Pandemic: time for haircut and write-offs

Source: TaxGuru.in

An additional 230 million people have quietly slid below the poverty line during the first year of the pandemic, reports the Centre for Sustainable Employment at the Azim Premji University (APU). In another study, the Pew Research Centre had computed the middle class to have shrunk by an estimated 32 million. This estimate is again for the first year of the pandemic. However, both the studies are a grim reminder of the severe blow of the pandemic that struck the middle class and the poor.  

We still do not know how severely (or relatively softly) the devastating second wave has impacted. While all sections of the society have been hit in varying proportions, with household savings coming down drastically, and unemployment soaring, forcing the government to extend till November the 5-kg free ration scheme for the 800 million needy, the good news is that the corporate net profits of listed companies have soared by 57.6 per cent in the last fiscal. At a time when economy is struggling to cope with the impact, the stock markets, fuelled by surplus money, too have been rallying high. While the wealth of India’s billionaires has gone up by 35 per cent, Bloomberg says the wealth of top two – Ambani and Adani – has jumped to $ 84 billion and $ 78 billion, respectively. 

The rich continue to amass wealth, while the pandemic has driven the poor against the wall.

Let’s dig still deeper. The increase in corporate profits does not however translate into higher tax collection from the rich. In reality, while the rich get hefty tax concessions and easy money, the rest of the country ends up paying more taxes. Corporate tax collections have declined significantly, reaching its lowest in ten years. The systematic reduction in corporate tax is in sync with the global trend. The Finance Minister had in Sept 2019 lowered the corporate tax base from 30 to 22 per cent, and reduced the corporate tax for the new manufacturing companies from 25 to 15 per cent. This costs the exchequer Rs 1.45-lakh crore by way of revenue foregone every year.  

Now let us take a look at how the tax base has shifted from the corporate to the average households. Against the direct tax collections – corporate and personal income tax -- for 2020-21, which amounts to Rs 9.45-lakh crore, the indirect tax collections have exceeded it, and reached a high of Rs 11.37-lakh crore. In addition, the common person in the street ended up paying over Rs 5.70 lakh crore as taxes (excise and VAT) on petrol and diesel, with roughly 60 per cent of fuel tax coming from two-wheelers. Add to it the electricity duty that consumer pays along with taxes on real estate registry and excise duty on liquor, the share of indirect tax that a common person finally ends up paying is enormous. At least now the individual tax payers cannot claim they alone provide resources for development. The non-tax payers too have made a significantly higher contribution in generating revenue. Let’s not forget, even a labourer wearing a plastic chappal (bathroom slipper) pays GST. In fact, it should now be abundantly clear: everyone pays tax.   

What may appear baffling is that at a time when the share of corporate profit in the country’s GDP has reached a 10-year high of 2.63 per cent, Indian banks had written-off a whopping Rs 1.53-lakh crore of corporate bad loans in 2020-21. As per RBI estimates, non-performing assets (NPAs) of banks are expected to increase further. Meanwhile, the total write-off in the past four years, since 2017-18, stands at a staggering Rs 6.96-lakh crore. A lot of hue and cry erupts whenever farm loans are waived but the periodic NPA write-off by the banks goes rather unnoticed.

As if this is not enough, a newspaper report, based on an RTI reply, showed how Rs 5-lakh crore of bank money is struck in frauds. Accordingly, the top 50 credit accounts contributed 76 per cent to these dubious transactions. 

Interestingly, the Insolvency and Bankruptcy Code (IBC) was enacted with the aim to punish the chronic defaulters but has left much to be desired. The two recent insolvency proceedings, where the banks/lenders have been forced to take a ‘haircut’ of 93 to 96 per cent, have evoked a lot of public anger. In a resolution plan, approved by the National Company Law Tribunal (NCLT), the bidder -- Twin Star Technologies of Vedanta group -- gets control of 13 companies of the debt-ridden Videocon group by ‘paying almost nothing’. Against the admitted claims of Rs 64,838.63-crore, Vedanta group walks away by paying only Rs 2,962.02-crore as one time settlement which is merely 4.15 per cent of the total amount. In other words, the creditors, including banks, have agreed to waive the remaining 95.85 per cent of the outstanding amount. 

In another insolvency resolution, lenders of the Shiva Industries and Holdings, including several banks, have agreed to take a ‘haircut’ of 93.5 per cent. Of the total outstanding of Rs 4,863-crore, the creditors will get only Rs 313-crore. Of this, the company has agreed to pay upfront only Rs 5-crore. Quipped the well-known financial journalist and author, Sucheta Dalal: “Now take a bicycle loan and see how banks treat you.” 

There are numerous such cases, where the bidders have walked away with cheap deals, leaving the banks (and other lenders) to take a heavy cut, often in the range of 80 to 95 per cent. The general impression is that it is public money that is being siphoned-off through a legitimate route. After all, the banks hold public money, and any write-off means public money lost. 

Probably this is what irked industrialist Harsh Goenka who tweeted: “Promoters stash away money on the side, take the company to the cleaners, get a 80-90% haircut from bankers/NCLT - that’s the new game in town.” he wrote, adding: “A lot of institutions cleansed by the government – NCLT next please @PMOIndia. We can’t have our hard earned money being stolen.”

Public money write-off calls for accountability. The Tribune. June 28, 2021. https://www.tribuneindia.com/news/comment/public-money-write-off-calls-for-accountability-274934 

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Investing in agriculture is the best way to create domestic demand

Pic courtesy: Deccan Herald

A few days after the Cafe Coffee day founder V M Siddhartha reportedly ended his life, five farmers attempted suicide consuming pesticide in the office of the district collector of Akola in Maharashtra. They were demanding speedy compensation for their acquired land. Almost at the same time, another farmer who had been sitting on a dharna in Haryana for past four months died. He was protesting for a higher compensation for his land acquired by the state government.

While the death and attempted suicide by these farmers had largely gone unnoticed, a huge uproar by the industry had occupied the media space following the circumstances leading to the tragic death of the coffee King. Most industry captains linked his death to the ‘tax terrorism’ that prevails and knowing that the investment climate remains subdued sought more investments, tax concessions and of course wanted tax freedom. Many business journalists and columnists echoed the industry sentiments without even caring to find out that the Cafe Coffee Day owner carried a massive debt burden, which at some stage had peaked at Rs 11,000-crores.

Nevertheless, while the industry may have genuine economic reasons for seeking more sops, including an economic stimulus package to tide over the continuing slowdown, the continuing spiral death dance on the farm did not evoke even an iota of concern; forget about any response in the media. If the late Siddhartha was an entrepreneur who needed support in his difficult times, the fact that is not being acknowledged is that farmers too are entrepreneurs and given the state of distress that prevails all around are perhaps in dire need of hand holding. If only these farmers had got the right amount of compensation and that too in time, they too could have unleashed their entrepreneurial skills. But an opportunity denied, is opportunity lost.

At a time when the industry is already getting an economic stimulus package of Rs 1.8-lakh crore every year, which has continued to pour in since the global economic meltdown in 2008-09, the nationalised banks stare at massive stressed loans of Rs 17-lakhcrore, including roughly Rs 10-lakh crore of non-performing assets (NPAs). In other words, the industry has received Rs 18-lakh crore in the past ten years by way of an economic package, and still remains deep in crisis. Further, newspaper reports quoting the Reserve Bank of India (RBI) statistics say that almost Rs 8.36 lakh crore of bad debts have been written-off in the past 12 years, between the fiscal 2007 and 2019. It’s time to see whether the slowdown is the reason for the slackening performance of the industry, manufacturing sector and exports or whether the huge bank defaults have led to an economic slowdown.

Between fiscal 2007 and 2016, the total amount written-off by banks stood at Rs 2.88-lakh crores. But following this, huge amounts have to be written-off in quick succession – Rs 1.33-lakh crore in 2016-17; Rs 1.61-lakh crore in 2017-18 and a record Rs 2.54 lakh crore in 2018-19 – sucking the banks dry. Whatever be the reasons, the fact that the RBI is reluctant to make public the names of over 9,000 wilful defaulters is clearly an indication that the write-offs hide more than what we need to know. Although the government appears keen to launch a clean-up process, and the introduction of an Insolvency and Bankruptcy code (IBC) in 2016 was considered to be one of the strong approaches to curb the menace, the efforts to dilute the regulations have certainly hit at the possibilities. At a time when the industry receives huge tax concessions ever year, as much as 5 per cent of the GDP according to the Niti Aayog, there is no justification for the industry to cry hoarse when the tax sleuths come knocking.

Now contrast this with how the system works for farmers. Over the years, hundreds of farmers have been publicly humiliated and thrown behind bars for defaulting banks. While lakhs of crores are being written-off for the industry, unable to pay even one bank instalment lands farmers in jail. The banks first confiscates his movable and immovable property, and when the farmer is still unable to pay an outstanding instalment the banks deposit blank cheques taken from farmers at the time of extending the loan, which converts the civil case into criminal. Farmers are then sent to jail, with orders to pay back the original amount plus the interest on it. If only the farmers could pay the instalment I don’t understand why he would have defaulted in the first place. And when some State Governments waived farmer’s bad loans, up to a maximum of Rs 2-lakh for small farmers, economists and economic writers are up in arms warning that the fiscal deficit will hit the roof. But when banks quietly write-off corporate loans I have never seen any mention of fiscal deficit widening and the question of where the money will come from. In fact, the industry is now asking for an economic stimulus package of Rs 1-lakh crore !

For several years now, enough pointers were available indicating a slowdown in the economy. Farm incomes had plummeted to the lowest in 15 years, and some studies had shown that even rural jobs were badly hit. Accordingly, 3.2- crore casual labourers in rural areas lost their job between 2011-12 and 2017-18. Roughly 3-crore of these were farm workers. But the bigger tragedy is that policy makers ignored the loud warnings emanating from a distressed agriculture and only woke up when cars and automobiles sales dipped for months together, cutting tens of thousands of jobs, and when FMCG sales too failed to show any growth. The point I am trying to make is that if agriculture remains perpetually in crisis, Indian economy too will remain in limbo. A thriving economy depends on rising consumption, which in turn depends on how much demand can be created. What has to be understood is that rural sector plays a significant role in spurring up domestic demand. And this will mean more public sector investments in agriculture and farming in the years to come, clearly a shift from the effort to enhance privatisation and provide more stimuli to the industry.

The answer therefore lies in revitalising agriculture, pumping in more money in a sector that promises to provide millions of livelihoods, and in the process create more domestic demand. Agriculture, which caters to nearly 50 per cent of the workforce, receives less than half a percent of the GDP in public investment , 0.4 per cent to be exact, between 2011-12 and 2016-17. This has to change. #

Why this double standard? Deccan Herald, Aug 8, 2019

https://www.deccanherald.com/opinion/main-article/why-this-double-standard-752841.html?fbclid=IwAR1OYg30qh3yPNIGtX9BCZUqdZyuY0z7EVxV8CEii0YyquM0VX2PEH3YFSo

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Why shouldn’t the owner of the companies who default on paying back the bank loans not treated the same way as the farmers?

In April this year, Karamjeet Singh, a farmer from village Nandgarh Kotra in Bathinda district in Punjab, was arrested after his cheque of Rs 4.34-lakh bounced, reports Indian Express. Still in jail, he is amongst hundreds of farmers who have been sent to jail for bounced cheques deposited for repayment.

Credit policy has two faces. One for the rich, and another for the poor. Let’s first take a look at the credit policy for farmers. The Punjab Agricultural Development Bank has served legal notice to 12,625 farmers threatening to sell their farm land to recover an outstanding due of Rs 229.80-crore, at a time when the Kolkata bench of the National Company Law Tribunal has allowed just one defaulting company – Adhunik Metaliks Ltd (AML) – to walk away with 92 per cent ‘haircut’. While the undated and signed bounced cheques is a common way to haul up defaulting farmers for non-payment of farm credit, I wonder why a similar strategy is not followed in case of corporate loans.     

Take another example. Two months back, Monnet Ispat & Energy got a ‘haircut’ of 78 per cent; the company had an outstanding debt of Rs 11,014-crore. Under the insolvency proceedings, the lenders will get only Rs 2,457-crore. The remaining amount of Rs 8,557-crore of bad debt will be written-off. The haircut, which in reality is nothing short of a waiver, comes at a time when a 34-year-old farmer, Sukhpal Singh of Mansa region in Punjab, committed suicide for an outstanding loan of Rs lakh drawn from a cooperative bank. In contrast, while the marginal farmer was unable to face the humiliation that comes with indebtedness and ended his life, we don’t see any change in the lifestyle of the owners of these defaulting companies. In fact, they feel recharged after being divested of the financial burden they were reeling under. It’s a new life offered to them on a platter.

This is how the banking system works. When it comes to industries, it looks at every opportunity to strike-off as much of the defaulting amount as possible. AML defaulted to the tune of Rs 5,370-crore, and under the Insolvency and Bankruptcy Code (IBC) it has been allowed to walk away after a settlement was reached with the UK-based Liberty House Group for Rs 410-crore. In other words, the company gets a write-off or call it a ‘haircut’ for Rs 4,960-crore. I don’t think it is even fair to call it a ‘haircut’ as it is nothing short a complete head shave!

Compare this with the Rs 229.80-crore outstanding loan pending against 12, 625 Punjab farmers that the Punjab Agricultural Development Bank is trying to recover. It is not even a sizeable fraction of the huge amount written-off for just one industrial house. Call it a settlement to affect a resolution plan for the companies declared bankrupt; the economic jargon actually is an attempt to hide what in reality is more than a write-off. By selling off a loss making unit the promoter walks out free from what would otherwise be a life-long indebtedness. Almost the entire debt is eventually borne by the tax payers. This is what Noam Chomsky calls it as ‘tough love – tough for the poor and love for the rich’.      

The former Chief Economic Advisor Arvind Subramanian had in fact said that writing-off of corporate loans leads to economic growth. If this is true, I don’t understand why waiving farm loan does not lead to economic growth. After all, both the farmer as well as the industry takes loans from the same banks. How then can the write-off of corporate bad loans lead to economic growth whereas farm loan waivers lead to moral hazard? Why should farmers be therefore despised for seeking loan waiver? In fact, Arundhati Bhattacharya, the former chairperson of the State Bank of India had blamed farm loan waivers for leading to credit indiscipline. The Reserve Bank of India governor Urjit Patel had found farm loan waivers as a moral hazard upsetting the national balance sheet.

Although the Punjab Agricultural Development Bank has denied of any real intention of putting the land of 12,625 farmers for public auction saying that the legal notice is just a threat, the fact remains that as many as 71,432 farmers are under scanner for having defaulted the bank to the tune of Rs 1,363.87-crore.  Sooner or later, all these farmers will receive legal notices if they fail to pay up. In fact, many of them have already landed in jail. Similarly in Haryana, just to illustrate, a farmer who had failed to pay back a loan of Rs 6-lakh taken for laying a pipeline for irrigation was ordered by the district court to pay a fine of Rs 9.83-lakh and undergo a 2 year jail term.   

On the other hand, the ‘haircut’ allowed to AML means the banks will not be able to recover this huge amount. According to media reports, some of the other not so-high profile companies allowed ‘haircut’ includes: Jyoti Structures 85 per cent; Alok Industries 83 per cent; Amtek Auto 72 per cent; Electrosteel Steels 60 per cent and Bhushan Steels 37 per cent. Among other outstanding cases listed by the Insolvency and Banking Board of India, Synergies Dooray Automotive Ltd got a ‘haircut’ of 94. 27 per cent as a result of which financial companies are able to recover only Rs 54-crore from an outstanding amount of Rs 972.15-crore.

According to the latest data, over Rs 3-lakh crore worth of loans belonging to 70-80 companies has now been referred for ‘hair-cut. These are loans which have not been paid for 180 days. This includes Rs 1.74-lakh crore of 34 power companies. According to a High Power Committee set up by the Gujarat government, three power projects of Tata, Adani and Essar carrying a cumulative debt of Rs 22,000 crore will get a haircut of more than Rs 10,000-crore. What is interesting here is that in case of big defaulters, the entire government and banking machinery become hyper active to bail out the companies. But in case of agriculture, the same banking system seeks exemplary punishment, including jail term. I have never seen a jail term being prescribed for a corporate defaulter.

In an article entitled Reform that Isn’t in Indian Express former Cabinet Minister Kapil Sibal rightly sums it up saying: “Recovery through the IBC process in the steel sector will be about 35 per cent of the loans advanced and in the power sector, only 15 per cent of the loans advanced. This is a scandal in itself. Even the beneficiaries will raise loans from banks to pay for acquisitions.”

The question that needs to be asked is why aren’t the defaulting companies being allowed to go bust? Why is the entire effort to bail out the companies that have failed to perform? At the same time, why shouldn’t the owner of these companies who default on paying back the bank loans not treated the same way as the farmers? First, why should the RBI not disclose the names of defaulting companies to begin with? Secondly, why shouldn’t the corporate bigwigs be made to cool their heels in jail? #        

Haircuts are good, Farm loan defaults are bad -- the two-faced treatment of waivers. The Wire. Oct 1, 2018. https://thewire.in/political-economy/farm-loan-defaults-waivers-india

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