Bankruptcy Bill breaks Modi’s reform jinx but GST failure spoils party

After two successive washed-out Parliament sessions (Monsoon and Winter), the passage of Insolvency and Bankruptcy Code, 2016 in the budget session becomes the saving grace for the Narendra Modi-government to avert a wash-out hat trick, even as the big-ticket item, the Goods and Services Tax (GST), continues to be the victim of bad politics. Seen in the context of economic reforms, Modi can showcase the Bankruptcy code as a critical victory his government managed to seal in the Budget session, which too, at one point, faced the threat of a total wash out entangled in accusations and counter accusations in range of issues including the Agusta Chopper scam.

Representational image. AFP

Representational image. AFP

Bankruptcy Code is crucial as it enables Indian banks to address the future cases of loan recovery for corporations. It is even more critical in the current context, when the entire country is taken for a ride by one Vijay Mallya (who owes Rs 9,000 crore (about half of the amount government infuses in 27 public sector banks every year). Mallya-episode epitomizes the pitiable state of India’s banking sector when it comes to recovery of money lent to large corporations.

The critical difference bankruptcy code brings into the loan recovery process is this: No matter what happens within 270 days (180 days with a grace period of 90 days if majority lenders agree) the troubled promoter will have to either pay back dues resolving the problem or dissolving the operations. Thus, it brings certainty in the banking sector, investors, clients and employees as to what happens if a company collapses all of a sudden. This is the big change that the law will bring.

To put it in other way, had an efficient bankruptcy law put in place, the creditors would have finished the Kingfisher episode back in 2012 when the loan became a non-performing asset (NPA) and the airline was shut down on account of a severe financial crisis. Winsome Diamonds wouldn’t have been a persisting pain on bank’s books, so are about Rs 70,000 crore worth of wilful defaulter loans on the books of Indian banks.

Still, the question is can the bankruptcy code work in a country, where there is a complex, understaffed judicial system that takes years to resolve a case? That’s the question experts raise. “We already have facilities like SARFAESI Act and Debt Recovery Tribunals. But, none of these have really helped to expedite recovery. Even with the new bankruptcy law coming in, the question is how effectively the country can implement it,” told Pratip Chaudhuri, former chairman of State Bank of India to Firstpost. “How will it address the issue of multiple types of creditors to the company which is being liquidated,” asked Chaudhuri.

Nevertheless, for now, the passage of the Law scores a brownie point for the Modi-government facing criticism on slow-progress of the reforms process. Banking sector issues have figured mainly in Modi’s big economic reforms agenda since very beginning. Post the arrival new set of banks (small finance banks, payments banks) and emergence of on-tap licencing process, the clearance of bankruptcy code has certainly taken the banking structure reforms process ahead—something Modi can highlight in its two-year report card. The government completes two-years on 26 May.

Still, no hope on GST

But, on the political score card, the GST remains as a negative mark for Modi-government as the session concludes (Lok Sabha finished its business on Wednesday, Rajya Sabha is likely to follow suit today). The Modi-government has failed so far to build a consensus on the GST law, touted as the biggest economic reforms of the decade, leaving the biggest tax reform a pipedream for the economy.

In the beginning of the session, there were hopes that the Congress-party led opposition would soften its stance on GST Bill—something which is a brainchild of earlier UPA-government. But, the political climate turned when the Agusta episode dominated and put the opposition on war path. The result was GST turning casualty yet again.

There aren’t any unresolvable reasons that could block the GST Bill except lack of political consensus. There are three major points of contention between Congress and BJP on GST issue. 1) Inclusion of the GST rate (agreed around 18 percent) in the constitution 2) Doing away with the inter-state levy 3) Constituting an independent dispute resolution mechanism.

Of the three, the only major point of difference is capping GST in the Bill, but not something that has the potential to perennially block the passage of the crucial piece of reform. For instance, a solution such as empowering a joint committee involving the centre and state governments (including Congress-ruled states) to set the GST rate, isn’t difficult to agree upon. The other two demands are actually non-issues.

GST is the biggest tax reform Indian has ever seen to make the process transparent and broad base the tax net. This is critical for India’s ambitions as a global manufacturing hub and would add to the GDP growth. For Modi himself, prolonged delay in the passage of GST is no good news since it raises questions on the NDA-government’s ability to push economic reforms process. IMF has already warned on the need for Modi-government to quickly progress on the reforms path.

After bankruptcy code, building political consensus for GST would be the next big political test for Modi. It is too big a reform that the Modi government cannot afford to give up. Chances will be more for the passage of GST when BJP and allies improve their position in Rajya Sabha in 2016-17, but it will still require opposition support. The NDA-government has already missed the April 1 deadline on GST. Modi has to give his best to break the political deadlock on GST.



Updated Date: May 12, 2016 14:03 PM

Also See