Public-Private Partnership has been adopted as the main route for implementation of the road projects in the country especially in National Highways Development Programme (NHDP) and is expected to finance the major share of ambitious road construction/upgradations projects in India, both by the Central andState governments.
According to National Highway Act, 1956, National Highways are owned, constructed, maintained and operated by the Central government via National Highways Authority of India (NHAI). This Act was amended in 1995 to allow for private participation. Now a private entity too can construct and operate highways and can also levy user charges on the commuters to cover up their costs and earn profits. The Government of India first laid down basic principles and guidelines for the PPP in a cabinet decision of 1997 . In 2000, Cabinet Committee on Economic Affairs approved the first phase of NHDP with a major emphasis on promoting PPP. Two models were preferred above all-BOT-Toll and BOT-Annuity. The third alternative was Special Purpose Vehicle (SPV), which was to be used in the case where former two models failed to attract private investments. Recently, a hybrid annuity model has been introduced as well. However, there are several pitfalls in this approach which must be avoided.
The growth of PPPs began in the 80s with the advocacy of greater role of the private player and limiting the role of the state to that of a facilitator. A major emphasis was placed upon cutting the public expenditure to restrict the size of the fiscal deficit. It is argued that higher fiscal deficit lead to destabilising effects for the economy due to higher inflation and higher interest payment due to expanding public debt. Also, that higher public spending ‘crowd outs’ the private investments due to increasing interest rates. Therefore, PPP in infrastructure was seen as the mechanism of not only reducing resource constraint facing the government in bridging the infrastructure gap, but in bringing in innovative financial and management techniques in the sector, which increases efficiency while rationalising the costs.
It also ensures an optimum risk allocation system . The high degree of the economic externality of public infrastructure, and the commercial and socio-economic risks involved in developing and operating them has made it difficult to appropriate returns from infrastructure investments. The long gestation period of infrastructure projects also requires sustainable financial and operational capacity. Therefore, there is some reluctance in both the public and private sectors to absorb all the costs and assume all the risks of building and operating these assets alone. Since the risk of performance of the projects is passed on to the private sector, PPP leads to better risk assessment and cost estimation which is done on the basis of economic considerations alone .
Even though there are arguments for PPP, there are major concerns regarding its viability and effectiveness especially in the road sector, which requires significantly large investment for an extended period. The first problem arises with the issue of financing PPP projects and cost recovery. Who will be in charge of the cost recovery from the projects whose gains due to their public nature are often indivisible? Since investment in a highway project is indivisible and colossal, fixed charges form the major component of the costs of providing the road services. When gains from a highway project are purely economic and accrue only to users with no externality present, the toll rate cannot exceed the marginal benefit from road services with the result that despite tolling, consumer surplus may be substantial. Thus, though the net economic benefits from a road project are positive, it may not be commercially viable .
It leads to a condition where the quantum of the private investment is less than the optimal level. It means that even the criterion of private profitability cannot be the only parameter for judging the investment in the roads sector. The problem becomes even more acute in the case of a developing country like India where there are high positive externalities associated with the road construction . It promotes inter-regional trade, stimulates the local economy, helps in the exploitation of local resources and can aid in the division of labor and specialisation . Since much of such gains cannot be captured through tolls, the gap between the socially optimal and commercially viable levels of investment in highways tend to be lower than required.
Apart from making the scale of capital outlay lower than the socially optimal level, the aforementioned economic and social factors also cause serious distortions in the composition of investment. Under private commercial considerations, the dice is heavily loaded against projects which a) promote basic social, as against purely economic, objectives, b) result in economic gains which cannot be appropriated through user charges and c) trigger with a time lag a cumulative process of regional or national economic development. Thus, we see that private investors are more than happy to undertake the projects against negative grants for brownfield projects connecting major cities and industrial areas. However, few would like to take up greenfield projects in backward regions or remote regions like the northeast, which have a higher cost-benefit ratio than the former.
The government, thus, is forced to enact policies for neutralising bias in private investment. It bears the pre-construction costs like project feasibility study, land acquisition, environment clearance and other costs. It launches various schemes like viability gap funding, tax exemptions period and duty-free imports of equipment. The tax exemptions are given to financial institutions involved in financing road projects, borrowing abroad is eased, and mostly government also gives upfront grants for specific projects . These concessions negate the basic arguments for PPP i.e. it will reduce the burden on public funds. On the other hand, it becomes difficult to calculate whether the total cost of the road construction has increased due to such concessions to the private sector. Duty rebates on inputs and interest subsidies erode allocative efficiency and give rise to the deadweight loss for the economy.
The solution to this dilemma is to change the approach towards highways construction. There is no reason to make highway construction incumbent upon the inflow of the private sector. The government must be willing to undertake the projects on its own when the private sector shows no interest. It will send a strong signal to the market about the determination of the government to undertake road projects and in the end, will boost investor sentiment. The government should focus on developing a long-term debt market and fixing the health of the financial sector of the country because a major impediment to the participation of the private sector is the lack of access to long-term finance at reasonable rate.
By simplifying rules and regulations in the financial and banking industry and adopting transparency and predictability in the highway sector policy framework, the government will be able to facilitate the private sector inflows more than the often illogical concessions & financial incentives . Also, there are several other major problems in the PPP projects like unfair concessions in the form of guaranteed rate of return, no competition clauses, manipulative toll fixing .
Therefore, proper mechanisms must be evolved to avoid repetition of such mistakes. It calls for a threefold approach: capacity building in the government departments and technical training of the personnel, standardisation of the procedures for the award of contract and concessions, with enough regional flexibility to reduce arbitrariness and lastly a clearly defined penalty for private and government officials engaged in unfair practices. An efficient mechanism for audit and performance appraisal needs to be evolved. It needs to stressed that the goal of the highway policy should be to provide world-class infrastructure at the lowest possible economic cost rather than following any model or approach as a matter of faith.
(AbhinavPrakash is an assistant professor of economics at Zakir Husain Delhi College (E), Delhi University.)
(This article is carried in the July-August 2017 issue of India Foundation Journal.)

The ancient Holy Puya of Meitei (Holy Book of Meetei) predicted “Nongpok Thong Hangani”, which means “The eastern gate will open”. This prediction in the Holy Puya could not have been truer when the Government of India formulated ‘Look-East Policy’ initiated by Prime Minister P.V. Narasimha Rao (1991-1996) and rigorously pursued by the successive administrations of Atal Behari Vajpayee (1998-2004) and Manmohan Singh (2004-2014). Under the leadership of Prime Minister Narendra Modi, the new government of India has made its relations with East Asian neighbors, a foreign policy priority by proposing a new outlook calling it the Act East Policy. India’s Look East Policy which started as an economic engagement with its eastern neighbors, turned into a tool for forging strategic partnership and security cooperation by the following governments. The so-called Act East Policy driven through North-East India and Myanmar has now become the centre of geo-economics and geo-politics.

Strategic Importance of North-East India

North-East India, comprising of eight states, has almost ninety five percent of its boundaries as international borders – surrounded by China, Nepal and Bhutan in the North, Bangladesh in the South-west and Myanmar in the East. In the past history, the mighty Himalayas in the north always kept India physically aloof from China. In the North-east, treacherous terrain, militia and ethnic tensions made it impossible to cross over and connect with China via Myanmar. On the return of democracy in Myanmar, almost after half a century of military rule and civil war, Myanmar is now set to open up to the world with democratic values and is showing an intent on improving trade and commerce relations.
Interestingly, in the past colonial times, when Burma was part of British India, British Indian government underestimated the strategic importance of Burma before the World War 2. It was when the fascist Imperial Japanese forces swept across China and rest of Asia and reached the borders of Burma, that the British forces realized that the threat is real now with the possibility of infiltration into the Jewel of the British Crown – British India. British-Indian forces retreated from Burma abandoning strategic Mandalay and defended from Imphal Valley and Kohima. In recent times, the British have declared the Battles of Imphal and Kohima as the ‘Fiercest Battles’ fought in the history of World War 2. The lesson that modern India needs to learn from the ‘mistake’ British-India committed is that North-East India should be defended militarily as well as economically with Myanmar as our first line of defense or a level playing field by upholding admirable diplomatic and trade relations.

Understanding Myanmar – New Crossroad of Asia

Myanmar (name changed in 1989 from Burma) is a country with a population of more than 60 million which neighbours North-East India inhabited by 50 million people. Myanmar is the direct land bridge for India to Thailand, Laos and China and indirect link to Cambodia, Vietnam and Malaysia. Modern India needs to recognize that Myanmar is extremely important as a land bridge to reach out to the rest of ASEAN countries and is a level playing field for India and China to exercise their influence. Fascinatingly, many Indian immigrants lived in Myanmar in the 20th century and were later cast out with the onset of civil war and military takeover on 2 March, 1962 by General Ne Win. However, in early 1980s, in spite of the military rule in Burma and the isolation it faced from the world, Chinese businessmen took first mover advantage and started investing in the Northern states of Kachin and Shan, leaving long lasting impression on Myanmar, that will be later seen as economic progress as well as political interference. In the past history, whatever has happened in China spilled over to Myanmar. The increasing Chinese influence and interference has often been met with resistance and backlash by the Burmese. With the onset of democratic reforms between 2011-15 and the win for National League for Democracy in 2015 elections, Myanmar is prepared to open up to the rest of world under the proficient leadership of Aung San Suu Kyi. While Myanmar has always experienced Chinese investment and political interference, the country has always looked up to India for its historical connections like Buddhism, Indian wisdom and its democratic values.
The peace process framed by the BJP-led government in the North-East India is bearing positive results. The diplomatic relations extended to the then military Junta government has also helped in reducing the insurgency activities around the international borders. The intent of Prime Minister Narendra Modi’s ‘Act East Policy’ can be gauged in the BJP’s election win in the states of Assam, Arunachal Pradesh, Nagaland and Manipur. History will be made when the Indian Railways reach Imphal and further connection to Myanmar will make Tran-Asian Railway a reality. The India-Myanmar-Thailand Trilateral highway through Moreh in Manipur will further connect Laos, Cambodia and Vietnam, to be known as East-West Economic Corridor. Kaladan-Multi Modal Transit Transport will connect seaport of Kolkata with Sittwe seaport and then through Kaladan river route, from Palethwa (Myanmar) to the North-Eastern state of Mizoram.

Role of Skill Development in India’s ‘Act East Policy’

In this backdrop of history, politics, economics and connectivity in North-east India and Myanmar, Indian Government must not only focus on geo-economics but also have a clear geo-political strategy to contain neighbouring China and to boost trade and security cooperation with ASEAN countries. By design, it helps India gain a dominant influence in the Indian Ocean Rim. With the future that India is envisioning, it becomes pertinent to factor in relevant functions that support India’s ‘Act East Policy’. One function that will add great impetus to India’s ‘Act East Policy’ is Skill Development, undertaken by the Ministry of Skill Development & Entrepreneurship, Government of India.
With the Trans-Asian Railway and the India-Myanmar- Thailand Trilateral highway through Moreh in Manipur nearing completion, India foresees a colossal boost in trade and commerce making North-East India, the next big economic corridor connecting India to ASEAN countries and China. In the light of this development, NE states need to develop an ambitious yet meaningful Skill Development and Employment Plan for its youth, taking into account what development will take place at its international borders in the next 40 to 50 years.
We must recognize that unemployment is at the core of all issues in North-East India. Three levels of Skill Development and Employment plan can be formulated: – (1) Develop skills among the North-East youth, which are needed across the world specially in service industries like Tourism & Hospitality, Retail and IT & IT-enabled services. Initially, these skills can be exported outside the North-East and later, as the industries develop in the North-East, they can be absorbed into local employment. (2) Nature has gifted rich flora and fauna to the North-East region and the region could become a hub for developing agriculture, horticulture, floriculture, and food processing. There is a huge potential to create local enterprises and local employment around these sectors. (3) As the trade & commerce boom in North-East India through connectivity with ASEAN and China, youth of the region need to get skilled in relevant trades to support the cross-border trade and business. Mammoth skill training initiatives should be taken up in the fields of Logistics and Warehousing, Cold Storage, Railways, Highways, Mining, Oil and Gas, Heavy Vehicle Driving, Business Management and Banking & Finance. These three levels of Skill Development and Employment plan can only be realized by forming an efficient and effective State Skill Mission in each of the states in North-east India; primarily in the states sharing international ‘trade’ borders with Myanmar; namely, Manipur and Mizoram. In order to deliver quality training of international standards, state-of-the-art infrastructure in the form of ‘Multi-Skill Training Centers’ should be built in North East India. The Multi-Skill Training centers need to have ‘Language Labs’ to deliver training on Burmese and Mandarin, which will be of immense help in penetrating business and maintaining diplomatic relations with Myanmar. ‘Skill India’ mission can play a vital role in preparing the youth of North-East India for the drastic positive changes that ‘Act East India’ will bring to the region.
Myanmar is the land bridge for North-east India to the Bay of Bengal, Andaman Sea and the Indian Ocean and is also a country India needs to compete for with China. North-east India is Myanmar’s neighbour and will remain so. Therefore, North-East India is logistically best placed for India to consider any activity in Myanmar or other ASEAN countries. Since 1980s, Chinese influence is deeply entrenched in the Burmese society either through business or political interference. Often the dominant influence and Chinese spillover onto Myanmar have been met with backlash by the Burmese from time to time. Myanmar definitely enjoys business investment by China but not at the cost of political interference. On the other hand, Myanmar is keen to counter-balance China’s influence by reaching out to India. The wisdom for India is that India needs to understand the ‘fears’ and ‘desires’ of Myanmar. This may be the ‘key’ to the success for India’s “Act East Policy”.
(Lairenjam Niranjan Singh is director of JCRE Skill Solutions and working towards skilling the youth & solving unemployment in North-East India.)
(This article is carried in the July-August 2017 issue of India Foundation Journal.)

In an recent article “The End of An Era For White Men” by David Rothkopf in FOREIGN POLICY Journal (Dated 01 Feb 2016) there is the historic admission of steady global dominance of western world.

It states:-

“While men had a great run from the rise of the Greeks to the birth of western based global empires – they have controlled much of the world sought to. So much of history is a consequence of decisions made by and at the behest of the white guys in-charge’.

 The learned author adds:-

“Several factors are contributing to make this historic moment a watershed in global history. ….. …. ….. ….. While the planet earth has always been home to great non-white civilisations, such societies have ebbed and flowed in relative importance. Today it is clear that these emerging societies, namely China and India are on the rise.”

 In context of above, what our Hon’ble Home Minister Shri Rajnath Singh had stated sometime back that Maharana Pratap of Udaipur deserves to be titled “The Great”; it quintessentially sounds logical and convincing.

Interestingly, historians world over have not yet found as to which august body (or a group of individuals) had constructed the qualifying requirements for the title “The Great”. And, also who (and when) the title(s) were conferred on the selected few. Just to mention some of them:-

• Alexander The Great (of Macedonia)
• Constantine The Great (of Byzantium Empire)
• Peter The Great (of Russia)
• Fredrick The Great (of Germany)
• Ashoka The Great (of India)
• Akbar The Great (of India)

Interestingly, commentary on the traditional belief in the decline of greatness; THOMAS CARLYLE laments in his classics “Heroes, Heroworship And The HEROICS IN HISTORY (1841)” that “Napoleon was our last Great man”. He also singles out the lone social fact that “Greatness has been equated with fame and the fame could not be made overnight”.

Delving deep into the dynamics of above stated “Greatness” conferred on heroes of yester-years; shouldn’t we presume that it was the western media which was on the beck and call of European world conquerors that played the trick. History is testimony to the fact that whenever civilisations preferred convenience, they spelt their downfall. Dr. Radha Krishnan had once said “India was never conquered from “without”; it was always from “within” that it was subdued”. Third world countries have not only lost on battle-fields but also on brand/image projections. Maharana Pratap’s case is to be viewed through the above prism.

Battle of Haldighati (fought on 21^st June 1576) with Raja Man Singh as Commander-in-Chief of Mughal army and Maharana Pratap of Udaipur leading conglomerate of Rajput warriors – the episode is well documented. The outcome of the clash is known to students of history. Mewar army was routed in the final run. General Sagat Singh of Indian army (hero of Bangladesh’s liberation: 1971 India-Pak war) has attributed Mughal army’s success to their superior artillery.

A moot point is that Pratap could not be captured and his flight from battle-field was orchestrated by his faithful(s) – for yet another day to settle scores with the Mughals. It is also on record that Emperor Akbar had refused to meet Raja Man Singh and Asaf Khan while expressing his dissatisfaction over the results. On this subject, we have the last word from eminent history scholar Prof. G.N. Sharma. He states:-

“The Kachhawaha General (Raja Man Singh) had failed either to kill or capture the Rana. Hence Haldighati was a barren victory for the Mughals”.

 The Battle of Haldighati has immortalised Maharana Pratap as a warrior of freedom and pride. Amongst the Mughal Kings, Akbar rose to dizzy heights of greatness and the title “AKBAR THE GREAT” is well deserved. But Maharana Pratap’s rugged defiance against Mughal rule qualifies him as fountain-head of liberty and self-rule. It wasn’t easy – those were the times when consequences of not towing the diktat of an Emperor could bring-in untold miseries; Maharana Pratap who epitomised exemplary courage and indomitable spirit had outrightly rejected the olive branch. He toiled hard for decades – post-Haldighati clash, practicing guerilla tactics against the adversary and refused to compromise with freedom.

There are some unsung heroes of Battle of Haldighati.

1. Jhala (Bida) Man – who had assisted Maharana Pratap in moving to a place of safety (in this manouvre he got killed).
2. Hakim Khan Sur – The Afghan General and a loyalist. He was a strategist and warrior of repute. (Not much literature is available on him).
3. Bhama Shah – He was the financier who greatly helped Maharana Pratap during his “exile” after the Battle of Haldighati.
4. Rana Punja – The Bhil Chieftain – his band of followers had inflicted severe blows on enemy flanks. His generosity towards Rana Pratap in providing “men and material”, assistance during “war and peace” periods with Mughals is well known.

It is said that “History has been unfair to its heroes, leaving ordinary men to decide the difference between posterity and oblivion”.

For the six eminent luminaries viz. Rani Gaidinliu, Lala Lajpat Rai, Tatya Tope, Maharana Pratap, Shri Bhisham Sahni and Sage Chaitanya Mahaprabhu; the recent initiative in constituting an Implementation Committee on Commemoration under the Ministry of Culture is worth mention.

Govt. of India’s effort to “resurrect” heroic images from our hoary past are well-meaning. Maharana Pratap of Mewar richly deserves the title “The Great”. One is reminded of Martin Luther King Jr.’s words “The Arc of moral Universe is long, but it bends towards Justice”. Yes, we are talking about Justice for recognition to a great Indian warrior Maharana Pratap.

Gp Capt DC Bakshi, VSM, IAF (retd.)

Introduction: Power to Tax and Sovereignty

Power to levy taxes has been universally acknowledged as an essential attribute of sovereignty. Cooley in his Book on Taxation – Volume-1 (4th Edn.) in Chapter-2, recognises the power of taxation to be inherent in a sovereign State. The power, says Cooley, is inherent in the people and is meant to recover a contribution of money or other property in accordance with some reasonable rule or apportionment for the purpose of defraying public expenses.

In Commissioner of Income Tax, Udiapur, Rajasthan v. MCdowell and Co. Ltd. (2009) 10 SCC 755, the Supreme Court observed as follows:

“(iv)  As an incident of sovereignty and in the nature of compulsory exaction, a liability founded on principle of contract cannot be a “tax” in its technical sense as an impost, general, local or special.”

Further, a tax is a compulsory exaction of money for general public good and is defined as under by Thomas M. Cooley in his book The Law of Taxation at page 61(Clark A. Nichols ed., 4th ed. 1924) as follows:

 “Taxes are the enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of government and for all public needs. This definition of taxes, often referred to as “Cooley’s definition,” has been quoted and endorsed, or approved, expressly or otherwise, by many different courts. While this definition of taxes characterizes them as ‘contributions’, other definitions refer to them as ‘imposts’, ‘duty or impost’, ‘charges’, ‘burdens’, or ‘exactions’, ; but these variations in phraseology are of no practical importance.”

GST and the World

Prior to the implementation of the Goods and Service Tax (GST), there were several indirect taxes which were being levied at different levels of the supply chain. The implementation of the GST has resulted in the merger of indirect taxes (central as well as state) thereby making the GST an umbrella tax, which would facilitate Indian Businesses compete globally. GST is inter-alia structured for efficient tax collection, seamless inter-state movement of goods and reduction of the number of indirect taxation departments such as VAT, Excise, Service Tax, etc which resulted in glitches and undue delays.

France was the first country to implement GST to reduce tax-evasion in 1954. Since then, more than 160 countries have implemented GST with some countries having Dual-GST (e.g. Brazil, Canada etc.) model i.e. Federal GST and State GST. India has chosen the Canadian model of dual GST i.e. CGST and SGST or IGST in case of inter-state transport of goods or provision of services.

In Canada, the GST is known as Federal Goods and Service Tax and Harmonized Sales Tax which is being implemented since 1991. A table made below provides a comparison of scheme of GST in India and the prevailing schemes in Canada, Singapore and Malaysia.

Therefore, GST model across the commonwealth countries are similar with some variations with respect to the rates and threshold limits, which may be economy specific.

GST in India: Biggest Economic Reform since Independence

GST is a single tax that simplifies the giant tax structure by supporting and enhancing the economic growth of a country, and is levied on the supply of goods and services, right from the manufacturer to the consumer. GST is a destination i.e. final consumption based tax regime, however, credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer would thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. To the credit of the Finance Minister and the GST Council, the efficient input tax credit system ensures that there is no cascading of taxes i.e. taxes on tax paid on inputs that go into manufacture of goods.

In order to avoid the payment of multiple taxes such as excise duty and service tax at Central level and VAT at the State level, GST has unified indirect taxes and created a uniform market throughout the country. Integration of various taxes into a GST system has brought about an effective cross-utilization of credits. The current system taxes production, whereas the GST will aim to tax final consumption. The following taxes have been subsumed in the GST:

At the Central level, Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, and Special Additional Duty of Customs.

At the State level, State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling.

There are following benefits of the GST:

• Two-tiered One-Country-One-Tax regime.
• Subsuming indirect taxes at the centre and the state level.
• Widen the tax regime by covering goods and services and make it transparent.
• Benefit to the manufacturing sector from cascading effect of taxes, thus by improve the cost-competitiveness of goods and services.
• Bring down the prices of goods and services and thus by, increase consumption.
• It would create business-friendly environment, thus by increase tax-GDP ratio thereby enhancing the ease of doing business in India.
• Direct benefit to Manufacturing: Logistics and More Employment – The manufacturing sector has great importance for many developing countries. India’s manufacturing sector has complex tax structure with only 16% share in GDP, India’s manufacturing sector has been close to stagnant for the last two decades. India has shifted itself from an agricultural economy to a manufacturing and service economy. The direct benefit in the hand of manufacturers and logistic companies, warehousing facilitators rather than industries. GST will bring slight change in prices & tax burden on consumers. It will reduce the transit time by which more efficiency will be and benefiting manufactures. Further, logistics sectors would benefit after implementation of GST, reducing compliance cost, dropping number of warehouse and allowing tax credit across the supply chain. Almost all the sector would have indirect benefit from it and expand their operation that will create a more employment.
• Under GST, without costs on Inter-state movement of goods (CST or Entry taxes) and change in the point of taxation to be the consumer, businesses shall have greater flexibility to muster and re-design their supply chains thereby optimizing their logistic cost. Since sellers are also likely to get benefit from changes, Companies ought to negotiate and get benefit on Input Prices.

Conclusion: Challenges ahead

The most critical challenge in the implementation of the GST would be the IT transformation that is required to be made by the businesses and their respective organisations. Technical systems would have to be in synchronisation with the scheme of GST as monthly returns would have to be filed electronically. Secondly, since the threshold exemption limit has been kept low, SME’s and small traders may be would have to compete aggressively. However, with time it would be the SMEs and small traders who would benefit the most from the implementation of the GST, and lastly, the intended revenue collection would depend on the strict implementation in letter and spirit of the GST Act and allied Rules.  

(Sagar Suri is an advocate practicing at the High Court of Delhi and Supreme Court of India.)

We have been hearing about India’s developing debt crisis for a while now. News reports also listed top defaulters.

Insolvency or Bankruptcy are terms which are usually used interchangeably for a situation of a person or a corporate when they are unable to repay their debts. Bankruptcy is the legal adjudication of Insolvency which is a factual scenario. Insolvency can occur due to a set of factors which include, slowdown of the cash flow, poorly managed cash system, increase in cash expenditures, etc. The reasons for insolvency are important, as the specific rights are allowed for the creditor to be exercised against the entity which is insolvent in any legal system.

The Indian insolvency law recently went through an overhaul with the government notifying most of the provisions of the new Insolvency and Bankruptcy Code (IBC) earlier this year. The Indian Law is one of the better drafted legislations if we compare it globally and has borrowed best practices from both UK and the USA. The new Law was passed, enacted and notified at a break neck speed.

Last month Reserve Bank of India was armed with a set of powers by the Government to identify and initiate proceedings, through the respective banks, against defaulters under the Code. These powers flow through an amendment to the Banking Regulation Act, which adds Sections 35AA and 35AB to the Act.

Though any set of Insolvency laws in any jurisdiction are not a debt recovery tool per se but they certainly play an important role in promoting credit discipline at large. India’s debt problem is concentrated to a few entities as has been pointed out by the RBI. As per the RBI only 12 NPA accounts account for 25% of the total NPAs by volume. The gross bad debt of the Indian banking system as of March, was at Rs 7.11 lakh crore, which means the 12 accounts would be responsible for about Rs 1.78 lakh crore.Recently the Finance Minister, Arun Jaitely remarked that the whole NPA problem is only limited 20-30 accounts and is not spread to large number of accounts.

The RBI will in all probability recommend the respective commercial banks to initiate proceedings under the IBC against these 12 accounts. This move has drawn an international applause, including a praise from the international credit rating agency Moody’s too.

This is a valid point considering the proceedings under the code can’t go beyond 180 days which are stretchable upto 270 days at the most. Time is of essence for the resolution of this problem because the debt is growing day by day. There is a counter argument to this, that the time limit may actually force the corporate into liquidation. This is a very flawed argument. Insolvency is not necessarily the worst outcome in the current situation and in fact it is probably the best solution. The corporates which we are dealing with here, most probably have already been subject to multiple restructuring through various schemes of RBI like Strategic debt restructuring, S4A, 5/25 etc. Hence, insolvency under the IBC is not that bad afterall, since the banks and the creditors will atleast be able to recover a part of their credit. This will certainly help them improve their asset quality which is under tremendous amount of stress right now.

Had there been no IBC, the resolution of each case would atleast take 4 years, which has been India’s average of resolving Insolvency in the recent past.

Given the knowledge of the cancer of debt, surgery shouldn’t be a problem if we are prepared to take bold decisions. All top 20-30 accounts in fact can be subjected to IBC proceedings. Even if they result in a 40% of haircut by the banks on an average, 60% of the money gets back to the banks which can be used for their recapitalisation.

If we start now with the resolution of the first 12 accounts, as recommended by the RBI, the judicial proceedings can be done within a year and the rest 10-15 accounts or so in the next year. The amendment in the Banking Regulation Act is very critical here. The creditors, which being the banks, anyways don’t need a sanction or a permission from the RBI to initiate proceedings under IBC, as per its provisions. What happens in practical situations is that the defaulter is a person who is politically connected and pressurizes the bank administration to not proceed and usually succeeds in doing it. Now after the amendment it is the RBI can be authorized by the Central Government to direct the banks to initiate proceedings under the IBC. This way the bank administration can escape any political pressure which is usually the problem.

Due to a small number of NPA accounts accounting for the major NPA by volume, our debt problem is still a problem only and not a crisis. For the sake of comparison, the sub-prime crises in the USA, involved a large number of accounts and hence became unmanageable and ultimately resulted in global recession. India’s debt problem therefore can be effectively resolved or at least contained by effective implementation of the IBC. The priority here should be saving the banks and an impending debt crises and not saving a few corporates.

(Raghav Pandey is a Research Scholar at School of Humanities, IIT, Mumbai.)