the country into uncharted waters. For more, click here.