The Hindu Business Line : Mad business of insolvent state

THE SUPREME Court, by its judgment in the Balco case, has cleared the way for disinvestment of public sector corporations. It is now accepted that privatisation is part of government policy that cannot be questioned by any particular interest, unless there is clear evidence of mala fide decisions.

So far so good. The Minister for Disinvestment, Mr Arun Shourie, is reported to be ecstatic and will, probably, gallop ahead with all divesting from the loss-making PSUs. One only hopes that the decision had come a decade earlier. That would have avoided a lot of confusion and acrimony.

The Supreme Court decision has come at a time when not only the private sector, but also a number of State governments are unable to balance their accounts. The position of the State has been deteriorating over decades.

The last straw came in the form of the recommendations of the Fifth Pay Commission. State governments are now borrowing funds to meet their current expenses including payment of staff salaries.

The Maharashtra Government pleaded `insufficient funds' to defend its inability to carry out the statutory obligation of paying, at least, the minimum support price for cotton and paddy. Many governments are working out schemes for outsourcing several functions that have long since been considered to be the exclusive privilege of the State. Collection of taxes, tolls and cess has been extensively contracted out to private agencies. Plans are being made to outsource such functions as irrigation, road construction, tourism over the next five years.

The government has still not formally abdicated its responsibility for the maintaining law and order. Several corporations, communities and colonies have, however, proceeded to hand over the watch-and-ward as also the security functions to private bodies.

The Supreme Court has come out with directives about the statutory procedure for disinvestment, but what is really required is a clear guideline on disinvestment in various governmental functions carried out by departments and semi-government bodies.

Nobody had ever envisaged that the governments will go insolvent. We have the Insolvency Act for the individuals and the firms; we have provisions in the Company Act for liquidation of joint stock companies; the BIFR has laid down procedures for winding up of industries. We have now guidelines about disinvestment in public sector enterprises. Nobody is clear as to what happens when the governments are unable to meet their statutory financial obligations.

Governmental bankruptcy is quite common in Latin America and Africa, but is new to India. Most politicians appear to believe that creditors can have no statutory claim against the State that gets financially crippled. "If the salt loseth its saltness from wherewith shall it be restored?"

If the state — the paramount authority that controls currency — goes bankrupt, the creditors have no option but to wait for the dark days to end.

Unlike the housewife who tries to keep expenditure within the household income, the government first draws up a wish list of various expenditures, then proceeds to find the resources for them. It may impose taxes; borrow money or simply take recourse to printing currency notes to make up the deficit.

The new era of economic reforms has suddenly produced an insolvent state, baffling the Indian farmer.

Not so long ago when private moneylenders lorded over rural credit and the farmer was unable to meet the repayment schedule, the moneylender would go to the court of law, obtain a decree and seize the land as also the household belongings. The farmer's piteous pleading that the monsoons had failed, and that the crops were poor invoked little sympathy. The advent of cooperative societies and nationalised banks in the place of private moneylenders has made little difference to farmers' woes. Loan recoveries are made forcibly from the sale proceeds without examining the social and economic obligations of the farmer.

Bank agents confiscate tractors, tin roofs, cycles, motorcycles, table-fans and even utensils to force the farmer to make payments. In the last decade, hundreds of farmers committed suicide, unable to respect the loan repayment schedule.

The farmer is, therefore, familiar with the plight of a debtor. But he is unable to understand that, for once, when he is the creditor, it is again the other party that holds a whipping hand, simply saying, "Sorry, I cannot pay." He is at a greater loss to find that the cheques issued by the government bounce for want of sufficient funds. Is there no remedy for him against a bankrupt government?

The Constitution provides for imposition of the President's rule where a State government is unable to maintain the law and order.

There is no precedent of a State government being scrapped for its inability to respect financial obligations. The little funds available with them are used without any kind of orderly management of the assets.

In the case of an indigent individual, the Insolvency Act in Part III deals with the administration of property with method of proof of debts, with realisation of property and with the distribution of property.

It is only logical that a government caught in fiscal inability uses the available scarce resources according to a scale of preference.

It is patently unfair that farmers should be asked to accept only a part payment of the price of their produce while babus continue to draw their full emoluments, allowances and increments.The order of preference between various creditors should be established in accordance with the principle of justice, equity and transparency.

The state is withering away and a method needs to be brought in the mad, mad business of the bankrupt state.

(The author is founder, Shetkari Sanghatana. Feedback may be sent to sharad@mah.nic.in)

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