While pundits are busy blaming all economic ailments to the demon called demonetisation, few are taking a look at the "new normal" that has been made the order of the day. Take for instance the Insolvency and Bankruptcy Code (IBC). The Indian promoters accustomed to ever greening of their debt and living luxuriously at the expense of public saving, were shocked when in June this year the RBI asked the banks to take up cases against a dozen defaulters under the IBC. This saw the breach of the banker-borrower cosy relations which was a win-win for both at the expense of the national economy. Despite the disruptive effect of the same, analysts are curiously reticent to take up the impact – short and long term – of "new normals" on the Indian economy.
An economic system dependent in no small way on corruption, nepotism and law avoidance, cannot all of a sudden be made to turn transparent and rule abiding. The result of applying sudden breaks was clearly illustrated during the demonetisation decision on November 8, 2016. While cancelling high-value notes was certainly not a sufficient instrument to weed out black money from the system, it is no denying that the intent of the scheme had sent shivers down the spines of many. Criticism, therefore, was intensely camouflaged directing the plight of the poor and small businesses. To evade, help came from all usual participants in the system – bankers, accountants, lawyers and even officials who were supposed to detect malpractices. The end result, in terms of cancelled notes returning to the system, has been a failure.
Demonetisation apart, the other jolt from the prevailing economic system came from the much hailed indirect tax system, the Goods and Services Tax (GST). The scheme is a text book example of how a great idea can be diluted to turn it into a forgettable one. In one shot, the service tax regime turned complex, the number of returns and paper work increased by manifolds, a confusion over state GST and central GST pervaded and multiple registration issues turned even ardent supporters into hostile participants; what is more important is that small traders accustomed to transact in cash without proper receipts increased their cash transactions after locking up their newly acquired POS machines and digital cash with it.
IBC is the third jolt having no less long term effect on the economy. At the risk of simplification, one can safely conclude that the measure will be praised in the short term for bringing in the much-needed measure to reign in corrupt business practices; and criticised as the reason for the death of Indian enterprise in the medium term. It will also create a new generation of service sector professionals who will work as insolvency professionals. And like any other new initiatives in the country, there is now a rush to clear the requisite test and qualify for the task.
While banks will get back money through IBC there are two critical issues which need to be addressed. First, and the important one for banks is, what will be the discounted value of the asset that lenders will take over. Will lenders receive the full amount which is outstanding on paper? Clearly, the business going in for insolvency could not generate that cash flow. Can a new management revive the business? It will be simplistic to presume that with a little change here and some tweaking there, the business would stand on its feet again. Banks will have to sacrifice a portion of its loan which is shown as outstanding. May be some will come back from the earlier provisions against such NPAs. Still, there is a possibility of banks losing money despite the IBC process.
The second question, not raised at all, is the loss of employment, direct and indirect, due to the insolvency of businesses. Is there a deluge of fresh investment to overcome this loss? Prima facie it is not so. It will take years to resolve the effect.
IBC is also yet another example of the short sightedness of those who draft laws in this country. Take for instance the real estate sector, the Jaypee Infratech case for instance. A real estate developer borrowed money from the bank but that is only a small part of its capital. All of them pre-sells flats based on drawing collect money and divert funds for other uses – with the cash component used for bribing to obtain regulatory approvals. Without any consumer protection act, property buyers have nowhere to look for the redressal of their grievances in the case of a delay.
The case between Olympic medal winner, now a minister, Rajyavardhan Singh Rathore and a builder Parsvanath is an ideal example. Under IBC, the property buyers are unsecured borrowers ranked at the bottom of the heap. Once a bank appoints an Insolvency Professional and finally decides to liquidate the company, the unsecured buyers of flats will have no recourse to recover their life time savings. The rules do not offer any solution for the home buyers who are ultimately cheated in the end. Shouldn't the lawmakers have thought of the specific product category and accordingly built in checks and balances in the rule? Now the task has fallen on the Supreme Court.
When the Government opts for certain well-meaning decisions which would have a wide ranging disruptive effect it should have outlined potential consequences with precision and diligence. The failure to do so in the three important decisions mentioned here points to the weakness of the administration and the current political leadership.
To take tough decisions is indeed tough but the tougher task is to solve the problems brought forth by such decisions. Implementation is no less important than the decision. Demonetisation, GST and IBC are three examples of such management failures of the national Government in implementing much heralded right decisions.
(The views expressed are strictly personal.)