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Opinion | Governance collapse triggers a sense of deja vu

The collapse of governance starts with the government and percolates to the corporate level

The word governance has been popping up regularly, with the frequency increasing as elections get closer. The current government came to office promising “minimum government, maximum governance". This undertaking was not elaborated or expanded, and details remain fuzzy. Governance is an ongoing process, but what is promised and desired is “good governance". According to the World Bank, there are many definitions of good governance, but the basic framework ( promises, “democracy and good civil rights, with transparency, with rule of law, and with efficient public services".

It is also true that government’s governance models and practices echo across varied stakeholders and civil society layers. For example, the term “good governance" has eased into corporate argot, spawning a cottage industry of consultants, mentors, authors and head-hunters. Markets regulator, the Securities and Exchanges Board of India (Sebi), has set up multiple committees to flesh out an ideal, but practicable corporate governance framework to ensure that companies are fair to shareholders and broadly aligned with society’s requirements.

The general disintegration of governance over the past few months seems to indicate that collapse of governance starts with the government and percolates to the corporate level. Though there is no authoritative study to prove this causality, some correlation does seem to exist. There will be many who will, without any sense of irony, jump up and point to the past to justify the present. Bad governance and corruption were certainly the previous government’s hallmark, but then this government did come to power promising an epochal shift in governance.

The starting point for illustrating this seamless transfer of misgovernance could begin with the loan defaults at Infrastructure Leasing and Financial Services Ltd (IL&FS). One important lesson from IL&FS over-shadows everything else: The government is the country’s largest debtor, but cannot be dragged to any insolvency court for not paying up on time, including to IL&FS. Estimates of the government’s outstanding liabilities range anywhere between 3 trillion and 4 trillion. For example, the ministry of road and highways has an unpaid annuity liability of 45,689 crore. The government has provided 333 guarantees to various parties, amounting to 3.8 trillion, some of which (such as Air India’s loans) are bound to be invoked. Therefore, while India Inc. must repay its loans on time, this governance norm should apply to even the government.

The entire governance matrix actually stands twisted. The implementation of demonetization and introduction of the goods and services tax (GST) in quick succession has crippled firms, farms and households. Beyond the pale of official statistics lies the larger but unofficial economy, which acts as an absorber for many shortcomings in the formal economy such as unemployment. The impact of economic shocks to this segment is not captured in any official statistical survey, but anecdotally, there are enough examples of how the twin shocks have devastated even this segment of the economy.

Alongside the twin shocks, this government has also earned the reputation for undermining India’s institutions. The latest example is a systematic deracination of India’s statistical services, built brick-by-painful-brick by giants like P.C. Mahalanobis, V.K.R.V. Rao and D.R. Gadgil. As highlighted by this newspaper, many overseas experts had unstinting praise for India’s early statistical surveys. It did fall into disrepair over the years because of government neglect and the IAS lobby’s subversive attempts, but this is the first time a government has either meddled with data methodology (such as, revising GDP growth during 2016-17, or the year of demonetization, to over 8%) or suppressed reports that highlighted adverse economic developments, such as the employment report.

As if in lockstep, multiple breaches of corporate governance have also come to light. The problems at ICICI Bank and Yes Bank were one of a kind. Then came the IL&FS fiasco, which exposed the over-leveraged and vulnerable underbelly of non-banking finance companies. The latest and emergent crisis is corporate promoters borrowing after pledging their shares. In itself, there is nothing illegal about it. But things get slippery when mutual funds—repositories of public funds—lend money against such shares, much of which is not even disclosed to investors. Worse, many promoters have been pledging shares through structured deals, which shield the risk from prying eyes.

One thing is evident: Both regulation and self-regulation have failed. The Association of Mutual Funds in India, a self-regulatory organization, has no information on either pledged shares or even credit funds on its website. While Sebi promises to look into it, this ticking time bomb needs all regulators to put their heads together. Share pledges is just the tip: In the absence of bank lending, mutual funds and private equity funds have become proxy credit dispensers. Nothing wrong with that, but for one small glitch: Many of them may not be trained to assess credit risks. There’s no regulatory framework also: While mutual funds are Sebi’s jurisdiction, credit is Reserve Bank of India’s domain. This intervening gray zone is a familiar, but fertile landscape; many past scams blossomed in this no-man’s land between regulators. The last thing this government needs is another scam.

Rajrishi Singhal is consulting editor of ‘Mint’. His Twitter handle is @rajrishisinghal.

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