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Polls and after: Challenges that the new government will confront – Part 4

Having covered employment generation as the top priority in the post-election scenario and the farm sector as well as the slump in exports as the next two, let us now look at the banking industry as well as the overall ease of doing business in the fourth and final part of this series.

The Banking Imbroglio

There is no doubt that the NDA government has gone after some big names who were defrauding the banking system in the country. The infamous cases of Vijay Mallya and Nirav Modi are still fresh in public memory and efforts are still on to repatriate the two industrialists so that the law can take its own course regarding their activities.

And this is another area the government needs to focus. Government must bust popular perception that banks are suffering due to bad loans to farmers or to small industries. The Economic Survey clearly states that out of the Rs 2.6K Billion of total outstanding credit, a whopping 82.6% is with large enterprises followed by 17.4% with MSMEs, and the rest with small farmers.

The steps that were taken to recover bad loans from the banking system include the bankruptcy law as well as the fact that the National Company Law Tribunal courts across the country are now deciding cases faster. The latest instance being that of steel tycoon LN Mittal’s Arcelormittal and Nippon Steel buying debt-ridden Essar Steel for Rs 42,000 crore.

This is the biggest asset to be acquired under the new bankruptcy law. The Ruias-controlled Essar Steel owes Rs 49,000 crore to a number of banks, led by State Bank of India. India’s bad loan pile stands at a whopping $190 billion; the ratio (of bad loans to good ones) is now the worst among the world’s top 10 economies.

Interestingly, the RBI expects bad loans in the system to fall by the end of March. The central bank’s Financial Stability Report claims that the gross non-performing ratio of the Indian banking system will drop to 10.3% as compared to 10.8% in September last year. The fact remains that the NPAs could have risen higher, if not for the RBI’s relaxation of rules that allowed banks and non-banking companies a one-time restructuring of loans up to Rs. 25 crore in default as on January 1, without marking them as bad loans.

This move, announced by RBI Governor Shaktikanta Das immediately after assuming charge, was perhaps a way to make things appear better than they actually were. It is a known fact that his two predecessors, Raghuram Rajan and Urjit Patel, were considered to be tough on bad loans while Das was probably acting on behalf of the Finance Ministry (of which he was a part until recently) in order to placate a key constituent of the economy – the small and medium enterprises.

However, once the new government takes over, things have to be fixed in reality and not merely on paper. Adding to the mess is the issue of IL&FS that is building up into a big scam all by itself. Recently, the Economic Survey further pointed out that banks weren’t lending to real estate due to rising NPAs and lower profitability of banks. It is not only real estate that is facing a cash crunch- there’s the MSME sector, a major contributor to the GDP via products and services as well as being an important generator of employment.

The Economic Survey further pointed out that MSMEs, which provide more employment than the large enterprises, get lower disbursals because the credibility of the latter takes away banking credit. And this brings us to the actual ease of doing business in India.

Ease of Business

India has jumped 53 spots to rank 77 in the Ease of Doing Business list brought out by the World Bank. While there was improvement in six of the ten indicators on ease of doing business, the government needs to accelerate the speed at which business is done in India.

For example, there has been virtually no improvement in trading across borders, something that Prime Minister Narendra Modi has articulated well at international meets like the World Economic Forum. The fact remains that there are a slew of procedures that need to be followed for setting up a business, and the bureaucracy often slows down the process.

The current government did suggest that some blueprints have already drawn up, so the new regime should focus on these. Major changes came in awarding construction permits and trading across borders. However, the areas where a lot more needs to be done include credit availability where India ranks 22 in the world, infrastructure demand, and contract enforcements. The last-named places the country at 163rd position on its list.

When the new government takes over, it may have to bring forth more reforms in the administrative framework to allow for procedural simplification without actually reducing compliance. The answer could be paperless transactions and absence of human interface as currently evident in the Income Tax Department’s process of filing annual tax returns.

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