Of the two structural reforms associated with this government — the Goods and Services Tax and the Insolvency and Bankruptcy law — it is the second which has shown an early demonstrable impact in terms of behavioural changes on the part of economic agents. It has also recast the terms of engagement between lenders and debtors, skewed for long in favour of large borrowers in India.
This is visible with the implementation of the Insolvency and Bankruptcy Code (IBC) starting November 2016 with a couple of big transactions being put through under this framework, the latest being the takeover of Bhushan Steel by Tata Steel. Over the next few months, there will be a closure — either through a resolution or liquidation in the case of the 12 large firms referred to the National Company Law Tribunals under the IBC, thus promising to ease the pain for Indian lenders.
While there have been concerns regarding the timeline of 270 days, what cannot be lost sight of is the fact that the IBC is a new law and there is nothing cast in stone. From the point of view of the lenders burdened already by a huge pile of bad loans, maximising value will and should be an overriding priority. High recoveries will mean a lower burden on the taxpayer who underwrites the recapitalisation of state-owned banks. With the new law in force, there has been a gradual emergence of a new breed of insolvency professionals, quasi judicial officers handling a range of corporate default cases and a proactive Insolvency and Bankruptcy Board of India.
Overall, the experience has been positive even if it means learning on the job for those involved in this process and going by the changes carried out by the government to plug loopholes in the law and some of the changes proposed by a committee.
It can be argued that the government should have moved much faster on this law hand in hand with governance changes in state-run banks when the macro economic backdrop was far more favourable at the start of its term. Indian promoters who default may no longer have a “divine right to stay on” regardless of how badly they manage an enterprise, as former RBI Governor Raghuram Rajan said. But for the pendulum not to swing the other way, it is important that the government also quickly addresses the issue of getting projects off the ground and putting in place a stable tax and policy regime to ensure that Indian industry does not miss out riding the current global economic growth cycle.