On-time payments can drive higher growth

Lacklustre trend growth calls for attention to the economy, with less distractions, diversions, and disruptions. Government can lead with payment on time

India’s economic recovery from the recent slump offers hope of reasonable prospects for the future. There are other encouraging factors that bolster this expectation, such as the reduction in the non-performing assets (NPAs) of banks. Yet, there is the sobering reality of a number of counterpoints that give pause. 

Warnings about constraints limiting average growth to 5 per cent annually arise from many factors:

1. Bank NPAs at nearly 6 per cent are still well above prudential norms.
2. Unviable government overdue payments, the unacknowledged counterpart of NPAs (more on this below).
3. Electioneering practices that are socially disruptive and financially ruinous.
4. Low proportion of women employed (20 per cent).
5. The need for increased provision to improve access to better jobs, either by migration or by remote access.
6. The need for improved digitisation for quality and output, including clean, secure databases.
7. Government interference that decreases public sector productivity and performance.
8. Uncertainties and disruptions from external threats (border tensions/clashes, and global disruptions of critical supply chains).

Some factors are beyond policies and regulations, while others are not. What realistically could be the expectations of government policies and actions?  An average of 5 per cent (only)? Or could it be higher, as we need it to be? 

The chart shows recent annual growth rates since a peak of 8.26 per cent in 2016.

The annual average since 2016 is 5.19 per cent, which means growing at 8 per cent for the next three years will yield an average of only 6.03 per cent since 2016. Even growth at 9 per cent annually for the next three years will result in an average of 6.33 per cent for the period. Realistically, if the government and the rest of the country do some right things, an average 5-6 per cent is all that is likely. While this is indeed sobering, it signals the need for serious attention to the economy, and less distractions, diversions, and disruptions.

Payment discipline

There are of course broad, interlinked reforms needed in many areas, such as in farming, the judiciary and dispute resolution, trade protectionism and tariffs, and so on. But there is a simple, fundamental change required that is essential if India is to genuinely address “performance” instead of maundering its way to “non-performance” as in the case of NPAs, which, however, for some reason doesn’t happen. This simple change is performance of timely payments by government and government-owned entities. 

Three years ago, this column explained how overdues lead to NPAs, and more broadly why a fundamental change is required in adherence to payment discipline (1). While much has been made of NPAs being unacceptable, there seems to be a tacit acceptance of government and public sector overdues.  Government overdues are like the counterpart of NPAs, reflecting government non-performance of payment obligations.  

The Central Repository of Information on Large Credits (CRILC) for collated data on bank loans and NPAs was created in 2014. Until then, such data had to be obtained from diverse sources.  But there is no single point access to payments due and overdue from government and public sector entities (central and state). The power ministry’s portal from 2018 (praapti.in) is an exception, as is the Samadhaan portal for micro, medium, and small-scale enterprises (MSMEs) of the Ministry of MSMEs from 2017. For electricity, at the end of July 2022 state subsidy overdues to distribution companies (discoms) were reportedly at Rs 75,000 crore, while total overdues to generators and discoms was Rs 2.5 trillion. Regarding government overdues to MSMEs, nearly 100,000 applications had been filed in the four years to October 2021. A press report in October 2021 cited an estimate of overdues to MSMEs of Rs 1.5 trillion.

Bank NPAs were finally addressed in 2014-2015 by the Reserve Bank of India (RBI) enforcing existing regulations to clear dues or be classified as NPAs.  For most enterprises, this was like being sentenced to the guillotine. While this appeared draconian instead of calibrated attempts at restructuring, arguably, developments thereafter may justify the recourse to harsh methods.

Less drastic ways are possible, just as restructuring stressed loans through effective processes and timelines is possible, but only for viable projects, and not without difficulty.  This is the alternative to overdue bank loans being declared as NPAs, followed by bankruptcy and distress sales. An example of the effect of this blunt instrument occurred in 2019 to a number of power generators and distributors.  There were 34 power producers with viable projects who had unpaid dues from electricity distributors, or were facing coal supply problems, or were in the process of restructuring loans.  Classified as defaulters after the RBI-mandated 180 days regardless of the cause, they had to seek judicial relief. The Supreme Court quashed the order that gave rise to this condition, i.e., the RBI Circular of February 2018. Others had a worse fate, such as a major construction company whose receivables far exceeding its debt were overdues from major public sector companies, but suffered severe financial distress because it could not service its debts. 

For government dues, it would be far more preferable to institute a credible, calibrated and systematic process, including real-time monitoring and penalties (with minimum discretion), rather than adopting the guillotine approach. This is because the cost of the resulting economic shut-down has to be avoided if at all possible. Similar real-time processes and systems could be set up for bank loans for NPAs, and to prevent overleveraged borrowing. 

Uncollated data on government dues are already in the goods and services tax system, as detailed in this article two years ago. (2)

Fundamental changes in operational standards are essential for on-time payments, with penalties (penal interest, with restrictions on borrowing), with strict enforcement for non-performance. Central and state governments have to provide the lead on this necessary aspect of governance. Just getting cash flows on time would probably be sufficient to grow at well beyond an annual average of 5 per cent. 

shyamponappa@gmail.com

(1) https://organizing-india.blogspot.com/2019/04/delayed-cash-flows-and-npas.html; 

      https://www.business-standard.com/article/opinion/delayed-cash-flows-and-npas-119040301417_1.html

(2) https://www.business-standard.com/article/opinion/clearing-dues-from-the-government-120100601684_1.html