Debt don’t have no mercy
If this monsoon season has a theme in India, it has to be debt.
The Reserve Bank of India (RBI) is flexing its new powers and has initiated action against 12 companies under the new Insolvency and Bankruptcy Code. These companies account for around a fourth of the gross non-performing assets (NPAs) of the banking system. That works out to about Rs2 trillion (or $31 billion).
Farmers across India are protesting, demanding farm loan waivers and better prices for their crops. Bank of America Merrill Lynch (BofA-ML) estimates that by the time the next parliamentary elections come around, in 2019, Indian states would have waived farm loans worth $40 billion. That’s around Rs2.6 trillion.
Meanwhile, a bunch of telecom companies—in fact, all, but one—is lobbying the government for a bailout. The telecom firms were carrying debt of around Rs4.85 trillion on their books as of 31 December 2016. In addition, they owe the government close to Rs3 trillion for spectrum they have already bought. The numbers work out to around $75 billion and $46 billion, respectively.
Together, that works out to around $146 billion of debt which explains why the theme is dominating the headlines.
Let’s look at the three cases in ascending order of complexity.
The NPA problem is, believe it or not, the easiest to solve. Sure, bankruptcy proceedings could be long-drawn, and the discretion required to write down loans isn’t easily found in a banking system dominated by state-owned banks—not in an environment where investigative agencies can ask why loans are being written down—but at the heart of most non-performing assets is an asset. This could be a steel factory, a power plant, a stretch of road, even part ownership of an airport. All are assets that a growing economy needs and which, if run properly, or when the commodity cycle turns (or both), could be viable, even profitable. With the right regulatory regime, some hard calls, and the courage to take write-downs, this could happen.
The debt on the books of the telecom firms poses a more difficult problem. This is debt that has been built up because the government insisted on transparency and a market-driven approach above all else. The newsroom I work for, Mint, believes in free markets so it is difficult for me to argue with this approach. This is debt that has been built up because the government has sought to do the right thing from the perspective of technology, and by customers. Again, it is difficult to find fault with this approach although, over the years, this has benefited only three companies—the two Reliance entities in telecommunications, and Tata Teleservices. And this is debt that has been built up because most telecom firms have adopted the debt-based model of growth (over bringing in equity). It is difficult to blame this model too.
Together, these three approaches have benefited the government—through higher revenue, and customers, though lower tariffs. But the industry is in distress now, and crying for a bailout. The government should wait for market forces to play out and watch the ensuing consolidation (this has already begun, with the second and third largest telecom firms, Vodafone India and Idea Cellular Ltd announcing a merger), but it should also push for these companies to bring in more equity, agree to take a haircut on some spectrum payments, make mergers easier, ensure that the telecom regulator and the anti-trust body stay sharp and fair, and promise not to meddle with policy anymore (at least for a few years).
Farm loans pose the most difficult problem, not because they can’t be waived—they can be, as various state governments have shown—but because they are a symptom of the larger malaise in Indian agriculture. Despite assorted claims, all governments have largely steered clear of pushing through the kind of agricultural reform and building the agricultural infrastructure required to make farming a viable business. The order of investments required is huge; the changes required, complex and, in some cases, politically inconvenient; and the time horizon for outcomes, long. Waivers are the easy way out.