Our collective reaction to Vijay Mallya and Kingfisher's debt default says a lot about us as a country, particularly the socialist legacy that remains rooted deep in our national psyche. Our Constitution still refers to India as a "Socialist Secular Democratic Republic"--a legacy of Indira Gandhi's amendment during the emergency rule in 1976. While successive amendments swept aside many of Mrs. Gandhi's draconian changes, the reference to India as a Socialist Republic was left intact.
The Constitution is supposed to be a living document that is supposed to change to keep up with the times. But while there are many areas where such changes are needed, I doubt we need to remove the Socialist reference just yet.
Our bankruptcy laws are designed to ensure that the business owner or promoter never loses money.
Despite the ongoing economic reforms since 1991--that have led to splendid private sector businesses, millions of jobs in the high skill sector, the influx of global products to the Indian market, more accountable and productive public and private sectors--and the shift in the perception of India as an emerging world leader rather than a perennial economic laggard, we as a country remain deeply socialist at heart.
Look around--in the event of an accident, our natural instinct is to hold as guilty whoever's driving the bigger or more expensive vehicle. Success is often vilified. An act, howsoever reprehensible and illegal, committed by a group that can claim to be disadvantaged or that coalesces around an identity, is rarely punished. Communists, despite their violent and oppressive history within the country and widespread failure of their ideology across the world, have a stronghold in two major states and continue to inspire new offshoots at both the state and national levels. On the economic side, the State continues to own dominant parts of sectors such as banking and finance, energy, steel, transportation and infrastructure.
The same principle is at play in this debt default soap opera. A borrowing transaction has two parties--a borrower and a lender. The lender knows at the outset there is a risk of default and that risk is reflected in the pricing and structure of the loan. If a borrower defaults, the lender takes recourse available under the loan agreement. That's where the problem begins in India--we do not have the right laws, and the thin protection that exists for the lenders under existing laws are toothless, given our utterly lethargic and oftentimes corrupt judiciary.
Talk about bank privatization and modern bankruptcy laws, and you would be swiftly labelled a corporate/capitalist sell-out who is in favour of vulture lenders...
In an advanced economy, a payment default or even a non-payment covenant default can lead to lenders taking control of a borrower's business. Once in control, the lenders take a collective decision around whether sale of assets is better or they can restructure the debt in the hope of turning around the business for a better payoff in future.
In India, however, even when you have a lien on assets, the process of enforcing that lien takes years if not decades. Our bankruptcy laws are not designed to help restructure and revive viable businesses that face difficulties due to cyclical downturn or mismanagement and liquidate the ones that have no hopes of survival. Our bankruptcy laws are designed to ensure that the business owner or promoter never loses money. Businesses, viable or not, die an extremely slow and painful death taking down lenders, workers, suppliers and all other stakeholders except the businessperson.
The other aspect of a borrowing transaction is that both the borrower and the lender are acting in good faith. In the Indian context, that good faith doesn't exist. Most of the lenders to Kingfisher are government banks where the underwriting process can be described as subpar at best and corrupt in reality. Loan approvals of large amount are often influenced by government and priced not per the risk profile but 'mutual negotiations'. Notwithstanding the widespread corruption, government ownership often directs funds into sectors which are 'flavour of the month' that yet again distorts the principles of sensible lending.
Socialism, despite all the romanticism attached to it, eventually leads to transfer of wealth from the honest rich to the corrupt rich.
A reasoned debate on Kingfisher's default and Mallya's continued belligerence would force the government to modernize bankruptcy laws, privatize the banking sector or at the bare minimum make the banks accountable, modern and free of government influence but the whole debate is focused around who let Mallya out and how to bring him back. Talk about bank privatization and modern bankruptcy laws, and you would be swiftly labelled a corporate/capitalist sell-out who is in favour of vulture lenders devouring businesses down on their luck and selling the family silver to sharks for illicit kickbacks.
I am not giving Kingfisher and Mallya a free pass here-- I am fairly certain money was siphoned off to fund Mallya's lifestyle. I am also fairly certain he never had any sincere intent to honour his promises. But let is also not forget our State has repeatedly bailed out Air India, spending more than five times what's due from Kingfisher; we continue to see taxpayer money go down the drain in many other State-owned businesses.
Therefore, unless we can learn to focus the debate on real issues and put our energy behind solutions, we will continue to have businessmen like Mallya profit at the cost of taxpayers. The State will keep spending taxpayers' money to protect its piggybank. Socialism, despite all the romanticism attached to it, eventually leads to transfer of wealth from the honest rich to the corrupt rich. That's what happened on a wide scale during first 45 years of our independence and continues to happen despite reforms in the last 25 years. This might continue into the indefinite future unless we shake off our Socialist past and look beyond petty political fights.
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