Digital Transactions Were Growing Faster Before Demonetisation

The finance minister Arun Jaitley recently said: “Through demonetisation, the government created a new normal, with a big step in removing the earlier scenario of cash economy and shadow economy.”

If this is true then there should have been a substantial jump in digital transactions in the recent past. If people are not carrying transactions in the cash economy, then they should be carrying out transactions digitally. But is that true?

Let’s first look at the number of digital transactions (i.e. volume of digital transactions) that have happened every month between November 2016, when the demonetisation of Rs 500 and Rs 1,000 notes was announced, and May 2017, the latest monthly data available. All the digital data used in the column deducts the transactions carried out through Real Time Gross Settlement system simply because it is not a retail mode of digital transactions, which is primarily what we are looking at here. The minimum amount that can be transferred through this mode is Rs 2 lakh.

Take a look at Figure 1. This basically plots the total number of digital transactions that have happened between November 2016 and May 2017.

Figure 1: 

As is clear from Figure 1, the volume of digital transactions peaked in December 2016, when the impact of demonetisation was at its peak. With very little currency available to carry out transactions, people had no option but to use digital modes of settling transactions. In May 2017, the total number of digital transactions was down by 11.4 per cent in comparison to December 2017. This clearly tells us that fewer people are using digital modes of transactions in comparison to the period right after demonetisation.

Now take a look at Figure 2. In this we look at the total value of digital transactions carried out every month between November 2016 and May 2017.

Figure 2: 

From Figure 2, it is clear that the total value of digital transactions peaked in March 2017, and has fallen by 20.2 per cent since then. Past data shows that the digital transactions tend to increase in the last month of the financial year as people settle their dues and pay their taxes. Having said that, the total value of digital transactions in May 2017, was higher than that in December 2016. But with volume of transactions being lower, what this means that people who were already on the digital bandwagon are spending more digitally. And that is one piece of good news for a government looking to increase the proportion of digital transactions in the overall economy.

This comparison just tells us how things have evolved on the digital front after demonetisation. How do things look, if were to stretch the timeline a little more? Let’s compare May 2017 data with May 2016 data (In this case I have ignored the data for United Payments Interface and Unstructured Supplementary Service Data (USSD). I could not find this data for May 2016 and May 2015. This will not have any impact on the overall result because the USSD form of digital payment is close to zero and can be effectively ignored.

When it comes to UPI even in May 2017 with all the push and promotion by the government, it made up for 1.1 per cent of the total digital transactions by volume and 0.1 per cent by value (of course we have ignored RTGS here).

Take a look at Table 1. It has the total digital transactions both by volume and value, over the years.

Table 1:

Digital transactions May 2017 May 2016 May 2015
Volume (in millions) 831.5 726.3 491.2
Value (in Rs billion) 20,901.5 15,364.6 12,173.9

Source: Author calculations on Reserve Bank of India data 

What does Table 1 tell us? Between May 2016 and May 2017, the total number of digital transactions (i.e. volume) went up by 14.5 per cent. In value terms, the digital transactions jumped by 36 per cent. So, doesn’t this tell us that demonetisation had a positive impact on the digital transactions? Before we jump to that conclusion, let’s look at how the situation was between May 2016 and May 2015, when there was no demonetisation to contend with.

Between May 2015 and May 2016, the total number of digital transactions grew by 47.9 per cent in volume terms, which was significantly faster than the increase between May 2016 and May 2017. Of course, the low-base effect is at work, but even with that the jump in percentage terms was significantly more last year.

This also tells us clearly the negative effect that demonetisation has had on the overall economy, with the larger section of the economy going slow on spending. This ultimately reflects in the slower jump in digital transactions.

How do things look in terms of value? In terms of value, the jump between May 2015 and May 2016 stood at 26.2 per cent, which is lower than the jump between May 2016 and May 2017. (I did not look into data from May 2014 and before, because the structure of the digital data changes dramatically, with the importance of ECS increasing in comparison to NACH today).

What does this tell us? It tells us that demonetisation has led to those who were already on the digital mode to spend more digitally. It also tells us that the better-off haven’t been impacted much by demonetisation. Nevertheless, the main aim of demonetisation was to increase the total number of digital transactions (the dream of a cashless society i.e.), which was happening anyway and seems to have slowed down after demonetisation.

The fact that digital transactions in India were growing at fast pace even before demonetisation, isn’t surprising given that India is one of the youngest nations in the world. More than 54 per cent of India’s population is under 25 years of age. Youth take on to new technology faster than others. Hence, the digital transactions in India will continue to grow in the years to come, as they had before demonetisation.

This brings us back to the question was demonetisation necessary? The useful idiots of Narendra Modi (with due apologies to Thomas Sowell who coined the term for a different context) through their WhatsApp forwards and analysis in the media, would like us to believe that. But as more and more data comes out, it is becoming more and more clear that demonetisation was a more or less whimsical decision carried out without any due-diligence. Of course, it needs to be defended now.

The column originally appeared on Equitymaster on June 12, 2017.

The Mother Economy

Mother_India_poster

Gross domestic product or GDP, is one of the most used or perhaps abused terms in economics. The trouble is that too many people use it without realising that it is ultimately a theoretical construct and not a real number.

In the simplest terms GDP is defined as the value of goods and services produced in a country during the course of a year. The trouble is in defining what has a value and what doesn’t. As the old GDP joke goes, when a man or a woman marries his or her housekeeper, the GDP of the country goes down. This happens simply because the housekeeper was paid for doing the house work. The spouse clearly won’t be.

On a serious note, this joke shows a big loophole in the way the GDP is calculated. The calculation takes only paid work into account. The trouble is that unpaid work forms a very important as well as large part of the economy, though this is something that most people do not realise.

As Kate Raworth writes in Doughnut Economics—Seven Ways to Think Like a 21st-Century Economist: “If you have never really thought of it before, then it’s time you met your inner housewife (because we all have one). She lives in the daily dealings of making breakfast, washing the dishes, tidying the house, shopping for groceries, teaching the children to walk and to share, washing clothes, caring for elderly parents, emptying the rubbish bins, collecting kids from school, helping the neighbours, making the dinner, sweeping the floor, and lending an ear.”

Most of us do these things and don’t get paid for it. Nevertheless, they are a very important part of the lives that we live.

Raworth is British and hence, invocates the term inner housewife. In India, there are real housewives (not that they are not there in Britain) who just take care of the home. As per the National Sample Survey (NSS), for women in the age of 25-54, the labour force participation rate varies between 26 to 28 per cent in urban areas and 44 per cent in rural areas. Hence, most Indian women don’t work, in the conventional sense of the term. But they run their homes. Even young girls who are not married are expected to contribute towards house work.

All this never gets counted towards the GDP. As Raworth writes: “In sub-Saharan Africa and South Asia… when the state fails to deliver, and the market is out of reach, householders have to make provisions for many more of their needs directly. Millions of women and girls spend hours walking miles each day, carrying their body weight in water, food or firewood on their heads, often with a baby strapped to their back – and all for no pay.” And given that there is no pay, the work does not reflect in the GDP.

In fact, economists have even put numbers to this unpaid work. “A 2014 survey of 15,000 mothers in the USA calculated that, if women were paid the going hourly rate for each of their roles – switching between housekeeper and daycare teacher to van driver and cleaner – then stay-at-home mums would earn around $120,000 each year. Even mothers who do head out to work each day would earn an extra $70,000 on top of their actual wages.”

This unpaid work which is a very important part of a running a household smoothly as well as bringing up a child, is not reflected in the GDP. And that is a real problem. This patriarchal attitude of economics as it is practiced, needs to be corrected in the years to come.

The column originally appeared in the Bangalore Mirror on June 9, 2017.

This Govt Company Lost Rs 11.65 Crore Per Employee, and It’s Not Air India

Hindustan photo

The finance and defence minister Arun Jaitley, recently said: “India has a historic second chance, after nearly one-and-a-half decades, to disinvest in state-owned Air India Ltd and help propel the growth of aviation sector.”

Whether this happens remains to be seen given that the issue of disinvestment of Air India is a political hot potato, and any movement on this front is likely to lead to a lot of hungama, for the lack of a better word, from India’s professional trade union leaders, as well as the opposition parties, which have been in a rather moribund state of late.

Over and above this, the Modi government hasn’t really come up with any economic reform till date, which is likely to make it unpopular with a section of the population. The unpopular steps have typically been reserved to drive the so called cultural agenda of the Rashtriya Swayemsevak Sangh (RSS) and the Bhartiya Janata Party (BJP).

Having said that, before the government goes about disinvesting Air India there are several low hanging fruits that it can pluck, and save a lot of money in the process. One such company is the Hindustan Photo Films Manufacturing Co. Ltd. Take a look at Table 1.

Table 1: 10 Major Loss Making CPSEs during 2015-16 

As per Table 1, Hindustan Photo Films was the fourth largest loss maker among all public sector enterprises in 2015-2016. It made a loss of around Rs 2,528 crore. The three companies that made greater losses than Hindustan Photo, had some semblance of a business, though not a business model. The Steel Authority of India Ltd has steel plants all over the country and employs thousands of people, though it lost a lot of money in doing so, given that it can’t compete with the Chinese steel on the price front.

The Bharat Sanchar Nigam Ltd, offers telecom services across the country. And Air India, for whatever it is worth, is India’s national airline and flies people globally as well as locally. It also flies the prime minister whenever he takes an international trip.

But what about Hindustan Photo Films? What does the company do? Photo films went out of business a while back. The question is: Why is the government still running a photo film company? The photo film was killed first by the digital camera and then by the mobile phone. Actually, the company doesn’t make photo films any more.

During 2012-2013 (the latest annual report that I could find), the total production of the company had stood at Rs. 3.6 crore. The sales had stood at Rs. 3.7 crore. Now imagine who in their right minds would run a company with sales of under Rs. 4 crore and which ends up with losses of more than Rs. 1,500 crore, as it did during the course of 2012-2013. As mentioned earlier in 2015-2016, the company lost Rs 2,528 crore. It employed 217 individuals. This meant a loss of Rs 11.65 crore per employee. This number shows the ridiculousness of the entire exercise of keeping the company alive.

In fact, 2015-2016 wasn’t the first time that Hindustan Photo Films lost money. It has been losing money for over a decade. Between 2004-2005 and 2015-2016, the company has lost close to Rs 15,000 crore in total.

Table 2: Losses of Hindustan Photo Films 

As is clear from Table 2, the company hasn’t made any money in years. Given this, in order to continue to operate the company has borrowed money. As of March 31, 2016, the total long-term loans of the company stood at Rs 23,752 crore. Servicing these loans by paying interest on them, I guess is the major expense of the company now. I say guess because I don’t have access to the latest annual report of the company.

Banks keep giving loans to a dud company like Hindustan Photo Films because they know that they are ultimately lending to the central government, and what can be a more safer form of lending.

It is worth pointing out here that the government does not have an unlimited amount of money. Every rupee that goes towards funding the losses of companies like Hindustan Photo Films, is money that does not go towards more important things like education, health, or affordable housing, for that matter.

Also, a normal excuse offered on keeping a loss-making public sector enterprise going is that so many people are employed. Over and above the direct employment, there is a certain ecosystem that the public sector enterprise feeds into and helps that ecosystem as well. But in this case, this logic fails given that there are only 217 employees. They can be given a good voluntary retirement package and the company can be shutdown. Also, the physical assets of the company can be sold to repay the debt that has been accumulated. For starters, the company has 472 constructed homes in its township.

This is low hanging fruit that the Modi government can easily cash in on, if it wants to. Why this hasn’t happened up until now, on that your guess is as good as mine.

The column originally appeared on Equitymaster on May 30, 2017.

Which is the Biggest Hit of Them All?

Baahubali_the_Conclusion

The race is on. Is it Bahubali 2? Or is it Dangal? Which is the biggest Indian hit film of all time?

For a brief period, it looked that Bahubali 2 with a worldwide business of more than Rs 1,500 crore, would take the top slot. Until Dangal opened in China. The movie has done a worldwide business of close to Rs 1,700 crore, with around Rs 900 crore coming from China alone.

This means that Dangal is the biggest Indian hit film of all time. Ironically, Bahubali 2 with collections of close to Rs 500 crore in Hindi, is the biggest hit in Hindi cinema (originally made in Telugu it has been dubbed into Hindi) of all time. Dangal made a little over Rs 387 crore in Hindi. On an all India basis Bahubali 2 did greater business than Dangal. Hence, within India Bahubali 2 is the biggest hit of all time.

There are many things that this analysis does not take into account. The first and foremost is the fact that no one is looking at the return on investment.

If a film made on a budget of Rs 15 crore does a business of Rs 60 crore, it earns a return of 300 per cent. In comparison, if a film made on a budget of Rs 100 crore does a business of Rs 200 crore, it makes a return of only 100 per cent, even though the overall business that it does is certainly more.

Hence, just measuring the revenue of a film gives a misleading picture. But this is the way analysis happens.  This convolutes the overall picture in favour of films doing big business, even though their return on investment may not be necessarily high.

The second point is inflation. The value of the rupee today is not the same as it was 50 years back or 20 years back or even a year back. Ticket prices have gone up over the years. In fact, in large parts of the country, film ticket prices have gone up much faster than the overall rate of inflation. When I was in college in the mid to late 1990s, the most expensive ticket was around Rs 11. Even if we assume a rate of inflation of 8 per cent per year over the last two decades, Rs 11 then is now worth around Rs 51.

In the big cities, where much of the film business happens, Rs 51 is simply not enough to buy a film ticket. Hence, films now make much more money than they did in the past because tickets even after adjusting for inflation are more expensive than they used to be.

As Diptakirti Chaudhuri writes in Written by Salim-Javed—The Story of Hindi Cinema’s Greatest Screenwriters: “In the first run, Ramesh Sippy [the director of Sholay] estimates Sholay made a staggering Rs 25 crore. To put this in perspective, it made more than eight times the production cost—which was the highest ever at that time.”

How does this number look if we were to take inflation into account? Chaudhuri estimates the prices have gone up eighteen times since 1975. This “would put just the domestic gross collection of Sholay at Rs 450 crores.” A price increase of 18 times over four decades means a rate of inflation of around 5.3 per cent.

This is just adjusting for inflation. If we take into account the excessive increase in ticket prices in comparison to overall inflation, Sholay would have made much more than Rs 450 crore, if we were to adjust for today’s reality.

It would have definitely made more than Bahubali 2 has in its first run in Hindi. Also, this does not take into account the fact that Sholay continued to earn money over the years, as it kept getting re-released. Now that is something that doesn’t happen anymore with most money being made in the first few weeks of the film’s release.

If we see the situation from this lens, things suddenly don’t seem like they are being projected.

The column originally appeared in the Bangalore Mirror on May 31, 2017.

When It Comes to Creation of Jobs, We Agree and Disagree with Amit Shah

amit shah

The BJP president Amit Shah late last week said: “We have tried to give new perspective to employment as it is not possible to provide employment to everyone in a country of 125 crore people. We are promoting self-employment and the government has made eight crore people self-employed.”

Well it’s obvious that no government can create the huge number of jobs that India needs. But then politicians are not known to say the most obvious things. Hence, Shah deserves credit for saying what he did.

The number of jobs in central public sector enterprises has fallen over the years. Let’s take a look at Table 1.

Table 1: Employment and Average Annual Emoluments in CPSEs 

As can be seen from Table 1, the number of people employed by the central public sector enterprises has fallen over the last decade.

Now how do things look for the central government employees? On January 1, 2006, the central government had a sanctioned strength of 38.3 lakh. Against this, it had 32.7 lakh employees on its rolls. By January 1, 2010, the sanctioned strength had gone up to 38.9 lakh, while the number of employees had fallen to 32.3 lakh.

By January 1, 2014, the sanctioned strength had risen to 40.5 lakh, whereas the number of employees had risen marginally to 33 lakh. So, between 2006 and 2014, the central government basically added around 28,000 jobs.

Over and above this, the various state governments employ around 72 lakh individuals. Hence, the ability of the government to create jobs is limited. This does not help given that around one million Indians are entering the workforce every month. Hence, the economy needs to be creating 1.2 crore jobs every year, and that is clearly not happening.

In fact, the sad state of the Indian jobseeker can be made out from something I write in my new book India’s Big Government-The Intrusive State and How It is Hurting Us: “Only 60.6 per cent of the individuals who were available for work all through the year were able to get work for the entire year. In rural areas, this figure was at 52.7 per cent. This basically means that close to half of rural India cannot find work for all 12 months of the year.” These numbers were true for 2015-2016.

Further, the situation on this front is more or less the same since the last survey was carried out, in 2013-2014. As per the last survey, 60.5 per cent of individuals who were available for work all through the year had been able to find work for that entire year. In rural areas, this figure was at 53.2 per cent. The figures are more or less similar to those of the latest survey.

Last week Shah talked about self-employment and the government having made 8 crore people self-employed. In the next breath he also said: “There is no system to find out the exact availability of jobs in the country.” So that makes us wonder, where did the 8 crore number come from?

Also, Shah in his statement tried to pass-off self-employment as something unique to the current government. Self-employment is what almost every Indian who does not find a job, ends up with.

As Abhijit Banerjee and Esther Duflo write in Poor Economics: “The sheer number of business owners among the poor is impressive. After all, everything seems to militate against the poor being entrepreneurs. They have less capital of their own (almost by definition) and… little access to formal insurance, banks and other sources of inexpensive finance…. Another characteristic of the businesses of the poor and the near-poor is that, on average, they are not making much money.”

The point here is that a large part of the workforce is not self-employed by choice but are self-employed because they have no other option. Banerjee and Duflo call them ‘reluctant entrepreneurs’. This can be made out from the fact around 46-47 per cent of the Indian workforce is self- employed.

The fact that Indians are reluctant entrepreneurs also becomes clear from some data highlighted in the National Manufacturing Policy of 2011. It estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people.

This means that any SME, on an average, employed 2.27 individuals. The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals. These firms are responsible for 45 per cent of the manufacturing output of the country.

What this clearly tells us is that the size of the average Indian manufacturing firm is very small. This is a good proof of the fact that most Indians getting into entrepreneurship do so because they don’t get jobs. They start small and continue to remain small. One reason lies in the fact that their business does not generate enough capital to expand.

The second reason lies in the lack of ease of doing of business. Any firm looking to grow soon runs into a maze of rules and regulations and corrupt bureaucrats appointed by both state and central government. Jobs are created when small firms start to grow big and recruit more people.

As an OECD (Organisation for Economic Co-operation and Development) research paper points out: “SMEs (small- and medium-sized enterprises) account for 60 to 70 per cent of jobs in most OECD countries, with a particularly large share in Italy and Japan, and a relatively smaller share in the United States. Throughout, they also account for a disproportionately large share of new jobs, especially in those countries which have displayed a strong employment record, including the United States and the Netherlands. Some evidence points also to the importance of age, rather than size, in job creation: young firms generate more than their share of employment.”

Hence, jobs are created when small firms grow. And that clearly isn’t happening in India. The labour laws continue to remain as screwed up as ever. And so does the ease of doing business. On that front Shah’s government has barely managed to move.

When it comes to creating jobs, the government can at best act as a facilitator and help the private sector and individuals create jobs. But that facilitation is easier said than done.

Postscript: I recently did a podcast with the writer Amit Varma who is currently the editor of the Pragati magazine, on The Coming Jobs Crisis. Most of what I spoke was based on my new book India’s Big Government-The Intrusive State and How It is Hurting Us. You can listen to the podcast here.

The column originally appeared in Equitymaster on May 29, 2017.

Why Demonetisation Did Not Hurt Modi

narendra_modi

Later this week, the prime minister Narendra Modi will complete three years in office. In the recent past, there have been a spate of articles analysing the performance of the Modi government.

The general conclusion seems to be that the prime minister continues to remain politically popular. The recent wins of the Bhartiya Janata Party in the Uttar Pradesh state assembly elections and the Delhi municipal elections, is evidence of the same.

Over and above this, there has been a lot of analysis around the impact of demonetisation, as more data becomes available. Most data show that the economic impact of demonetisation has been negative. For all the trouble that people were put through, the income tax department hasn’t been able to identify much of black money.

Further, barely any fake currency was identified during the process of demonetisation. Digital transactions peaked in December 2016 and have fallen since then. Hordes of informal businesses were shut down and many people lost their jobs, in the process. And if all this wasn’t enough, on some days ATMs still run out of cash.

Nevertheless, despite all this Modi continues to be a popular prime minister. What is happening here? The negative economic environment created in the aftermath of demonetisation hasn’t impacted the prime minister.

Narendra Modi is what political scientists call a populist leader. What is the definition of a populist leader? Jan-Werner Müller, a professor of politics at Princeton University, defines this in his book What is Populism?

First and foremost “it is a necessary but not sufficient condition to be critical of elites in order to count as a populist”. Over and above this, there are other factors that go into the making of a populist leader like Modi is.

As Müller writes: “Populists claim that they, and they alone, represent people… The claim of exclusive representation is not an empirical one; it is always distinctly moral. When running for office, populists portray their political competitors as part of the immoral, corrupt elite; when ruling, they refuse to recognise any opposition as legitimate. The populist logic also implies that whoever does not support populist parties might not be a proper part of the people—always defined as righteous and morally pure.”

A populist leader also likes cutting out the middleman. This means relying as little as possible on party organisations and the media, which acts as intermediaries between party organisations and the people.

This explains why Modi chose to directly address the nation on Doordarshan while announcing demonetisation on November 8, 2016. He spoke to the nation through the mann ki baat programme on radio on November 27, 2016. He addressed the nation again on December 31, 2016.

The focus of the message delivered was on how black money of the morally corrupt elite was hurting India big time and how important it was to tackle this problem on a war footing on an immediate basis. By doing this a situation of a crisis was created.

As Müller writes: “A “crisis” is not an objective state of affairs but a matter of interpretation. Populist will often eagerly frame a situation as a crisis, calling it an existential threat, because such a crisis then serves to legitimate populist governance. Put differently, a “crisis” can be a performance, and politics can be served as a continuous stage of siege.”

And this direct talking by populists attacking the so called morally corrupt elite goes down well with the true people, something which all the data and the numbers offered against decisions made by them can’t do anything about.

As Müller writes: “Populists ultimately appeal to a certain symbolic rendering of the “true people,” the appeal of that image will not vanish automatically when voters are presented with a some set of correct statistics about a particular policy area”.

And that best explains why demonetisation was a politically popular decision though numbers clearly show that it hurt the Indian economy.

The column originally appeared in the Bangalore Mirror on May 24, 2017

The Banking Ordinance is no magic pill for ailing banks

RBI-Logo_8

Recently, the government promulgated the Banking Regulation(Amendment) Ordinance, 2017, to tackle the huge amount of bad loans that have accumulated in the Indian banking system in general and the government owned public sector banks in particular. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more.

This Ordinance is now being looked at the magic pill which will cure the problems of Indian banks. Will it?

The Ordinance essentially gives power to the Reserve Bank of India(RBI) to give directions to banks for the resolutions of bad loans from time to time. It also allows the Indian central bank to appoint committees or authorities to advise banks on resolution of stressed assets.

The basic assumption that the Ordinance seems to make is that the RBI knows more about banking than the banks themselves. This doesn’t make much sense for the simple reason that if the RBI was better at banking than the banks themselves, it would have been able to identify the start of the bad loans problem as far back as 2011, which it didn’t.

Over and above this, this is not the first time that Indian banks have landed in trouble because of bad loans. They had landed up in a similar situation in the early 1980s and the early 2000s as well, and the RBI hadn’t been able to do much about it.

In fact, at the level of banks, many banks have been more interested in postponing the recognition of the problem of bad loans. This basically means they haven’t been recognising bad loans as bad loans. One way of doing this is by restructuring the loan and allowing the borrower a moratorium during which he does not have to repay the principal amount of the loan. In some cases, even the interest need not be paid. In some other cases, the tenure of the loan has been increased. In many cases this simply means just pushing the can down the road by not recognising a bad loan as a bad loan.

Why have banks been doing this? The Economic Survey gives us multiple reasons for the same. Large debtors have borrowed from many banks and these banks need to coordinate among themselves, and that hasn’t happened. At public sector banks recognising a bad loan as a bad loan and writing it off, can attract the attention of the investigative agencies.

Also, no public sector banker in his right mind would want to negotiate a settlement with the borrower who may not be able to repay the entire loan, but he may be in a position to repay a part of the loan. As the Economic Survey points out: “If PSU banks grant large debt reductions, this could attract the attention of the investigative agencies”. What makes this even more difficult is the fact that some of defaulters have been regular defaulters over the decades, and who are close to politicians across parties.

Hence, bankers have just been happy restructuring a loan and pushing the can down the road.

Over and above this, writing off bad loans once they haven’t been repaid for a while, leads to the banks needing more capital to continue to be in business. In case of public sector banks this means the government having to allocate more money towards recapitalisation of banks. There is a limit to that as well.

Also, a bigger problem which the Economic Survey does not talk about is the fact that the rate of recovery of bad loans has gone down dramatically over the years. In 2013-2014, the rate of recovery was at 18.8 per cent. By 2015-2016, this had fallen to 10.3 per cent. Hence, banks were only recovering around Rs 10 out of the every Rs 100 of bad loans defaulted on by borrowers. This is clear reflection of the weak institutional mechanisms in India, which cannot change overnight.

Also, many of the companies that have taken on large loans are no longer in a position to repay. As the Economic Survey points out: “Cash flows in the large stressed companies have been deteriorating over the past few years, to the point where debt reductions of more than 50 percent will often be needed to restore viability. The only alternative would be to convert debt to equity, take over the companies, and then sell them at a loss.”

The first problem here will be that many businessmen are very close to politicians.
Hence taking over companies won’t be easy. Over and above this, it will require the government and the public sector banks, working with the mindset of a profit motive, like a private equity or a venture capital fund. And that is easier said than done.

The column originally appeared in the Daily News and Analysis on May 22, 2017.