Modi govt‘s corporate reforms far from over
India’s corporate reforms scorecard under the current government has been a mix of hits and misses, with some proving to be transformative, while others not delivering adequately on the stated intent.
In its 2014 campaign, the Bharatiya Janata Party relied heavily on the “policy paralysis” pitch, blaming the Congress-led government for India lagging behind in ease of doing business. Later, Narendra Modi’s government launched many big-ticket business-centred policy moves. Some were seen as transformative, while others are yet to make meaningful impact. Here’s a look:
BIG BANG CAPITAL
Seen as the most infamous legacy of the previous regime, India’s bad loans mess showed in the impaired balance sheets of banks by the mid-2010s. The cracks were laid bare after an asset quality review in 2016. By 2018, gross non-performing assets (NPAs) had scaled a peak of 11.5% of total advances, and almost a dozen banks were under the prompt corrective action (PCA) framework.
With further recognition of restructured loans, provisioning requirements surged, especially for staterun banks. To fix their balance sheets and to nurse the system back to good health, the Centre rolled out a massive recapitalization drive, amounting to close to ₹3 trillion between 2017 and 2022.
The exercise showed results: Profit margins of public sector banks began improving as lending resumed. “The pain was severe, but beneficial effects started to show up from 2018, resulting in improved asset quality,” the Reserve Bank of India (RBI) noted in October 2023. By 2022, all troubled banks had exited the PCA, and the gross NPA ratio fell to 3.9% by March 2023.
Stability seems to be back. “The stress test results reveal that scheduled commercial banks are wellcapitalized and capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by stakeholders,” the RBI said in another report. No bank was likely to breach the minimum capital requirement norm in the next one year, the report said.
INSOLVENCY CODE: A STRESS BUSTER?
All moves were not as successful. The 2016 Insolvency and Bankruptcy Code (IBC) was also aimed to be a game changer, meant to bring a sense of structure to the insolvency process through a time-sensitive approach. But it did not live up to its intent, bogged down by litigation and amendments. It has already been amended more than 90 times, as per a count by Crisil Ratings.
Till 2023, 7,325 companies had entered the corporate insolvency resolution process, of which 74% of cases stood closed and the rest were at various stages of resolution. Among the closed cases, just one-third benefited from the process—16% yielded successful resolution plans, and 19% were withdrawn as lenders agreed for settlement. Others were settled or closed on appeal or review (21%), or ended in liquidation orders (44%). Meanwhile, in the last five years, while waits for resolution have become longer, the recovery rate (the settled amount as a share of the total amount initially claimed by lenders) has fallen from 43% to nearly 32%.
For the IBC to succeed, some impediments must be removed, a Crisil Ratings note in November 2023 pointed out. The law’s effectiveness can be improved through better infrastructure, such as bench strength of judges, digitalization, and expanding the scope of prepack insolvency resolution for large firms, the report noted.
THE OTHER BIG GAMBLES
The Centre also took concentrated steps to reignite investments and capital flows. Early on, the Modi government moved fast to open several sectors to foreign direct investments (FDI) under the automatic route. The first three years saw 37 sectoral relaxations in FDI rules, outdoing the entire six-year run of the Atal Bihari Vajpayee government, and equalling the 10-year tenure of Manmohan Singh, an analysis by the Centre for Strategic and International Studies showed. Record FDI inflows followed. The last two years have been challenging as developed economies lost pace, interest rate differentials narrowed, and geopolitical tensions picked up. But with Chinabound investments no longer as lucrative, India has the chance to actively court foreign inflows. “Looking ahead, the government could expand the number of sectors eligible for automatic approval, encompassing both brownfield and greenfield projects,” said Rajani Sinha, chief economist at CareEdge. The recent initiative to open up FDI in the space sector through amendments to the Indian space policy is a positive stride in this direction, she added.
Meanwhile, the corporate tax cuts in 2019 don’t seem to have unleashed the animal spirits of India Inc. yet— despite being costly to the exchequer. Hurt badly by the pandemic, companies are still keeping their powder dry: Despite a growing cash kitty, growth in net fixed assets (a proxy for capital investments) of listed firms has been anaemic. Some green shoots are visible, with close to 10% rise in net fixed assets as of September 2023. “The private sector is showing increasing intent to invest,” Sinha said. “Hence, as there is more certainty on the domestic policy front after the general elections, we could expect a pick-up in the private capex cycle.”
This is the fifth part of a series on top poll issues and the government’s 10-year report card. Previous parts covered welfare, jobs, farmer issues, and health and education.