Wednesday, February 21, 2024

US corp pledge elusive,Bad bank is expensive

By Nagaland Post | Publish Date: 9/26/2021 2:31:00 PM IST

 The visit of Prime Minister Narendra Modi to the US has tried to kindle hopes in an economy that needs investment but the American companies yet have not given any firm commitments at the meetings with corporate CEOs.

India has taken many steps to bring in reforms through an asset reconstruction construction company (ARC) or the bad bank, lower interest rates, networked businesses and chain of roads. 

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The Prime Minister held bilateral meetings with US President Joe Biden and Vice President Kamala Harris. He also met his Australian counterpart Scott Morrison and Japanese PM Yoshihide Suga. PM Modi also participated in the first in-person Quad meeting after COVID-19. He also held meetings with five global CEOs for potential investment in India on Thursday.

Some companies like Qualcomm has investments wireless modem, digital media networking, dairy transportation to defence. Now PM suggests them to invest in hi-tech sectors and measures to strengthen innovation ecosystem. Since the Qualcomm is in India since 1996, it may continue to increase its operations but that would be its business decision. General Atomics, which opened its first office in India in 2018, is making significant contributions to deepen India-US defence and security cooperation. It is working with both governments in an effort to provide India with the latest defence systems and technologies. It has also partnered with Indian companies to develop solutions for Indian defence as well as capacity building.

Investments in real estate too are always lucrative. Blackstone has so far invested $ 15 billion in real estate, private equity, real estate, education, fashion, packaging and housing finance. It would continue to do so as per the meeting with its CEO Stephen Schwarzman. 

Blackstone Real Estate Fund is said to be the largest owner of commercial real estate in India. The company played a key role in launching India’s first real estate investment trust (REIT) along with its partner Embassy Group in 2019 and has since then launched two REITs in the country. 

The Quad is symbolic multilateral body. It provides a platform to seek cooperation from like-minded countries on issues like ensuring respect for territorial integrity, sovereignty and peaceful resolution of disputes. It is a kind of united front to check the unceremonious and belligerent activities of China. As US President Joe Biden says it plans to open up to build a free Indo-Pacific. The Quad leaders agree to scale up collective strategic cooperation. It is gaining momentum but still China could not be contained to the extent it is planning. 

There may be gains in future. As of now it is expectations amid not so good situations in the domestic arena. The country’s non-performing assets increased because of not only the business cycle but also for many underwritings. Various steps like taming inflation, the Insolvency and Bankruptcy Act, Real Estate Regulatory Act, and GST did not add to the desired growth. These have shaken the system and market confidence. The rules are more stringent and do not help the people. The foreign investors though may be keen also have apprehensions, which partially the scrapping of the retrospective taxation may help.

Corporate tax rates were cut but it ignored the pivot the individual. His taxes peaked during 2019. It hit the basic capacity of individual to ride through a crisis pandemic situation. At 42 percent plus various cesses, India has the highest tax rates. The gestures by the foreign countries would not be enough to bring that confidence back. It would be welcome even now to cut the income tax rates. It would boost the individual’s capabilities and benefit the whole economy as he consumes more.

The lower interest rate is playing havoc along with tax deductions on deposit hedging against inflation that interest accrual does. It affects the developmental process. To accelerate development, the interest rates must be lowered. Economic development is a complex matter. It cannot be done merely by the government but needs involvement of all – businesses and the public in their various sphere of activity. The pattern may be the level of cooperation and social discipline seen in ASEAN – South East Asian nations. The country needs to ponder how the entire system is revamped.

The new ARC or the bad bank with the limited government guarantee will remove Rs 22.14 lakh crore ($ 30 billion) NPAs from the system. Since now it will be now under one entity resolution would be easier, it is being said. Bad bank is not all virtue. It started in 1988 with Mellon Bank, which created bad bank to hold $ 1.4 billion bad loans. Others who have it are Swededm following Swedish bank crisis in 1992, UK, Germany, France, Finland, Indonesia and Belgium and many others. The US sub-prime mortgage crisis has been one of the worst global tragedies.

The world experience sees bad banks having excessive and hidden fees, funds or cheques bounces, most expensive debits, loyalty means virtually nothing, large errors and mistakes and failing to honour the promises. Though it separates the good funds from the stressed, it has not been a solution to the NPA crisis. It may reduce bail outs but it is not ruled out. It can create a new kind of market in dealing with stressed loans but there are apprehensions that asset buyers may resort to harsh unethical methods.

In a difficult situation, new methods are likely but it also has to be remembered that all Euro-US models of capital market should not be copied as the financial literacy is poor here and even in the most developed countries. Moreover, Indian society is far more complex and heterogeneous. A complicated system may not be a proper solution. Hiving off bad assets may be practical but settling those or reselling those for realization of dues is not easy and would have many complications as each of the cases are different. True, the nation will chart out its course. Setting the new course is not easy and none as of now has a clear idea how it would function.

The country has to balance critical situations with well-thought of measures. Demonetisation had done lot of harms and had given a jolt to the economy.  These new steps may have the capacity to give further jolts. While cajoling for foreign investments is a good idea along with make in India, but a self-sufficient amanirbhar economy would need much more.

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