T K Arun

It was economic salvage week for the government. A package for the telecom sector was finally approved and announced, which makes it clear that the government favours three private players competing amongst themselves rather than a duopoly. The government also announced the formation of a bad bank to buy out Rs 2 lakh crore (Rs 2 trillion) worth of bad loans from the troubled Indian banks.

But the most dramatic developments were the protest resignation of Punjab chief minister Captain Amarinder Singh, who said the Congress high command had humiliated him (to be fair, he spoke in the passive voice, which makes it unnecessary to specify upfront who did the insulting). The Congress chose a Dalit Sikh leader, Charanjit Singh Channi, as his replacement. The Congress unit of the state is in turmoil, baffled at the rise of Navjot Singh Sidhu as state party chief.

No less spectacular was the Gujarat council of ministers performing a live demonstration of a central precept of the Bhagavad Gita: the atman lives on, but changes its bodily form the way a person changes old clothes. The BJP government continues in Gujarat, but every member of the council of ministers is new — not even an intimate piece of inner wear has been retained. Will the voters of Gujarat appreciate in full this display of Vedantic wisdom before they elect a new set of legislators later next year, or will they stay attached to the more muscular, bash-the-Muslim kind of Hindutva the BJP has popularised?

After the announcement of the telecom package, Vodafone-idea, the most stressed telecom company, can now stop contemplating the afterlife, raise funds and struggle to survive. The government could have been more imaginative and generous (see http://bit.do/fRXKD), but the sector does get some reprieve from a four-year moratorium on some large past dues, conversion of some dues into government equity and future elimination of non-telecom revenues from the revenue that a telco has to share with the government, as well as dispensing with a spectrum usage levy that lost its rationale when the government started allocating spectrum on the basis of auctions in which telecom companies bought spectrum at fancy prices.

Bharti Airtel announced that it would make use of the moratorium and use the saving to invest in the network.

In another major move, the government fleshed out a proposal first unveiled on February 1 this year, along with the Budget, to set up a bad bank. India’s banks have accumulated bad loans of more than Rs 8.3 lakh crores (Rs 8.3 trillion) and these are likely to balloon to in excess of Rs 10 lakh crore (Rs 10 trillion), by March next year, an assessment released by a rating agency estimates. A bad bank will buy out the non-performing assets (loans on which the borrower has stopped paying interest and repayment of the principal) from banks and sell off the underlying assets (companies as going concerns or as plant, machinery, and such other valuable parts after liquidation) over a period of five years.

This will have a dual structure. The National Asset Reconstruction Company (NARC) will be majority-owned by public sector banks and buy out bad loans from banks, and engage India Debt Resolution Company to resolve the bad loans, including by running a company for a while before selling it off. The bad bank will buy bad loans from the banks that gave out those loans at a discount to the face value of the loan. The average realization under the Insolvency and Bankruptcy Code so far has been a little over 40%, and in some cases, the recovery has been as low as 5%. Suppose the bad bank buys the loan for Rs 100 crore for Rs 50 crore.

This discount is a source of disquiet for a public sector bank, whose loan had turned sour. Some future Comptroller and Auditor General might decide to do an imitation of his illustrious predecessor Vinod Rai, and arrive at an estimate of notional loss caused to the exchequer by this sale, possibly inviting prosecution for corruption and a visit to the jail (it had been Vinod Rai’s wholly arbitrary estimate of notional loss running to Rs 1.76 lakh crore in the allocation of telecom spectrum that had sealed the Congress-led UPA’s reputation as corrupt, although, after lengthy prosecution that culminated in the Modi government’s first term, a court dismissed the charge).

Since the bad loan is being sold to NARC that is collectively owned by the banks, any upside in subsequent resolution of the bad loan — that is, the sale of the underlying company as a going concern or, after liquidation, as constituent parts fetching a sum higher than NARC’s cost of acquiring that loan and creating a profit — would accrue to that collectively owned body, and not to a private entrepreneur as of today. This offers, it is hoped, some insulation against any charge of favouring a private buyer to acquire a valuable asset at a cut-rate price.

The Insolvency and Bankruptcy Code (IBC), under which resolution takes place, is losing credibility today because of the sale of companies underlying bad loans at steep discounts, in one case as much as 95%, to some big players of India Inc. NRAC will act as patient capital, taking the bad loan off the banks’ books and freeing them to raise capital and start lending again, while preventing erosion of the value of the asset underlying the bad loan, and realizing good value for it over a period of time, free from the compulsion to sell off the asset in the 270-day deadline set by the IBC.

How well this model would work depends on how good a job the India Debt Resolution Company performs. Its managers and those whom the managers employ must be given a portion of their remuneration linked to the value they realise from the resolution process, so that they have the incentive to make legitimate money and would be able to resist the temptation to make quick, underhand bucks from the resolution process.

The principal-agent problem — shareholders own the company, but the management runs it, ostensibly on the owners’ behalf — is never fully resolved even when a functional board supervises the working of the management, and during the resolution process, when a Resolution Professional is given full control of an asset with only a code of conduct to guide him, the problem worsens. Perhaps, the Bad Bank would solve a part of it.

A big problem this model faces is the funds needed to buy out the bad loans from the banks. In the US, the asset reconstruction company would issue bonds, and even if these are below investment grade, that is, classified as subprime, there would be takers, as large pools of capital are willing to take a tiny exposure to risky assets, given the higher-than-normal rates of return they offer. India lacks such a deep and broad market for corporate bonds.

So, the deemed solution has been to restrict cash payment for the bad loan being bought out to 15%, the balance being paid in the form of Security Receipts (SRs), essentially, IOUs, to be redeemed from the proceeds of resolving the underlying assets. The government has decided to offer a guarantee for the SRs issued by the NRAC: the government would make good the difference between the face value of the SR and the money received from resolution of the assets, spread over the relevant number of SRs, up to a total of Rs 30,600 crore.

SRs are supposed to be tradable, just like corporate bonds, including subprime or junk bonds. But, in effect, there are no takers for SRs. This is one reason, apart from restrictive regulation by the RBI, that the existing lot of Asset Reconstruction Companies (ARCs) have not been very productive so far.

The NRAC is supposed to undertake resolution of Rs 90,000 crore (Rs 900 billion) worth of bad loans to begin with, and resolve Rs 2 lakh crore overall. That still leaves over Rs 8 lakh crore worth of bad loans to be resolved by next March. The old ARCs must be empowered to become functional. The best way to do that is for the government to kick-start a market for corporate bonds.

India-Southeast Asia direct payments

In a truly positive development, the Reserve Bank of India and the Monetary Authority of Singapore agreed to make the two countries’ official payment applications interoperable: India’s UPI and Singapore’s PayNow. PayNow is operational, in an experimental fashion, in Thailand as well. Eventually, this agreement would make it possible for India and the whole of Southeast Asia to make payments amongst themselves directly, instantly and at low cost, bypassing the antiquated SWIFT (Society for Worldwide Interbank Financial Telecommunication) network.

As if to demonstrate that high-tech finance can be derailed by its less sophisticated components, Bihar Gramin Bank credited some accounts with over Rs 900 crores of rupees, in error.

Even as wholesale price rise stayed in the double digits for August, although declining for the third month in a row, retail price rise dipped well below the RBI’s upper band of tolerance of 6%. Exports rose sharply, going up 46% and imports by 52%. The cumulative value of exports for the period April-August 2021 expanded by 67.3% to $164.10 billion compared with $98.06 billion in the year-earlier period. Imports over the same period nearly doubled over the level for the pandemic-struck 2020-21. The stock market continued to rise. Only the US Fed, meeting this week, can now prevent it from losing its head altogether in pink clouds.

The number of people flying on domestic sectors rose sharply, and the government responded to editorials asking it to lift the curbs on capacity and fares it had imposed, by allowing seat capacity to rise to 86% of the pre-pandemic level.

Air India’s privatization plans progressed, with the Tata Group putting in a bid. Spice Jet chief Ajay Singh is also a bidder, presumably to prevent the Tatas from feeling lonesome in the buyers’ lobby, or to give the sale a semblance of a competitive process.

Rural households’ average debt grew from ₹32,522 in 2012 to ₹59,748 by June 2018, according to the All India Debt & Investment Survey conducted by the National Statistical Office (NSO), while urban households’ average debt increased by 42% in the same period to little more than ₹1.20 lakh.

However, growing indebtedness has not prevented Indians from splurging on the all-new Ola e-scooter, launched by the ride-hailing company’s electric vehicles division. Ola e-scooters sold out in two days, netting sales worth Rs 1,100 crore (Rs 11 billion), sales are to resume in November. Ola’s two models claim, respectively, a single-charge range of 121 km and 181 km, and top speeds of 90 km and 115 km per hour. The models cost Rs 99,999 and Rs 1,29,999 (about $1,350 and $1,750) respectively.

Ola would be happy to know that the government has extended its Production-Linked Incentive (PLI) scheme — subsidies for meeting target volumes of production with stipulated local value addition — to e-vehicles, advanced automotive tech and parts and drones.

Indian Space Research Organisation announced that it would make reusable rockets, of the kind that Elon Musks SpaceX and Jeff Bezos’s Blue Origin make. Geostationary Launch Vehicle Mark III would land back on earth in a designated area, after launching its payload in space. The announcement came in the same week when a Chinese space module and another from SpaceX landed safely, carrying passengers back to earth, respectively from China’s space station and a touristy jaunt for four people with no specialized training for astronauts.

When technology becomes user-friendly to the point where someone who understands nothing of the tech can still use it very well — for example, someone spreading the notion that 5G telephony causes Covid, using phones that make use of 4G networks — scientific advance becomes the preoccupation of an elite, even as ordinary folk are free to dispense with even the rudiments of the scientific temper. Be ready for space travellers who consult astrologers for safety tips before their trip beyond the stratosphere.

The GST council met in person in Lucknow, decided to keep petro-fuels outside GST for the time being, exempt some expensive drugs from GST and remove the distortion of the tax rate on inputs being higher than that on the finished product, in several cases. The inverted duty structure makes it difficult for producers with relatively low levels of value addition to offset their input tax credit fully against their output tax due. The Council also decided to extend the tenure of the compensation cess to 2026, but not to extend the period of compensation of states beyond 2022, brought down  or eliminated GST on some cancer drugs, exempted leased aircraft imports from IGST

The Courts have their say

A number of judicial pronouncements were significant last week. The Supreme Court collegium has been active, recommending the elevation of eight high court judges as chief justices and transfer of five high court chief justices to other states, including of Justice Kureshi from tiny Tripura to populous Rajasthan. The Centre had had objections to Justice Kureshi’s elevation to the Supreme Court, besides to his appointment as the chief justice of Madhya Pradesh, before his appointment in Tripura. Over 100 judicial appointments recommended over the past month. Chief Justice Ramana has indeed been living up to his name — it literally means one who brings pleasure or happiness.

A case that the Supreme Court heard last week related to an activist in Manipur, who was jailed under the draconian National Security Act for a Facebook post that questioned the efficacy of cow urine and cow dung when it came to curing Covid. As if questioning the curative powers of bovine excreta was not provocation enough, he also linked their impotence in the face of the coronavirus to the death of a local BJP leader from Covid. If this does not endanger national security, what would? So, with great reluctance, and in consonance with PM Modi’s commitment to be there for everyone, to work for everyone’s development and to win everyone’s trust, the BJP-led government of Manipur charged him under NSA and put him in jail. He is out on bail. He wants compensation, no scatology.

Hearing another case, the Supreme Court has urged legislation that makes irretrievable breakdown of marriage a legitimate ground for divorce. This would, indeed, uphold a radical stand in Indian tradition, espoused by Sita, in opposition to Ram’s stand. Ram had banished his pregnant wife to the forest, where she gave birth to twins and raised them in a hermitage. But in Ram’s mind the marriage was intact, and invited Sita to sit next to him while he conducted a sacrifice that would enhance his fame. Sita did not think the marriage subsisted. She did not heed Ram’s request, but called upon mother earth to take her back, and disappeared into a deep crevice that opened up before Ram, Sita and other witnesses to what could be called an extinction rebellion.

The Madras High Court made two notable pronouncements. In one, it revoked an earlier order that had made five-year comprehensive insurance mandatory for all new vehicles, raising the cost of automobile ownership at a time when car sales were struggling. In another, it criticized the government’s Intermediary Guidelines under the Information Technology Act for its attempt to impose a form of censorship on online media.

Delhi Police claimed to have busted a Pak-backed terror module. A Judicial commission in Chhattisgarh found that a claim by the paramilitary CRPF that it had shot dead eight Maoists in an encounter in 2013 was cooked up. All those killed were simple villagers with no Maoist links. The one CRPF soldier who was killed died in friendly fire, falling to a bullet of the kind used by the CRPF and not to a country-made gun, as the CRPF had claimed.

Birthday bash, bash the Muslim

Prime Minister Modi had a busy week, celebrating his birthday and attending two multilateral summits, of the Shanghai Cooperation Organisation and the Brazil, Russia, India, China, South Africa or Brics forum. At the SCO, the PM took a tough stand on recognizing the Taliban government of Afghanistan. Ready recognition would not gel with the ongoing campaign to retain Uttar Pradesh, where the Taliban provide a lot of fodder to a campaign centred on Hindu-Muslim divisions. Chief minister Yogi Adityanath raised his Abba Jan remark of the previous month yet again.

Over two crore vaccines were administered on Modi’s birthday, on Friday, the 17th, when he turned 71. Gifts to the PM were to be auctioned, it was announced, and the proceeds to go to the clean Ganga project. The Prime Minister found time to launch Sansad (Parliament) TV, which replaces the erstwhile separate TV channels for the Lok Sabha and the Rajya Sabha.

The PM also laid the foundation stone for a defence industrial complex in Aligarh, Uttar Pradesh. The Central and UP governments hope to develop a major defence industry in the state.

US special climate representative John Kerry visited India, failed to get a commitment on when India would switch to net-zero emissions, but struck up agreements on assorted climate-friendly technologies.

The income tax department continued with its raids on people in bad odour with the government. While it had been media outlets News Laundry and Newsclick last week, it was the turn of activist Harsh Mander and actor Sonu Sood, who had done more to help migrant workers during their initial flight back home from distant towns, than had the government.

The Tamil Nadu government withdrew more than 5,700 cases against those who had protested against the Citizenship Amendment Act, inviting applause from a broad swathe of people. The Trinamool Congress, which had raked some abrasions across its ties with the Congress by inducting supposed Gandhi loyalist and Assam leader Sushmita Dev into the party, rubbed some salt into those raw welts by nominating her to the Rajya Sabha. The Congress is trying its level best to deny a Rajya Sabha nomination to Ghulam Nabi Azad, a leader of the Group of 23 that seeks inner-party reform. The party lost another veteran, Oscar Fernandes, to old age, he was 80.

In a significant development, the bishop of a relatively small Syrian Christian denomination in Kerala used the term ‘narcotics jihad’ while warning his parishioners off drugs. He also talked about love jihad. Christian resentment against Muslims has been on the rise in Kerala, from where many migrants work in Europe, and have been directly or indirectly affected by sporadic Islamist terror attacks on that continent since the Islamic State established a Caliphate in 2014. The reconversion of Istanbul’s ancient church Hagia Sophia into a mosque by Recep Tayyip Erdogan, Turkey’s ruler, who might fancy himself as a latter-day Ottoman heir, had caused much resentment among Kerala’s Christians. Hagia Sophia had been the most important church of Orthodox Christianity, with which many Kerala denominations identify. It had been converted into a mosque and later converted back to a church.

The BJP in Kerala was delighted to find endorsement for their Islamophobic propaganda about love jihad and its twinning with other harmful jihads. The Congress and the Communists in Kerala oppose talk of love jihad. The Communist chief minister has failed to take on the bishop, but chose to send a party troubleshooter to ask him to shut up on jihad.

Now, Kerala has seen fringe Islamic radicalism for some years now, with some radicals cutting off the palm of a Christian college lecturer who had used the name Mohammed in one of his questions for a test. There have been reports of young girls being radicalized, converted to Islam, and recruited into jihad in Syria and Afghanistan.

These are too few in number to constitute a trend among Kerala’s Muslims, well-integrated into Malayali society for 14 centuries. But to deny their occurrence altogether would be false as well. A recent internal document of the Communists urges its youth and student wings to guard against attempts to radicalize bright young women. Lest anyone think this means mainstream parties of the state buy into the Love Jihad narrative, last week the Communist cultural organization helped a Muslim man get married to his Hindu fiancée after 11 years of hiding their relationship from disapproving relatives.

Dengue and assorted other viral fevers began to take a toll across northern and eastern India. The coronavirus is on the retreat. The active caseload came down by 42,111 and India delivered more than 60 million vaccine doses, bringing the total number of vaccine doses delivered to 804.3 million, as of Sunday morning.

First Published in Substack Last Week in India: 12-19 September 2021 | Vodafone- Idea, Bad Bank and ‘narcotics-jihad’ on September 19, 2021.

Read another piece on Politics and Twitter by T K Arun titled Stopping Fakes on Twitter! in IMPRI Insights

Read another piece on COVID-19 Vaccine by T K Arun titled Increasing Vaccine Production: India an Answer to Global Woes in IMPRI Insights

Read another piece on COVID-19 Vaccine by T K Arun titled Bold Vaccination Policy Needed in IMPRI Insights

Read another piece on Israel Palestine Conflict by T K Arun titled Netanyahu Culprit of History? The Politics of Israel- Palestine Conflict in IMPRI Insights

Read another piece on Retrospective Tax by T K Arun titled Retrospective Tax, Retrograde Social Values: Last Week in India | W31 2021 in IMPRI Insights

About the Author

T K ArunConsulting Editor, The Economic Times, New Delhi.