Good governance means no vested interests, and full accountability

J Mulraj | Updated on July 12, 2019 Published on July 12, 2019

The huge electoral mandate given to the Modi government for a second term brings with it a huger expectation of good governance, including an absence of vested interests in making policy. In order to achieve our ambition of becoming a $5-trillion economy in five years, we must ensure that policy is not directed solely by vested interests, one in which the errors are committed by policy makers, but the price is paid by others.

There are several examples.

Take the 2018 Kerala floods which led to severe loss of life and property. The New India Assurance Company has had to pay ₹580 crore as compensation. But the floods occurred because in 2011, when Congress Oomen Chandi was Chief Minister, it ignored the Gadgil Committee report on environmental damage caused by over building. It did not accept the recommendation of environmentally sound development, but appointed another committee to water down the recommendations. This bad policy decision caused the floods seven years later. The price was paid by the citizens and the financial cost borne by NIA.

Or look at lives lost in building collapses. The Bombay High Court recently suggested that MHADA take over dilapidated buildings. But it did not go into the root cause for the dilapidation. The root cause is the freezing of rents, insufficient to pay for maintenance. The Rent Act was passed as a temporary measure, to provide accommodation to British troops. It has survived because no government has the backbone to ensure it is fair to both landlords and tenants, because it sees the larger number of tenants as vote banks. Even the new model draft rent act announced this week does not address the root cause.

The root cause is that frozen rents cannot pay for maintenance and so buildings collapse. The remedy should be to pass a law under which, over a period of 5 to 10 years, the difference between market rents (which the government can define), and actual rent, is made good through annual increases. After enjoying subsidised rents for years, tenants should become used to paying the fair price. (Just like Mumbai has, last week, started charging a Rs 10000 fine for parking in a no parking area, resulting in an end to illegal parking. Why should it not be equally willing to let market rents be payable?)

So, the poor governance by policy makers leads to building collapses and the price is paid by lost lives and insurance companies. Not by those responsible.

Or take the case of Sterling Biotech, whose owners, the Sandesarias, have fled after having borrowed over ₹15,000 crore from banks, thanks, apparently, to links with a prominent figure in the then Congress government. Banks were willing to accept a one-time-settlement (OTS) involving a 60 per cent haircut, but, luckily, this was disallowed. So in this case a policy maker prods banks to give loans, with very poor due diligence, to a crony company, allows the defaulters to escape from the country, probably leans on lending PSU banks to accept a OTS. The price is paid, of course by the PSU Banks and their depositors, who get lower interest rates on deposits to compensate for such losses. It was the same bad governance that led to the collapse of Air India. Those who took the bad decision and arm twisted the management are not brought to task; those who pay the price are taxpayers, employees of the airline and, yes, competing airlines which do not have constant supply of funds.

This has led to the demise (and escape by the owner) of Kingfisher, and the demise (and near escape by the owner) of Jet Airways.

Will the Modi Government bring to task the policy makers who took poor decisions in the past or will the price for these decisions continue to be borne by citizens, taxpayers, bankers, government officials, et al?

The stock market fell sharply, post Budget. Perhaps the figures, especially that of containment of fiscal deficit at 3.3 per cent, were doubted. The revenue figures were thought to be optimistic, as indicated by the 12 per cent fall in auto sales in Q1, and other sectors.

The other important reason is that banks were depending on a time bound completion of the insolvency process by NCLT which would release to them funds from the sale. But timelines have been extended for different reasons, including objections for different reasons. The sale of Essar Steel has been extended and even now the owners of Essar Steel are stalling the completion of sale to Arcelor Mittal by appealing to the Tribunal [6]. So the release of the over ₹Rs 40,000-crore funds from the sale is delayed.

Even more bizarre, the NCLT has decided that there is no difference between secured creditors (banks, lending against mortgages) and unsecured ones (trade creditors etc) and the Committee of Creditors cannot decide on distribution of the sale proceeds. If so, why should banks provide interest at lower rates to a secured creditor (it is lower because of comfort)? It makes no sense.

The government must ensure that those responsible for poor decisions are brought to task. It is high time that others stop paying the price for poor governance.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

Published on July 12, 2019
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