Over the last four-and-a-half years, the Bharatiya Janata Party-led National Democratic Alliance government has done much to constrict India’s economy.

Demonetisation hurt the smallest businesses: those of the self-employed. Their incomes are yet to return to pre-demonetisation levels. Many slightly bigger businesses, like small and medium enterprises in industrial clusters like Surat in Gujarat and Tirupur in Tamil Nadu, closed down after the introduction of the Goods and Services Tax in July 2017.

What has received less attention is the government’s ham-handed treatment of the country’s bad loans problem. The government’s insolvency proceedings have created a situation where a handful of companies are buying most of the distressed firms put up for sale by banks. The implications, as Scroll.in reported in October and November, run deep. They include both the possibility of cartelisation in the country’s core sectors and a freeze in fresh investments.

Adding to this, India’s financial institutions have taken a pounding. With the government preferring fealty over capability, institutional autonomy has come under a cloud. At the Reserve Bank of India, for instance, the government first replaced Raghuram Rajan, who opposed demonetisation, with Urjit Patel, who mutely allowed it, and then with Shaktikanta Das, who loudly defended it.

In April, Yashwant Sinha, finance minister from 1998-2002, during the Atal Bihari Vajpayee government, resigned from the Bharatiya Janata Party. He has emerged as one of the most prominent critics of the Narendra Modi government. His bookIndia Unmade: How the Modi Government Broke The Economy, released in December, details his thoughts on what the administration has done wrong. Scroll.in spoke to him about how the economy could be revived.

To start with, could we have your assessment on how India’s insolvency proceedings are coming along?
After coming to power in 1999, the Bharatiya Janata Party brought in the Sarfaesi Act [Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002]. That allowed banks to take over assets pledged to them by defaulting companies. At that time, we felt that the Act and the reformed Debt Recovery Tribunals were sufficient to tackle the problem of the NPAs [Non-Performing Assets].

Why was that?
We did not think a NCLT [National Company Law Tribunal]-type process was needed. The best cure for NPAs [Non-Performing Assets] is economic growth. And the economy started doing well. After us, when the UPA [Congress-led United Progressive Alliance] came to power, they did not think about it either even though, towards the later years of their rule, the economy had begun to slow.

Two months ago, when Scroll.in took a closer look at India’s insolvency proceedings, we found that a handful of companies are buying most of the distressed firms on sale. Second, with more sellers than buyers, most of these firms are changing hands at very low rates. For example, the going rate for a distressed power project, which costs above Rs 5 crore/MW to set up, is about Rs 2.5 crore/MW. As a result, not only are banks recovering only a fraction of their loans, but existing companies in these sectors are warning of an investment freeze – a greenfield power project set up at Rs 5 crore/MW cannot compete with one which cost its new owners half as much.
The idea of taking away a business from a failed entrepreneur and giving it to a more competent entrepreneur is conceptually okay. To evaluate the NCLT [National Company Law Tribunal], there are two questions you have to look at: what percentage of debt is getting returned and is the project getting rehabilitated. What we are seeing is some deals have been concluded but the speed is slow. That is because there are challenges to the process. A person aggrieved by the final outcome can appeal – even go to the Supreme Court.

What about a few companies buying most of the firms on sale?
That is not a welcome development. That will lead to creation of monopolies. There is a natural process of consolidation in economics which is fine – we have seen that in various sectors like airlines, telecom and renewable energy. But the NCLT [National Company Law Tribunal] process is different. Here, banks and the Reserve Bank of India are identifying weaker units and forcing them to sell.

One critique here is that this approach is inflexible. Companies can default for many reasons – an economic downturn, a sudden government policy like demonetisation – but the current regime holds the promoter responsible for all of these and dissolves existing shareholding, and puts the project up for sale. One power plant faced cost overruns because of delays in arrival of its machinery, ran into a working capital crisis, could not get a Rs 300 crore loan, and is now up for sale.
Yes. You will have many such cases. At such a time, it is about which companies have staying power. A large diversified company has more staying power.

They can subsidise loss-making projects. Doesn’t that mean we will see a large change in the nature of these sectors? In steel, I was told in Chhattisgarh, 55% of manufacturing capacity is currently with the top six companies. By the end of the National Company Law Tribunal process, as firms like Bhushan Steel, Monnet, Electrosteel and others are picked up by larger companies, their share will rise as high as 85%.
Yes. This is something the Competition Commission has to look at. When I was in the Standing Committee for Finance, we asked them to look at predatory pricing by airlines. Here too, the Competition Commission needs to see if monopolies are forming. Otherwise, this will reshape the economy. In a democracy, businesses should be dispersed. In other words, we should not create another problem while solving the present one.

Some businessmen and analysts felt giving distressed assets to a public sector unit like NTPC or someone else to rehabilitate would have been better. What do you think would have been a better way? And why do you think the government opted for this approach where no less than 2,500 companies are up for insolvency proceedings – in a country with no more than 7,500 companies with a topline over Rs 250 crore?
In our plan, we had proposed an Asset Reconstruction Company where these bad loans could be transferred. It is hard to say whether this was designed to favour a few companies from the start. For that, a lot of investigation would be needed.

In all this, what is the larger picture of the economy that emerges? We have demonetisation that has hammered the informal economy. The Goods and Services Tax has hurt small and medium enterprises. And now, we have the National Company Law Tribunal regime, which is making larger companies in the country insecure as well. Apart from all this, we have the attack on economic institutions – the latest instance of which is the Reserve Bank of India.
The government cannot say the economy is doing well when 2,500 companies are in bankruptcy, when units are closing in Ludhiana, Tirupur, Surat and other places. Wherever you see, there are tales of woe. The problem is that little of this has been studied. Most of what we have are anecdotal evidence. By the time the government gets its studies, it will be three years.

What will it take to revive the economy?
The first thing is to promote investment, especially private investment. And for that, we need to boost demand, which has been adversely affected due to demonetisation and the botched-up GST. There are two types of demand in the economy – that of investment goods and consumption goods. There must be the right sequencing between the two. When I was in the government, we built roads – the National Highways Development project, the rural roads project. That made the core sector grow, created jobs and then people’s demand for consumption goods picked up as well.

When it came to power, the UPA [United Progressive Alliance] changed the sequence. They focused on consumption-led growth. Which led to an increase in inflation, and resulted in the Reserve Bank of India hiking interest rates, further affecting industrial investment. It brought back the vicious circle of high interest rates and low investment.

All – government, banks and companies – are in trouble right now. The government is cash-strapped, banks are saddled with debt, and companies are afraid to invest.
Yes. That circle has to somehow be broken. I had advised this government to invest not only in big things but also small things – irrigation, check dams. Just 40% of the country is covered by irrigation, expand that as much as possible. That would boost not just demand for labour but also demand for cement, stone chips and more. But it was not done. Either they did not know. Or they did so deliberately, to benefit their cronies.