Political Economy

M.M. Joshi-led Panel Summons Arvind Subramanian, Hasmukh Adhia over NPA Crisis

The estimates committee, which examines the efficiency of proposed government expenditure, is likely to probe the magnitude of India's bad loans and the issue of wilful default.

New Delhi: The estimates committee of the Lok Sabha, which is headed by senior BJP leader, Murli Manohar Joshi, has summoned outgoing chief economic adviser Arvind Subramanian, finance secretary Hasmukh Adhia, deputy RBI governor Mahesh Kumar Jain and economic affairs secretary Subhash Chandra Garg over the burgeoning non-performing assets crisis in India’s banking system.

In the past, Joshi headed the public accounts committee (PAC), which brought out a scathing report on the 2G scam.

The estimates committee, on the other hand, examines the efficiency and usage of proposed government expenditure of taxpayer money. In this context, sources with knowledge of the matter say that Joshi is likely to follow a non-partisan approach in examining the magnitude of bad loans plaguing the financial system.

Of particular significance is the invitation to Subramanian, the outgoing chief economic adviser in the finance ministry, who is known to be candid in his analysis of the economy.

The Wire has learned that the panel’s summons sent alarm bells ringing in the finance ministry, which is currently being helmed by Piyush Goyal, even though erstwhile finance minister Arun Jaitley continues to strongly articulate his views on various policy issues.

The Joshi-headed parliamentary committee will examine the issue of non-performing loans (currently over Rs 10 lakh crore) at a time when the NDA-II government seems to be struggling with the sheer scale of the problem. The NPA crisis has in part become quite difficult to manage because of the Centre’s delay in addressing it.

As India heads into general elections next year, the latest RBI report on financial stability says that by March 2019, the bad loans in the banking system will rise further to 12.2% of outstanding credit from 11.6% in March 2018. This shows that the problem is worsening and the BJP is in a fix because some of the big corporate defaulters, especially in the infrastructure space, are also big funders of elections.

These circumstances have sparked suspicion that big corporate defaulters may get a breather in the run-up to the 2019 Lok Sabha polls. The recent move by acting finance minister Piyush Goyal to set up a special asset management company (AMC) to resolve the bad loans of the power sector (about Rs. 2.5 lakh crore) is seen as an attempt to provide relief to some powerful business houses whose power projects are already in default and, as per the central bank’s new guidelines, would have to enter bankruptcy proceedings by October 1.

Whether the newly-created AMC can rescue these businesses from going into bankruptcy proceedings by October is a million dollar question.

Chief economic adviser Subramanian said in an interview last week that he was not clear how the recently-created AMC would interact with the bankruptcy court procedures already in place which the NDA-II touts it as one of its biggest reforms. Will they work in tandem or work against each other?

Subramanian’s doubts are shared by many other experts who think the Insolvency and Bankruptcy Code (IBC) had brought in a special legal framework that enabled lending institutions such as banks to take over a company from its defaulting promoters.

However, the AMC mechanism, created by the interim finance minister Piyush Goyal, appears to give promoters some reprieve.

These are some of the complex issues that the parlimentary committee may look into. The panel may also go into the issue of wilful default by promoters, which makes it legally possible to seize their personal assets. So far very few promoters have been declared wilful defaulters.

A wilful default occurs when the loans raised for a specific project are diverted elsewhere. This is very common among family-owned big business groups.

There are cases currently being pursued by the finance ministry against many power companies which have allegedly diverted funds abroad by over-invoicing power equipment imports. These investigations must be kept in mind while considering how the bad loans of these companies should be resolved.