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Modi govt’s mixed record on corporate reforms
Summary
- India’s corporate-reforms scorecard under the BJP government has been a mix of hits and misses. In the fifth part of our pre-election data series, we evaluate what was transformative and what remains half-baked.
Setting the election campaign tone with a ‘policy paralysis’ pitch in 2014, Narendra Modi and the Bharatiya Janata Party blamed the Congress-led government for several failures that they claimed were hampering the ease of doing business in India. Within years of coming to power, Modi’s government introduced several big-ticket business-centred policy moves. Some were seen as transformative, while others are yet to make a meaningful impact. Here are the highlights.
Big bang capital
Seen as the most infamous legacy of the previous regime, the banking sector’s bad loans mess was getting visible through impaired balance sheets by the mid-2010s. The cracks became clearer after an asset quality review in 2016. By March 2018, gross non-performing assets (NPAs) had reached a peak of 11.5% of total advances, and almost a dozen banks were placed under the prompt corrective action (PCA) framework.
With further recognition of restructured loans, provisioning requirements surged, especially for public sector banks. To fix their balance sheets and to nurse the banking system back to good health, the government decided to roll out a massive recapitalization drive, amounting to close to ₹3 trillion between 2017 and 2022.
The exercise gradually 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 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.
The sector has regained stability. “The stress test results reveal that scheduled commercial banks are well-capitalized and capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by stakeholders," observed the RBI in its latest financial stability report in December 2023. No bank was expected to breach the minimum capital requirement norm in the next one year, the report said.
Insolvency code: A stress buster?
Other moves were not as successful. The 2016 Insolvency and Bankruptcy Code (IBC) was also supposed to be a game-changer that would bring structure to companies’ insolvency proceedings through a time-sensitive approach. But it didn't live up to expectations and was bogged down by litigation and amendments. It has already been amended more than 90 times, according to Crisil Ratings.
Until 2023, a total of 7,325 companies had entered the insolvency process, of which 74% of the cases stood closed and the rest were at various stages of resolution. Among the closed cases, just a third benefited from the process—16% of the cases 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 resolutions have become lengthier, and 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 need to be removed, Crisil Ratings wrote in a note in November 2023. The law’s effectiveness and efficiency could be improved through better infrastructure, such as bench strength of judges, digitalisation to connect all stakeholders to avoid information asymmetry, and expanding the scope of pre-pack insolvency resolution for large businesses, the report noted.
The other big gambles
The government has also taken steps to reignite investments and capital flows into the economy. Soon after coming to power, the Modi government moved fast to open several sectors to foreign direct investments (FDI) under the automatic route. The first three years in office saw 37 sectoral relaxations in FDI rules, outdoing the entire six-year run of the Atal Bihari Vajpayee government (29 changes), and equalling the full 10-year tenure of the Manmohan Singh regime, an analysis by the Centre for Strategic and International Studies showed.
The result was record FDI inflows in the following years, though the last two years have been challenging as developed economies lose pace, interest-rate differentials narrow, and geopolitical tensions refuse to die down. However, with China-bound investments no longer as lucrative as they used to be, India has the opportunity 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 largesse the government announced in 2019 does not 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 pile, the growth in net fixed assets, a proxy for capital investments, of the top 500 firms (excluding banking, financial services and insurance firms) has been anaemic of late.
However, some green shoots are visible, with an almost 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 an ongoing Plain Facts series covering the top election issues and the government’s report card after nearly 10 years in power.
Part 1: In charts: Story of polls, freebies and politics
Part 2: Why low unemployment rate hides the full picture
Part 3: A decade of flip-flops on farmers’ issues
Part 4: Inadequate government funding keeps healthcare, education in crisis mode
