The relatively new corporate bankruptcy law passed by India, which now stands suspended for a year as far as admission of new cases are concerned, due to the pandemic, is designed to allow companies to get back on their feet if they are unable to come out from the financial abyss they might have inadvertently dug themselves in their normal course of business. In other words a reset of their business, and while they do that, the law actually protects the company for a limited period of time from financial creditors pouncing in a free for all manner on the company’s assets.
Financial stress can be due to many reasons, technological disruption resulting in loss of demand of company products or temporary demand destruction due to external factors which the company has no control of. The solution could be for companies to reinvent themselves or to dig in and wait it out for the storm to pass, like the current health emergency. Add to that India has another peculiar problem of frequent changes in government rules and complicated regulation to suit one party at the cost of the other, which have forced many companies into bankruptcy.
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Companies that lose revenue either suddenly or over a period of time can still manage to turn around provided their current or projected revenues are more than their expenses. Expenses could be restricted by cutting costs which are controllable, but there are some expenses once the company commits, they might have very little control upon, for example ‘company debt’. Companies that usually go through bankruptcy are those who don’t generate enough revenue to service their debt, or have no proper visibility to pay the principal amount.
Goa seems to be in the same exact position bankrupt companies are, as far as finances are concerned, with the only difference being that Goa is a state and not a company. Apparently excess debt taken by previous Goan governments is coming to bite us and if we plan to come out of this rut than we will have to reset the way the government manages its finances. No point using the tax-payer money in only servicing debt, we will end up using all taxpayer money in paying only interest to the banks or financial institutions that lend us money, with no sign of the overall debt reduction. It is time for Goa to bring all financial creditors to the table and renegotiate the loan terms in this falling interest rate scenario. Not very wise to suddenly stop payments to creditors because that will be seen as default by the state, but it can be used as a tactic to renegotiate its liabilities. We cannot deal with this crisis with incremental improvements, but some out of the box thinking, even if it means a reset.
This pandemic has given a jolt to Goa’s revenues, we understand that, and we would be in a better position to handle the crisis if we did not have such a huge debt pile. A cash surplus government would be able to take its own time in unlocking the economy and even compensate Goans who have lost their livelihood during this period. The government going back and forth on the lockdown is because it wants to start the economy with an eye to mop up more taxes with the servicing of debt sword dangling over it. Turns out Goa has spent much more on capital expenditure than we could possibly chew and therefore are unable to handle the downturn.
True, Goa is a state and in no comparison to a private company, it can behave like tax terrorists and tax the citizens left right and centre, bolster its revenues and get their finances in order, but is that even ethical or possible when even the citizens are taking a financial hit in this pandemic. Or are we secretly hoping big brother in Delhi will waive some big ticket loans and bail us out from the financial mess. That explains why Goan politicians suck up to every small fry that arrives in the State from Delhi and why decisions about Goans are made directly by Delhi.
For example Goa’s Chief Minister along with the Health Minister did an excellent job in handling the health crisis in the initial phase, only to be later on coaxed or maybe even forced to open the economy by Delhi and thereby expose Goans to the infection. If the debt sword was not so huge the Chief Minister could have warded of the pressure from Delhi and refuse to open the economy. Don’t go by the Governor pulling up the Chief Minister on the handling of the crisis, he is actually trying to neutralise the positive media coverage the Chief Minister received in the initial phase by the Indian media for doing a good job. It is no secret that his party will never allow any Chief Minister from Goa or for that matter any other states to perform and be a worthy successor to the top office of the country. It’s just become a one man show.
The Chief Minister must therefore realise that his main priority should be to serve the people of Goa and don’t have big aspiration to play a long innings in the office. Sometimes a short stint in the office can make a lasting impact on the state, compared to someone glued to the chair with the thought that there can be no replacement. This pandemic has shown Delhi cannot take uniform decisions for the entire country and that decision making has to be completely localised. To argue and protect the interest of the state we will have to get our financial position in order. Renegotiating our liabilities is just a start and along with that many hard measure will have to be taken.
A company going in the process of bankruptcy usually ends up with the previous owner losing control of the company to the new owner with the highest bid. Reminding again Goa is not a company, but if we don’t have a plan to settle this humungous debt we might end up having new owners.
(Plastino D’Costa is a business consultant)
