Before the Bankruptcy Code, lot of businesses were playing coin toss with the banks, and that imposed a a significant cost on the economy, said Krishnamurthy Subramanian, Chief Economic Adviser (CEA), Government of India, here on Friday.
Speaking at the “Industry Future Forward” summit organised by the Confederation of Indian Industry-Southern Region (CII-SR), Subramanian said that such defaults have resulted in high cost of capital, because the banks’ credit spread are driven by “anticipated probability of default” and “loss given default”.
“Even if you have few bad fish in the pond, all the fish are thought to be bad,” Subramanian said, and added that banks have put the anticipated probability of default on those without a credit record, primarily the small and medium firms.
Noting that the attitude of the companies have changed after the Insolvency and Bankruptcy Code (IBC), Subramanian said borrowers are now coming forward to settle their dues, fearing loss of control over their business.
Highlighting the credit culture that prevailed in India for a long time, the Chief Economic Adviser cited the “doctrine of pious obligation” from the Hindu law, under which sons are held liable to discharge their father’s debts based on religious considerations.
On the state of Indian economy, Subramanian said that the average annual growth recorded in the last five years is higher than the growth rate recorded under any other government since liberalisation.
“We have recorded an average growth rate of 7.5 per cent despite slow credit growth and headwinds against globalisation which dampened our exports,” said Subramanian. Referring to the recent controversies over the GDP data, Subramanian said: “Given the number of touch points for policy in India, it is very hard to create a narrative that is far from the truth.”
He also lauded the Goods and Services Tax (GST) as a ‘path-breaking achievement’ of the government, adding that,“No path-breaking change achieves perfection immediately but let’s recognise the fact that it has changed India as one market and not 30-odd markets.”
Speaking at the event, CII President Rakesh Bharti Mittal said that the industry body has set ‘inclusiveness’ as this year’s agenda. He also highlighted the need to engage the youth through various employment opportunities by launching vocational training centres at the school-level. Mittal also suggested leasing out farm lands to the private sector for higher agricultural production.
Source: Business Line, March 30, 2019