📰 SC upholds bankruptcy code, cites improved financial flows
Clear message that India is no longer “defaulter’s paradise”
•In a whoop of victory for credits markets and entrepreneurship, the Supreme Court on Friday upheld the constitutionality of the Insolvency and Bankruptcy Code (IBC), saying the law sends a clear message that India is no longer “the defaulter’s paradise”.
•“The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained,” a Bench of Justices Rohinton Nariman and Navin Sinha gave the IBC a thumbs-up in their 150-page judgment.
•The Code consolidates disparate bankruptcy and insolvency laws of the past under one umbrella. The judgment authored by Justice Nariman termed these past laws as “trials which led to repeated errors”.
Time-bound
•The IBC, on the other hand, adopts a two-pronged approach. It provides a time-bound resolution mechanism, aimed at protecting the maximum value of the assets of the corporate debtor. It also, while doing so, promotes entrepreneurship and credit markets. The court noted that the working of the Code is being monitored by the Centre through expert committees. The Code is constantly evolving, bettering itself.
•“We are happy to note that in the working of the Code, the flow of financial resource to the commercial sector has increased exponentially as a result of financial debts being repaid,” the judgment observed.
3,300 cases
•“Approximately 3,300 cases have been disposed of by the adjudicating authority based on out-of-court settlements between corporate debtors and creditors which themselves involved claims amounting to over ₹1,20,390 crore,” the judgment added.
•It said the liquidation value of 63 of the 80 cases resolved through the acceptance of resolution plans was ₹29,788.07 crore. But the amount realised from the resolution process was ₹60,000 crore, that is, 202% higher than the liquidation value. The court noted that IBC has witnessed an improvement in the total flow of resources to the commercial sector, both bank and non-bank, and domestic and foreign (relatable to the non-food sector), has gone up from a total of ₹14,530.47 crore in 2016-2017 to ₹18,469.25 crore in 2017- 2018 to ₹18,798.20 crore in the first six months of 2018-2019. “These figures show that the experiment conducted in enacting the Code is proving to be largely successful,” Justice Nariman wrote.
•The judgment, however, partially reads down Section 29A. This provision disqualifies certain kinds of persons from submitting a resolution plan. The court said the very purpose of Section 29A is to ensure that the “persons responsible for insolvency of the corporate debtor do not participate in the resolution process”.
•However, the court interprets clause (j) of Section 29A to hold that the “mere fact that somebody happens to be a relative of an ineligible person cannot be good enough to oust such person from becoming a resolution applicant, if he is otherwise qualified”. It said the expression “related party” and “relative” would include only persons connected with the business activity of the resolution applicant.
Relaxation for MSMEs
•The court upheld certain relaxations given to micro, small and medium enterprises (MSME) under Section 29A of the Code. The court said the MSME form the “bedrock of our economy” and stringent restrictions through the IBC would adversely affect them. That is, instead of resolving crisis, it would lead to the untimely liquidation of MSMEs. The court said the relaxation provided to MSMEs is proof that the legislature is alive to the anomalies within the Code and is taking steps to rectify them.
•The court dismissed arguments that the IBC discriminates between financial creditors and operational creditors. It said “financial debts infuses capital into the economy inasmuch as banks and financial institutions are able, with the money that has been paid back, to further lend such money to other entrepreneurs for their businesses. This rationale creates an intelligible differentia between financial debts and operational debts”.
•“So long as there is some legitimate interest sought to be protected, having relation to the object sought to be achieved by the statute in question, Article 14 does not get infracted,” the court observed.
📰 Crisis in Caracas
Venezuela plunges from one catastrophic crisis to another
•The political crisis in Venezuela took a dangerous turn when Juan Guaidó, the new head of the National Assembly, declared himself “acting President”, challenging the authority of President Nicolás Maduro. Soon after Mr. Guaidó’s announcement, the U.S., Canada, Brazil and a host of other Latin American countries recognised the 35-year-old leader from the Popular Will party as interim President. A furious Mr. Maduro cut diplomatic ties with the U.S. and ordered American diplomats to leave in 72 hours. Venezuela has grappled with an economic and political crisis of its own making for almost two years now. When oil prices started falling from its 2014 highs, it badly hit an economy that was over-reliant on petroleum exports and was borrowing heavily to fund its over-spending on social welfare programmes, which former President Hugo Chávez liked to describe as a “Bolivarian revolution”. Mr. Maduro’s government was clueless when the economy started collapsing. At least 90% of the people now live below the poverty line, inflation is forecast to touch 10 million per cent this year, food and medicine shortages are widespread, and the economic woes have triggered a massive migrant crisis — nearly three million are estimated to have fled the country in recent years.
•The opposition, whose attempts to overthrow the Socialists, including the 2002 coup against Chávez, had failed in the past, launched protests against Mr. Maduro. The government used brute force to suppress them, while the economic situation deteriorated. This left Venezuela in a constant state of economic hardships and violent street protests over the past two years. The main opposition boycotted last year’s presidential election, which Mr. Maduro won with 67.8% vote. Mr. Guaidó’s claim is that the election was not free and fair and therefore Mr. Maduro is not the legitimate President — a claim that the U.S. and its allies back. While Mr. Maduro shares a lot of the blame for the mismanagement of the economy, forcibly removing him from power with support from foreign nations may destabilise the country further, even leaving aside the legality of such a move. Mr. Guaidó may have hoped that by anointing himself a rebel President with backing from the U.S., he could win the support of sections of the armed forces, without which he cannot unseat Mr. Maduro. But that plan appears to have failed with the military declaring its loyalty to President Maduro. To be sure, the people of Venezuela deserve a better deal from a government that has led them to untold suffering and forced millions to flee the country. Destabilisation by interfering in the political process is not the solution, however. What is required is a coordinated international effort to restore some degree of economic and political normalcy. In the long run, it is up to the people of Venezuela to decide their own political destiny.
📰 Examining farm loan waivers
The solution lies in better schemes that ensure universal coverage for small, marginal and medium-sized farmers
•To do or not to do? According to reports, the Central government is discussing a scheme to waive outstanding farm loans in the aftermath of widespread farmers’ protests between March and December 2018 . Till now, at least 11 States have announced schemes to waive outstanding farm loans: Madhya Pradesh, Uttar Pradesh, Karnataka, Tamil Nadu, Maharashtra, Chhattisgarh, Punjab, Andhra Pradesh, Telangana, Assam and Rajasthan. The pitch for waivers among States has added to the pressure on the Central government for a nationwide farm loan waiver.
Divided opinion
•Economists and bankers are sharply divided on whether farm loan waivers are desirable. One section of economists and hard-nosed bankers argues that loan waivers represent poor policy for a variety of reasons. First, loan waivers have “reputational consequences”; that is, they adversely affect the repayment discipline of farmers, leading to a rise in defaults in future. Second, earlier debt waiver schemes have not led to increases in investment or productivity in agriculture. Third, after the implementation of debt waiver schemes, a farmer’s access to formal sector lenders declines, leading to a rise in his dependence on informal sector lenders; in other words, waivers lead to the shrinkage of a farmer’s future access to formal sector credit.
•These arguments need careful and critical assessment. To begin with, there have only been two nationwide loan waiver programmes in India after Independence: in 1990 and 2008. The accompanying image gives data on agricultural non-performing assets (NPAs) of banks before and after the 2008 waiver, and throws up two conclusions.
•First, farmers are most disciplined in their repayment behaviour. In September 2018, agricultural NPAs (about 8%) were far lower than in industry (about 21%). Furthermore, agricultural NPAs were on a continuous decline between 2001 and 2008. Second, there is no evidence to argue that the 2008 waiver led to a rise in default rates among farmers. The lowest of all NPAs after 2001 was recorded in March 2009 (2.1%), which was just after the implementation of the 2008 scheme. The reason was the government’s cleaning up of the account books of banks. Once this was complete, it was totally expected that NPAs would rise again to settle at a slightly higher level. This was exactly what had happened: agricultural NPAs rose and settled at about 5% by 2011.
•For two reasons, the rise of agricultural NPAs, from 2% to 5%, is no evidence for indiscipline in farmer repayment behaviour. One, NPAs in agriculture remained stable at around 4 to 5% between 2011 and 2015. This was despite the fact that agricultural growth averaged just 1.5% between 2011 and 2015. Two, D. Subbarao, the former Reserve Bank of India Governor, had pointed out in a 2012 speech that the rise in agricultural NPAs between 2009 and 2011 was due to the “general economic slowdown” after 2009 and the introduction of new norms in the “system-wide identification of NPAs”.
•Agricultural NPAs began to rise again after 2015. There is enough evidence to suggest that this rise was not the result of any moral hazard; it was real, policy-induced and a direct consequence of acute agrarian distress that spread across rural India after 2015. In particular, the demonetisation of November 2016 aggravated already brewing agrarian distress by sucking cash out of the rural areas, crashing output prices and disrupting supply chains.
•The second argument — that loan waivers do not promote investment or raise productivity — is a bit absurd because nowhere has investment or productivity figured as the official objectives of these schemes. The third argument — that loan waivers shrink access to formal credit sector for farmers — is only partly true. But the culprits here are banks and not farmers. After every waiver, banks become conservative in issuing fresh loans to beneficiaries, as they are perceived to be less creditworthy. For instance, a Comptroller and Auditor General (CAG) report on the waiver in 2008 found that 34.3% of the beneficiaries were not issued debt relief certificates after the waiver, which meant that they could not avail of a fresh loan the following year. As a result, the scheme’s objective of expanding the issue of fresh loans to farmers was not fully achieved. But to cite such opportunistic actions of banks to deny fresh credit to farmers would be perverse policy.
•For every economic enterprise, it is only natural that when the bottom-line shrinks, a reduction of debt burden becomes inevitable. This is applicable for both (non-agricultural) firms and farms. Firms have always received debt waivers, though they are tactfully termed as “loan restructuring” or “one-time settlements”. Just as for firms, farms also need a reduction of debt burden, followed by fresh infusion of credit, when their economic cycle is on a downturn. The demand for loan waivers in India is absolutely logical when viewed from such a standpoint.
•On the other hand, to consider loan waivers as a panacea for the agrarian distress would also be wrong. To begin with, access to India’s rural banks is skewed in favour of large farmers. While public banks actively service the credit needs of large farmers, a majority of small and marginal farmers are not proportionately included. The latter are forced to rely on informal sources, particularly moneylenders, for much of their credit needs. As a result, the benefits of loan waivers accrue disproportionately to large farmers while only marginally benefiting the small and marginal farmers.
The Kerala blueprint
•But is this a good reason to disallow a loan waiver scheme, as the Prime Minister suggested in a recent interview? No. The solution lies in carefully designing waiver schemes that ensure universal coverage for small, marginal and medium-sized farmers while covering both the formal and informal sources of debt. The Kerala Farmers’ Debt Relief Commission Act, 2006 is an excellent model in this regard. This scheme defines debt as “any sum borrowed by a farmer from the creditor”, with the creditor defined as “any person engaged in money lending, whether under a licence or not”. The commission’s mandate included the right “to fix, in the case of creditors other than institutional creditors, a fair rate of interest and an appropriate level of debt, to be payable…” That is, the commission could waive, reschedule or reduce any debt on a need-basis after a detailed hearing of both the parties. Legislations such as Kerala’s are blueprints to design comprehensive, inclusive and less-leaky loan waiver schemes in other States.
•Finally, while loan waiver schemes are like a band-aid on a wound, it is the larger agrarian distress that demands urgent policy attention. Unless there are steps ‘to raise productivity, reduce costs of cultivation by providing quality inputs at subsidised rates, provide remunerative prices following the recommendations of the Swaminathan Commission, ensure assured procurement of output, expand access to institutional credit, enhance public investment for infrastructural development, institute effective crop insurance systems and establish affordable scientific storage facilities and agro-processing industries for value addition’, farmers will continue to be bonded to low income equilibrium and repeated debt traps.
📰 India, South Africa seal partnership deal
We have shared world view, says Modi.
•India and South Africa on Friday agreed on a three-year strategic partnership agreement to boost relations.
•The agreement, signed during the visit of President Cyril Ramaphosa, will cover defence and security, blue economy cooperation and sustainable development.
•At the end of the delegation-level talks, Prime Minister Narendra Modi highlighted the scope for cooperation.
Working together
•“Our countries have compatible world views. We have strong partnership in platforms such as the BRICS, the G-20, the Indian Ocean Region Association and the IBSA Dialogue Forum. We can work together for the reform of the UN Security Council,” he said.
•India also invited South Africa to join the International Solar Alliance (ISA) and congratulated it on securing the non-permanent membership of the UN Security Council for 2019-20.
•A joint statement acknowledged the growing interaction between the Navies of the two countries, and the Indian leader welcomed the South African participation in the India-Africa Field Training Exercise next March.
Common struggle
•The statement reiterated the role of the Indian Ocean Naval Symposium (IONS) that ensures freedom of navigation by keeping sea lanes free and secure.
•Speaking at the first IBSA Gandhi-Mandela Freedom Lecture, organised by the Indian Council of World Affairs, Mr. Ramaphosa highlighted the common heritage of struggle and the common aspiration of non-discriminatory national and international politics.
📰 ‘Agri sector should be boosted through credit flows’
PM’s Economic Advisory Council feels sector should be supported by schemes such as MGNREGS
•The Prime Minister’s Economic Advisory Council (EAC-PM) on Friday said that the agriculture sector should be bolstered through increased credit flows and schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme. The Council also added that it strongly felt that the government should not deviate from its fiscal consolidation path.
•“While the prospects for world economic growth does not look very promising, particularly in the advanced economics, there is sufficient amount of growth momentum in emerging market economies,” the EAC-PM said in a release, following a review meeting on the state of the economy.
•“India is not insulated from global developments. Nevertheless, India’s growth is expected to be in the 7-7.5% range in the next few years; one of the fastest in the world.”
•However, it added that with reforms designed to address the structural problems, growth rates can “easily be enhanced by at least 1%”. Among the issues discussed by the EAC-PM were agricultural problems, investment trends (including investments by States consequent to the 14th Finance Commission devolution), fiscal consolidation, interest rate management and credit and financial market issues, the release said.
•“The Council felt that the exchange rate management of the rupee by the RBI has been sound despite the volatility in the price of crude oil,” it said. “The good news is that oil intensity (use of fossil as a percentage of GDP) is showing a declining trend.”
Credit up tick
•“There are indications that financial savings have started going up and there is credit up tick through private banks to the services sector,” it added. “The reforms in the financial sector should be strengthened further building upon what the Government is already doing.”
•The EAC-PM said that it felt that the challenge of insularity being seen in external trade should be reversed through supportive policy interventions because there is a positive turn in exports that is now visible.
•The challenges in the agricultural sector should be addressed by looking at credit flows and support to employment programmes such MNREGA, the EAC-PM said.
•“The EAC-PM strongly feels that there should be no deviation from the fiscal consolidation target and but there must be continued emphasis on social sector intervention,” the release added. “Among the challenges that need to be addressed are reforms in the agricultural sector, the MSME sector, skill development, credit issues, digital payments and the banking sector reforms. The government and the RBI should be complimented for sound macroeconomic management, and this trend should be continued with.”
📰 Pranab Mukherjee, Nanaji Deshmukh, Bhupen Hazarika awarded Bharat Ratna
PM Modi lauds their contributions to nation
•President Ramnath Kovind on Friday conferred the Bharat Ratna, the nation’s highest civilian honour, on former President Pranab Mukherjee, along with social activist Nanaji Deshmukh (posthumous), and Assamese musician Bhupen Hazarika (posthumous).
•Prime Minister Narendra Modi was the first to congratulate the awardees. “Pranab Da is an outstanding statesman of our times. He has served the nation selflessly and tirelessly for decades, leaving a strong imprint on the nation’s growth trajectory. His wisdom and intellect have few parallels,” he tweeted.
•Of Nanaji Deshmukh, a senior RSS leader who also worked for rural development and welfare of farmers and was considered a stalwart of the Sangh Parivar, the Prime Minister said: “Nanaji Deshmukh’s stellar contribution towards rural development showed the way for a new paradigm of empowering those living in our villages. He personified humility, compassion and service to the downtrodden. He is a Bharat Ratna in the truest sense.”
•He said Bhupen Hazarika popularised India’s musical traditions globally. “The songs and music of Shri Bhupen Hazarika are admired by people across generations. From them radiates the message of justice, harmony and brotherhood.” The awards have political significance, with Nanaji Deshmukh being a nod to the larger ideological family of the BJP.
•Mr. Hazarika’s award appears to be a nod to the importance the North East has been accorded by the current government amid huge unrest following the Citizenship (Amendment) Bill being pushed. Mr. Hazarika had also contested and lost the Lok Sabha poll from Guwahati in 2004, on a BJP ticket.
•Mr. Mukherjee, whom Prime Minister Modi termed as being “like a father” to him has been awarded for public service, but did evoke controversy last year as he addressed the RSS cadre in Nagpur and created a debate on political dialogue.
•Congress president Rahul Gandhi lauded Mr. Mukherjee.
•“Congratulations to Pranab Da on being awarded the Bharat Ratna. The Congress Party takes great pride in the fact that the immense contribution to public service & nation building of one of our own, has been recognised & honoured,” he tweeted. He also expressed his happiness that Mr. Hazarika and Mr. Deshmukh had been honoured, posthumously.
•Mr. Mukherjee took to Twitter to thank “the people of India” for the award. “It is with a deep sense of humility and gratitude to the people of India that I accept this great honour,” he said.
