Shyam Ponappa | September 1, 2022
India’s economic recovery from the recent slump offers hope of reasonable prospects for the future. There are other
encouraging factors that bolster this expectation, such as the reduction in the non-performing assets (NPAs) of banks. Yet, there is the sobering reality of a number of counterpoints that give pause.
Warnings about constraints limiting
average growth to 5 per cent annually arise from many factors:
- Bank NPAs at
nearly 6 per cent are still well above prudential norms.
- Unviable government
overdue payments, the unacknowledged counterpart of NPAs (more on this below).
-
Electioneering practices that are socially disruptive and financially ruinous.
-
Low proportion of women employed (20 per cent).
- The need for increased
provision to improve access to better jobs, either by migration or by remote
access.
- The need for improved digitisation for quality and output, including
clean, secure databases.
- Government interference that decreases public sector
productivity and performance.
- Uncertainties and disruptions from external
threats (border tensions/clashes, and global disruptions of critical supply
chains).
Some factors are beyond policies and regulations, while others are not.
What realistically could be the expectations of government policies and actions?
An annual average of 5 per cent (only)? Or could it be higher, as we need it to
be?
The chart shows recent annual growth rates since a peak of 8.26 per cent in
2016.
Payment Discipline & NPAs
There are of course broad, interlinked reforms needed in many
areas, such as in farming, the judiciary and dispute resolution, trade
protectionism and tariffs, and so on. But there is a simple, fundamental change
required that is essential if India is to genuinely address “performance”
instead of maundering its way to “non-performance” as in the case of NPAs (i.e., non-performing assets),
which, however, for some reason doesn’t happen. This simple change is
performance of timely payments by government and government-owned entities.
On-time Payments Can Drive Higher Growth
Three years ago, this column explained
how overdues lead to NPAs, and more broadly why a fundamental change is required
in adherence to payment discipline.1 While much has been made of NPAs being
unacceptable, there seems to be a tacit acceptance of government and public
sector overdues. Whereas government overdues are like the counterpart of NPAs,
reflecting government non-performance of payment obligations. The Central
Repository of Information on Large Credits (CRILC) for collated data on bank
loans and NPAs was created in 2014. Until then, such data had to be obtained
from diverse sources. But there is no matching single point access to payments due and
overdue from government and public sector entities (central and state). The
power ministry’s portal from 2018 (praapti.in) is an exception, as is the
Samadhaan portal for micro, medium, and small-scale enterprises (MSMEs) of the
Ministry of MSMEs from 2017.
For electricity, at the end of July 2022 state
subsidy overdues to distribution companies (discoms) were reportedly at Rs
75,000 crore, while total overdues to generators and discoms was Rs 2.5
trillion. Regarding government overdues to MSMEs, nearly 100,000 applications
had been filed in the four years to October 2021. A press report in October 2021
cited an estimate of overdues to MSMEs of Rs 1.5 trillion.
Bank NPAs were
finally addressed in 2014-2015 by the Reserve Bank of India (RBI) enforcing
existing regulations to clear dues or be classified as NPAs. For most
enterprises, this was like being sentenced to the guillotine. While this
appeared draconian instead of calibrated attempts at restructuring, arguably,
developments thereafter may justify the recourse to harsh methods.
Less drastic
ways are possible, just as restructuring stressed loans through effective
processes and timelines is possible, but only for viable projects, and not
without difficulty. This is the alternative to overdue bank loans being declared
as NPAs, followed by bankruptcy and distress sales. An example of the effect of
this blunt instrument occurred in 2019 to a number of power generators and
distributors. There were 34 power producers with viable projects who had unpaid
dues from electricity distributors, or were facing coal supply problems, or were
in the process of restructuring loans. Classified as defaulters after the
RBI-mandated 180 days regardless of the cause, they had to seek judicial relief.
The Supreme Court quashed the order that gave rise to this condition, i.e., the
RBI Circular of February 2018.
Others had a worse fate, such as a major
construction company whose receivables far exceeding its debt were overdues from
major public sector companies, but suffered severe financial distress because it
could not service its debts.
For government dues, it would be far more
preferable to institute a credible, calibrated and systematic process, including
real-time monitoring and penalties (with minimum discretion), rather than
adopting the guillotine approach. This is because the cost of the resulting
economic shut-down has to be avoided if at all possible. Similar real-time
processes and systems could be set up for bank loans for NPAs, and to prevent
overleveraged borrowing. Uncollated data on government dues are already in the
goods and services tax system, as detailed in this article two years ago.2 Fundamental changes in operational standards are essential for on-time payments,
with penalties (penal interest, with restrictions on borrowing), with strict
enforcement for non-performance. Central and state governments have to provide
the lead on this necessary aspect of governance.
Just getting cash flows on time
would probably be sufficient for India to grow at well beyond an annual average of 5 per
cent
Shyam (no space) Ponappa at gmail dot com
