In the context of the death anniversary of our former Finance minister Arun jaitley, the need for reforms in GST and IBC is in news.
Issues with Structural reforms : GST and IBC:
Although faulting GST for poor revenue performance is unfair because revenues have suffered from very weak economic growth and those rate cuts; today, the GST Council is plagued by a trust-deficit,
- Compensation issue: Compensation payments to states started getting delayed since October last year as GST revenues started to slow down.
- The Covid-19 pandemic has widened the gap, with GST revenues declining 41% in the April-June quarter.
- Collections not growing at the rate of compensation: While the 14% growth rate in tax revenue has been compounded over the base year 2015-16, collections have remained around the same level for two years.
Other challenges :
- NPA crisis: More than 2.4% of total loans in India’s banking system were under stress on top of the 9.6% debt ratio as of June, 2019 the highest among major economies.
- The RBI’s February 12 circular ensured that wilful debtors were actually sent to the bankruptcy courts in a rules-based, timely manner under Insolvency and Bankruptcy Code.
- Missed deadlines under IBC:
- NCLT and the courts are not strictly adhering to prescribed statutory timelines.
- Recent estimates peg losses to banks’ income at about Rs 4,000 crore primarily due to pendency in the resolution of the original 12 major insolvency cases that RBI had referred last year.
- The idea of “Stigmatised capitalism” led the government to disallow defaulting promoters from the auctions because the public formed a negative perception of the Indian capitalists.
- In 2019, the Supreme Court trashed the February circular, on the procedural grounds that the RBI had over-reached its mandate.
How to smoothen out these issues?
- The government needs to restore trust between the Centre and states unconditionally.
- There should be three rates with no cesses.
- Revamping the IBC, by allowing promoters (except wilful defaulters) to be part of the resolution process.
- That would make the IBC less vulnerable to judicial pendency, expedite resolution, and also help maximise value from assets.
- Inviting consultations on the idea of ad Banks: The government could recognise that the power and real estate sectors cannot be handled through the IBC. Instead, bad banks should be established to resolve these debts.
The debate of IBC versus bad banks should be set aside. They should now be seen as complements, not substitutes as they were earlier.