Eco-latte . Bailout nation

In a singularly droll episode of the 1980s television series Yes, Prime Minister , crafty Whitehall bureaucrat Sir Humphrey Appleby introduces us to the “politician’s syllogism”, the classic failing of reason that defines the actions of survivalist members of the political establishment. Its logic, such as it is, runs thus: “Something must be done. This is something. Therefore, we must do this.”

It is never a comforting prospect when what passes for policymaking among the Prime Minister’s mandarins resembles the plotline of a 20th-century satire on goofy governance. And yet, the daily whack-a-mole that the Finance Ministry has been playing with the eruptions of a financial sector in distress, and most recently with the troubled IL&FS, resembles nothing so much as the “politician’s syllogism” on infinite comedic loop.

The seeds of the crisis, across sectors with a heavy build-up of asset-liability mismatches, may have been sowed in an earlier political dispensation, but the Narendra Modi government’s response, for the most part, does not sufficiently inspire confidence that it has a roadmap for securing control of the situation. The notable exception is, of course, the Insolvency and Bankruptcy Code (IBC), which has grabbed headlines by bringing insolvent barons kicking and screaming to the negotiation table with their lenders, but there too, attempts are under way to make a monkey of the system by abusing the spaghetti bowl of appellate procedures and litigation platforms.

In sector after tottering sector, in institution after failing institution, about the only element of policy consistency has been the government’s readiness to throw good money after bad. It has also distinguished itself in the fine art of spreading the contagion of financial distress around, while claiming it is actually doing everything to contain it. Arguably one of the most cringe-worthy examples of this in recent days was when Air India — that profligate white elephant in the sky — raised ₹1,000 crore from the National Small Savings Fund to meet its working capital requirements. The amount may seem infinitesimal, given that banks’ non-performing assets typically run into lakhs of crores but the government’s willingness to subsidise a corpulent, indolent Maharaja in the short term by dipping into the wallets of small savers is morally unsustainable and optically indefensible.

The case of IL&FS, the infrastructure investment company that has set off alarm bells with its debt defaults and is now begging to be bailed out, is even more egregious. It operates in the so-called ‘shadow banking’ sector — although ‘shady banking’ may be the more apt descriptor of IL&FS’s shenanigans — defying characterisation as either a private or a public entity. (Public financial institutions — including LIC, that sucker of last resort — own up to 40 per cent of the unlisted parent company.)

From the narratives now emerging from the vaults, IL&FS lorded over nearly 350 group companies, and from that corporate maze, it ran what’s been likened to an unsustainable “debt pyramid scheme” and bankrolled the lavish lifestyles of bureaucrats and political operatives in order to secure the insurance it needed to escape scrutiny. Now, even after the company has been stripped bare, the government has come under pressure to bail it out — or risk a systemic implosion, in the way that the collapse of Lehman Brothers did in 2008.

Meanwhile, the red flags of financial troubles and bad assets are being hoisted across other sectors — from telecom to power to real estate to renewable energy — and the calls for bailouts are growing clamorous. Going into an election year, with the government’s earlier resolve to abide by fiscal prudence already showing signs of fray, the temptation to throw yet more taxpayer-money may prove compelling.

At the most elemental level, such a survivalist “this is something, we must do this” mindset amplifies the prospect of creeping ‘moral hazard’ — where the insulation from loss incentivises unhealthy risk-taking behaviour and indeed any effort to prevent or minimise the cost of loss. Second, as risk-analyst Nassim Nicholas Taleb notes in his book Antifragile , complex ecosystems stand a better chance of actually emerging stronger from a crisis if they are exposed to “stressors”, risk and uncertainty — even if it means letting the fragile ones fall. By disrupting this evolutionary model — with bailouts, for instance — governments typically favour the fat cats at the expense of the weak.

The NDA government has, to its credit, over the past four years occasionally embraced a modicum of risk in order to break out of a status quo-ist mindset, even at the risk of expending its political goodwill. But as it heads into 2019, with the fuel gauge of its popularity at a four-year low, and a perfect storm of grim economic tidings, the appetite for taking what Sir Humphrey might call a “courageous decision” is low. That rattling sound you hear may be the echo of the can being kicked down the road.

VENKY VEMBU

Eco-latte is a new monthly column about the politics that drive economic policies

Venky Vembu is Associate Editor, BusinessLine ;

E-mail: venky.vembu@thehindu.co.in

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