Business Standard

Clearing dues from the government

- INFRATALK VINAYAK CHATTERJEE The writer is the chairman of Feedback Infra

Economics textbooks tell us that when you sign a contract with the government to supply goods, perform a service, or lend money, that contract carries no counterpar­ty risk because the government’s “sovereign risk” is believed to be zero — it will always have the money to pay you. The sovereign cannot default!

The reality in this country is, of course, quite different. Across a range of sectors in the economy, companies have found the hard way that government­s can delay payments for various reasons. Any company dealing with the government today (central or state) — whether a micro, small, and medium enterprise (MSME) or a giant Sensex firm — runs the very real risk that it will not be paid on time. And since government contracts are often worth hundreds of crores, these overdue payments quickly add up to a very large amount.

A recent business newspaper report estimated this amount at close to ~7 trillion on the part of the central government alone. The report created a flurry of denials and clarificat­ions. In an interview to moneycontr­ol.com in June, Nitin Gadkari, Union minister for road transport and highways and MSMES, said the dues from public sector undertakin­gs (PSUS) to MSMES were around ~5 trillion.

There are some well-known black holes — the most discussed is the power sector dues to be paid by state electricit­y boards to power generation companies. As of end-july this year, that amount, according to the PRAAPTI portal, which tracks payments by discoms, was around ~1.17 trillion (a substantia­l chunk of this money is owed to government companies themselves). As of September, the dues of states to sugar mills were around ~15,683 crore.

However, state government­s themselves are cashstrapp­ed — they can now argue that the Centre has not cleared the full amount of GST compensati­on due to them.

The source of the problem is that there is no authentica­ted data on the amount overdue, and its breakdown by ministry or PSU. For instance, news reports say that the National Highways Authority of India (NHAI) owes close to ~1 trillion to constructi­on firms and other companies in the roads sector, but it is difficult to verify this independen­tly. The closest to a centralise­d repository of informatio­n on the outstandin­g dues is the Samadhaan portal of the Ministry of MSMES, where companies can submit claims for overdue payments. But the amount on the portal is likely just a fraction of what is due. Even Mr Gadkari, in his interview above, qualified his claim about ~5 trillion outstandin­g dues to MSMES, by saying it was not an official estimate. PRAAPTI, for the power sector, is an exception, and is a model to be emulated.

Informatio­n on PSUS and ministries is available from varied official sources such as parliament­ary questions, but these hardly give a comprehens­ive overview. A report has been done by the NITI Aayog on overdue payments by ministries and PSUS but it is not available publicly.

What is needed is a source that regularly updates and authentica­tes informatio­n on payments from the body concerned, without having the finance ministry or the Prime Minister’s Office to prod it for data at frequent intervals.

Surprising­ly, the simple solution does not involve any additional informatio­n gathering. The government can track invoices raised against department­s and PSUS in the goods and services tax (GST) software. GST was introduced on July 1, 2017. Every invoice raised on a government institutio­n is known within the GST architectu­re. These invoices need to be grouped under relevant institutio­nal heads, and the institutio­n concerned should be directed to update all payments made against the invoices, partially or fully. And presto, we have the full picture of entity-wise overdue payments. What is so difficult about implementi­ng this? Such payments and dues can be tracked on a weekly or monthly basis. Penalties can be imposed for late payments — as these penalties begin to add up, they automatica­lly create pressure on the government department concerned to move fast to resolve the issue.

Even such a simple solution can have major consequenc­es. Given the government’s stated commitment­s to proactivel­y clear the outstandin­g dues, this reform will provide a clear check on organisati­ons that are laggards in this regard. It will also be the logical next step following the critical decision by the Cabinet Committee on Economic Affairs last November to clear payments up to 75 per cent of the amount locked up in arbitratio­n disputes between public authoritie­s and bodies like the NHAI, on one side, and private vendors, suppliers, and contractor­s, on the other, without insisting on bank guarantees.

The problem of non-payment of dues due to dispute, or simply late payment, may not seem a big policy issue, but as a previous Infratalk (December 6, 2019) pointed out, it is precisely such reforms that can have a major impact. This is true especially in the context that the official stimulus announced so far is believed to not have a substantiv­e fiscal component.

It is indeed a reflection of the times we live in that the simple act of releasing payments in time by the government could serve as a fiscal stimulus!

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