ECONOMIC HIGHLIGHTS

New Delhi, 4 November 2005

India’s Great Curse

Budget Must Tackle Sick Industries

By Dr. Vinod Mehta

The budgetary exercise for the next fiscal has started. Though the matter of sick industries is a serious one, it has not been adequately addressed yet. The next year's budgetary proposals should, therefore, seriously address the question of "sick industries" which is one of India's great industrial curses today.  Far from adding to the growth of gross domestic product (GDP) they are in fact eating into it.  How long can this go on?

"India has many thousand ‘sick companies’ that in most other countries would go bankrupt and disappear.  India's system keeps them struggling on for years with subsidies (including cheap power), tax breaks, debt forgiveness and other life support instruments.  Because of this "exit policy", as it is curiously called, assets including workers--which could be more efficiently employed elsewhere go to waste.  Sometimes factories are simply abandoned.  The owners strip them of everything portable and sneak away in the night. People with claims against the firm are left without remedy. Creditors, suppliers and workers-- despite (more accurately, because of) their formidable legal protection--get nothing", The Economist of London once observed.

A few years ago the Reserve Bank of India (RBI) had reported that the total outstanding bad debt of the sick industries stood at Rs 12,474 crore. Today, this figure might be much higher.   If these resources were to be recovered, they could be used to set up power plants and many other infrastructure projects in the country.  But in the absence of any exit policy the scarce resources of the country are blocked for the last so many years.

Moreover, bank loans to such industrial units have become non-performing assets for some of the banks.  There is little production in these units, the machine and equipment lie idle, the labour force is idle but gets some payment for not doing any work, the unit cannot be closed down because of our company and labour laws and these units cannot be taken over by better managements. Look at the sick textile or jute mills. The Government does not have the money to revive them and the workers would not like them to be taken over by another management in the private sector, the result, scarce funds remain locked and assets remain idle. Some special package has been announced for the revival of sick textile units but it had very little impact.

In most parts of the world takeover of inefficient units by healthier units is an accepted norm.  It is for this reason that there is no concept of "sick industry" in the economic literature of most countries; the production units are either efficient or inefficient but never sick; the inefficient units, which are unable to improve their efficiency, are generally taken over by the healthier units or are allowed to close down.  This saves the society from wasteful investment and ensures efficient use of scarce resources.

It is for this reason that from the very beginning of economic reforms both the domestic and foreign investors have been asking for an exit policy, so that if something goes wrong with their investment because of changed investment climate, (changed market scenario etc.) they are able to get out of it with the least loss.

It was hoped that in the absence of an exit policy, the takeover code, which was introduced five years ago, would substitute for an exit policy, which the industrialists have been clamouring for.  It is not that there have been no takeovers in the past.  There have been takeovers in the past, but they are of no significance and have been mainly for the existing profit-earning units and seldom sick units.  And, whatever takeovers have occurred has never been transparent.  It was thought that in the absence of an exit policy the takeover code could be used to nurse the sick units back to health, of course with the change of management. However, the so-called takeover code has miserably failed in tackling the problem of sick industries.

Either the Finance Minister should come out with the long-needed exit policy or make amendments in the existing takeover code and turn it into some kind of an exit policy. In fact, the takeover code if modified and vigorously implemented in the case of sick companies could very well redeem the situation of sick industries. Under the takeover code the inefficient and mismanaged companies should be openly encouraged to be taken over by the stronger companies. 

There is no reason why the ailing Indian Iron and Steel Works be taken over by the existing steel units or by foreign companies? There is no harm if inefficient Indian companies are taken over by foreign companies as it will bring not only foreign capital, latest technology but also modern management practices.

While on the one hand it will encourage all the companies to efficiently manage their business or risk takeover by others, on the other hand it will save the exchequer lots of precious funds; the banks would also be saved from non-performing assets and the workers and employees from shortfall in their income.  No more would the financial institutions be required to write off their bad debts or the Government to contribute from the central budget.  The sick company should be allowed to go to the highest bidder without any interference from any quarter.

It is common knowledge that the primary capital market has totally dried up for the past almost seven years while the secondary capital market is volatile.  The takeover of sick industries may perhaps also have salutary effect on the capital markets and may contribute to their revival. It is now up to the Finance Minister to tackle the problem of sick industries in the shortest possible time and enable the country to redeploy the resources to more meaningful areas like infrastructure development.  Now with the foreign investors showing interest in investing in India, the time is opportune to allow takeover of sick industries by the healthier units.--- INFA

(Copyright, India News and Feature Alliance)