Every single industrial association representing private enterprises in India has sought government assistance to tide over the pandemic induced economic lockdown. The central government has promised to help and is working on the mechanisms. In the US, huge sums of public money (taxpayers') have already been given to private industries as grants (no repayments) and loans (interest rate of 1%).
The clamour for public assistance raises questions about the post-1970 neoliberal concepts that seek to discredit state and public institutions in running economies and champion as well as drive private sector growth instead. The argument is that the private sector is inherently more efficient.
There is, however, little historical evidence, lived experience, or global studies to support this argument. Like many other neoliberal (radical right) constructs, this one too hides more than it reveals. (For more read Deconstructing Neoliberalism IV: How neoliberals won the world but India can ill afford their economics)
The clamour for assistance is an encore of the Great Recession of 2007-08 when private financial companies were bailed out on pleas such as "too big to fail", ignoring the fact that those very big private companies had caused the crisis in the first place through reckless business practices. The 1929 Great Depression too had been sparked by similar reckless behaviour.
Private sector thriving on public bail-outs
To many the maxim "privatisation of rewards and socialisation of risks" or "privatisation of profit and socialisation of loss" may seem malicious, but there is more historical evidence and lived experiences to validate it.
In April 2020, economic historian and author Dirk Philipsen of Duke University drove home the point bluntly in the US context.
In an article on April 24, Philipsen wrote: "...without massive public assistance, late-stage extractive capitalism, turbocharged by private interest and greed, would long be dead...Boeing, Goldman Sachs, Bank of America, Exxon - all would be bust without public bailouts, tax breaks, and subsidies. Every time the private system works itself into a crisis, public funds bail it out - in the current crisis (following the pandemic), to the tune of trillions of dollars. As others have noted, for more than a century, it's a clever machine that privatises gains and socialises costs."
Philipsen also reminded how once these private companies were back up and running, "they don't hold themselves accountable to the public who rescued them" and since the 2008 bailouts at Wells Fargo, American Airlines and AIG, companies that have been rescued often go right back to milking the public".
By no means is this an individual's observation. It is a matter of common knowledge. Nobel laureate Joseph Stiglitz has been repeatedly writing and explaining that the root cause of a pro-private policy is due to the fact that their money power translates into political power in the money-driven politics of the US.
This comes at a cost of ordinary citizens whose welfare is the primary job of elected public authorities. (For more read Deconstructing Neoliberalism III: Why neoliberalism calls for a rethink)
Look at some of the COVID-19 relief packages the US has announced.
Under the CARES Act of 2020 passed to address economic disruptions caused by the pandemic shutdown, the US gave $32 billion "grant" (free-money) and another $29 million as loan (at 1% interest rate) of public money (taxpayers') to big aviation companies. Now the airlines are seeking another $32 billion of public assistance.
Some of the biggest airline companies of the US spent $90 billion in stock buybacks in the past decade. This made their executives and shareholders a lot richer but reduced cash surplus and financially enfeebled their business.
In 2017, the US government cut corporate tax to boost investment and create jobs. In 2019, a US Congress investigation found that the tax cut was used to buyback stocks worth $1 trillion in 2018, breaking all previous records, instead of investing in businesses and creating jobs. (For more read Reality check: Corporate tax cut unlikely to increase investment or employment)
Under the Pay-check Protection Programme, another relief measure to aid private enterprises to protect jobs, the US provided $349 billion of public money as emergency loans to small private businesses having "no access to capital". An investigative report of the Associated Press (AP) found out that 94 publicly traded large private companies, some with over $100 million in market value, benefitted from it. It wasn't meant for them at all. (For more read Coronavirus Lockdown X: Why it can't be business as usual for India)
In July, another investigative report, by The Guardian, found that at least $3 billion aid was given to "over 5,600 fossil fuel companies" of oil and gas drillers and coal mine operators whose operations impose a high cost by way of air, water, and soil pollution spreading disease and death. A Harvard study has shown that COVID-19 deaths are more common in high air pollution counties of the US. Besides, such operations entail destruction of forests and wildlife habitats leading to a spike in zoonotic diseases like COVID-19.
The Guardian report said its assessment of $3 billion aid could be far less because (i) the US government did not disclose the exact amount but instead listed its range and (ii) the high end of it for fossil fuel companies was $6.7 billion. (For more read Rebooting Economy V: Why healthy environment is critical to fight COVID-19 pandemic)
India's Rs 21 lakh crore COVID-19 relief package consists of just 7-9% of allocations (fiscal spending) for the millions who have lost jobs and incomes due to the lockdown (additional food grain supply, cash transfers, etc.) and the rest are liquidity infusion for private businesses.
India has also announced moratorium on debt servicing and suspended insolvency proceedings for private businesses. Several states have suspended labour laws for three years, like Uttar Pradesh, removing such protections as minimum working hours, payment of minimum wages, etc. to help private industries at the cost of workers.
If India hasn't done more it is because in September 2019 it cut corporate tax by Rs 1.45 lakh crore to promote investment and job creation, just like the US. But unlike the US, the Indian Parliament did not find out what happened to the money saved. Going by the bull-run in the stock markets, the possibility of a part of the money saved finding its way into stock trading can't be entirely ruled out.
(For more on stock market rally read Rebooting Economy I: Why stock market is booming when COVID-19-hit economy sinks)
Following this tax cut, corporate tax rates have fallen below individual tax rates. Now existing private corporates pay 22-25% tax (with or without tax concessions) and new ones just 15% while individuals pay 30% tax above Rs 15 lakh annual taxable income. This turns the foundational principles of taxation - capacity-to-pay or equity and fairness - upside down.
Corporate tax cuts are not US or India specific but a global phenomenon.
An internal study of the International Monetary Fund (IMF), the champion of corporate tax-cuts and private sector growth, mapped the sharp fall in corporate tax in its 2019 internal study - reproduced below - and warning developing countries that this not only undermines fairness of the taxation system and provides opportunity for tax avoidance and abuse but also deprives much-needed revenues for reducing poverty and boost growth. (For more read Coronavirus Lockdown XII: Why the wealthy should be taxed more)
Here is a historic lesson.
During the Golden Age of Capitalism between 1950s and 1970s when both developed and developing countries registered the highest ever GDP growth (3.8% and 3%, respectively) and inequality was lower, the average top corporate tax rate was 70-80% in the US and 99.25-80% in the UK. (For more read Deconstructing Neoliberalism III: Why neoliberalism calls for a rethink)
Private enterprises thriving on public hand-outs
In India, private enterprises not only rely on public deposits in the public sector banks to fund their business activities (this includes almost the entire top brass), but a large number of them also don't pay back even when they can. The RBI calls them "wilful defaulters" - those who don't pay (i) even when they have capacity to pay (ii) diverted loan money for other purposes and (iii) siphoned off the loans.
Their debts are also written off routinely, on an annual basis, as non-performing assets of banks (NPAs), along with those who genuinely fail in their business venture and go bankrupt.
What should come as equally shocking is that going by the global financial company Credit Suisse's 'India Corporate Health Tracker' of August 2019, debts of almost all the big and familiar private businesses (more than 50) are marked "chronically stressed" or with inadequate capacity to pay interest (interest cover of less than 1) for several quarters.
These companies span finance, infrastructure, and construction, telecom, power, metals, textile, energy, and others. Credit Suisse has been saying that the corporate stress remains "elevated" at last since 2017. The lockdown is bound to increase financial stress even more and NPAs are expected to rise further due to the lockdown.
It does say something about modern business operations that even after running successful businesses for decades, India's familiar big names are so precarious in their financial affairs. Or is something amiss? What happened to decades of accumulated profits and wealth? Where is prudence in financial dealings? It calls for a detailed and honest study.
Ironically, every year Indian banks write off loans of private businesses.
It is a deceptive and dishonest game for sure. For one, loan defaults by private enterprises are masked as non-performing assets (NPAs) of banks. By calling it so, the burden and blame shifts to banks, starting another deceptive and dishonest game: recapitalisation of banks with more public money. Between FY15 and FY19, the PSBs have been recapitalised with Rs 2.46 lakh crore of public money.
This is a double whammy. First, public deposit goes into private hands, reducing scope for public investment in growth, and then more public money is ploughed back to fill the gaps in bank balance sheets. The defaulting private companies don't come into the picture at all.
On July 18, CH Venkatachalam, general secretary of the All India Bank Employees Association (AIBEA), released some startling information about the PSBs. His documents listed 2,426 private companies classified as "wilful defaulters" - 33 of them owing more than Rs 500 crore each and 147 more than Rs 200 crore each.
These companies include those run by high-profile and fugitive businessmen Nirav Modi, Mehul Choksi, Jatin Mehta, Vijay Mallya and others owing Rs 1.47 lakh crore to the PSBs.
The documents further revealed that the PSBs wrote off Rs 6.94 lakh crore of loan defaults (NPAs) by private corporate entities between FY01 and FY19. If the write off by private and foreign banks are added (which are part of the Scheduled Commercial Banks or SCBs), the number would go further up.
The SBI accounted for most of the "wilful defaulters" - 685 of them have not paid back Rs 43,887 crore even when they could have. The SBI's 2019-20 annual report reveals that it has written off corporate loans of Rs 1.79 lakh crore during FY17-FY20.
Private corporate defaulters get RBI protection
The banking regulator, Reserve Bank of India (RBI), has been zealously guarding the identity of private corporate defaulters, even those who are wilful defaulters. It braved the Supreme Court's (SC) warnings and even contempt proceedings in 2019, but refused to budge.
The top court's last order directing it to reveal the names of defaulters to an RTI applicant came in April 2019 during the contempt of court proceedings. The court severely reprimanded the RBI for "continuing to violate the directions by this court" and issued a warning: "Any further violation shall be viewed seriously by this Court."
After this, a fresh RTI application was filed in July 2019. Shailesh Gandhi, former Central Information Commissioner, who had issued a series of orders for such information that ended up in the apex court, confirms that the RBI is yet to comply with the order.
In the meanwhile, the RBI pulled out its data on NPAs being written off in 2019. Its latest banking trend report of 2018-19 gives adequate information on NPAs in the agriculture sector and how much is being written off, but not for private industries.
Come to think of it, the Gross NPAs of agriculture sector constituted just 8.6% and 12.4% of the total in FY18 and FY19, respectively, but those of private industries constituted 91.4% and 87.6% for those years. (For details read Reality Check: RBI acts penny-wise-pound-foolish in dealing with NPA crisis)
The following graph maps the two sectors' GNPAs of four years between FY16 and FY19.
Why does the RBI protects private corporate loan defaulters is not a mystery. Here is another aspect.
It is by now well-known that former RBI Governor Raghuram Rajan had given a list of big bank frauds to the central government in 2015 asking for "coordinated investigation", which included firms run by Modi, Choksi, among others. No action was taken for the next three years and both Modi and Choksi ran away in 2018.
The RBI's 2018-19 banking trend report does reveal the annual NPA write-offs in a graph (but no data) - as reproduced below. Taking the average write-offs at 20% of GNPAs for the SCBs during FY16-FY19 (for which data is given in 2018-19 and 2016-17 reports), the write-offs work out to Rs 6.7 lakh crore (total GNPAs being Rs 31.35 lakh crore).
Much else to consider for private sector efficiency
There are several other aspects to consider while examining the efficiency of private sector vis-a-vis public sector.
To its advantage, the cost of many benefits that private sector gets are not counted: tax holidays at the start, tax concessions through the ages, stimulus packages during crisis, virtually free use of public sector assets like infrastructure and human capital (even basic skilling is provided at public expense), allocation of public assets like land (through government acquisition), minerals (until recently given on a paltry royalty, not auctioned), forests, etc. at concessional rates.
Besides, the social and environmental costs of operations that cause pollution and deforestation leading to diseases and deaths are also not counted. The burden is passed on to people and government (healthcare).
To its disadvantage, there is much that the public sector does with taxpayers' money but not counted: building public goods and services (infrastructure, hospitals, schools, colleges and universities), funding all major technological and scientific breakthroughs on which the modern ITC revolution is built (Internet, GPS, touchscreen, Apple's Siri (virtual assistance) and Google's algorithm), taking care of poor and needy during normal times and everyone during calamities like droughts, floods, cyclones, earthquakes and even the current pandemic in all of which the private sector plays a very small role, if at all, without seeking profits (private healthcare for example).
(NB: Primacy of the US experience is warranted because the world has followed in its footsteps in social and economic governance, first after World War II when the reconstruction of war-ravaged Europe began with its money, followed by neoliberal push by the World Bank-International Monetary Fund (IMF) in 1980s when they provided loans to crisis-hit countries like India.)
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