The liquidity crisis is in part due to delay in payments to businesses. A fresh infusion to clear dues can boost sentiment and stimulate growth
During the past few weeks, there has been a flurry of activity on the economic front, with the announcement of a slew of measures designed to re-ignite growth. While these are welcome, the time for business as usual has passed. A mandate with decisive changes which fundamentally change the direction and trajectory of growth is called for. The recently announced corporate tax cut is envisaged to provide an impetus of growth of the Indian economy as well as boost ‘Make in India’ initiative. It is an indication that the government is determined to resuscitate the economy, which is a good signal for India Inc.
India is a country driven by sentiments and the promise of a better economic future. Much has been accomplished on improving the environment for business and entrepreneurship. During the last few months, the clouds of uncertainty, combined with the slowdown in the economy, have dampened this sentiment. Unless the sentiment for growth becomes positive, all other measures will not have the needed impact.
Delay in payments
A critical factor impeding growth is the absence of liquidity where its needed, along with uncertainty towards realisable returns from new economic opportunities. Paradoxically, businesses with excess liquidity prefer to park capital in high-yielding deposits rather than deploying it in long-gestation projects where the risks are much higher, but the realisable returns are uncertain. This is compounded by the uncertainty of collecting payments, which severely impacts cash flows and debt repayment obligations.
India suffers from a very poor culture of payment and we have the worst record in the Asia Pacific on delayed payments with respect to committed dates. Government payments are mostly delayed, as a result of which downstream payments to sub-suppliers have a contagion effect. The record of the private sector is no better, with payment delays being the biggest cause of angst for most entrepreneurs. The government has amended the laws where MSME payments cannot be legally delayed beyond 45 days and a mechanism for redressal has been set up. This suffers from the critical flaw, in which the balance of power is almost always with the government or the private buyer. MSME companies are hesitant to approach this redressal mechanism as they risk the denial of future orders once they make a complaint. This spiral of delayed payments results in higher purchase prices as the penal interest costs are factored in. Globally, our reputation for poor adherence to payment terms and poor enforcement of payment defaults impacts our ease of doing business ratings.
Due to their sheer size, MSMEs are the worst affected due to delayed payments. They have a very small window — or no window at all, at times — to cover up the financial shortfall, considering the high cost of borrowing and less robust credit rating.
The government needs to come with a ‘Big Bang’ reform of cleaning this culture of poor payments. The RBI today is flush with reserves which are deployed in almost zero interest foreign bonds. Also, global funds are available at very low rates.
The government should create a payment facilitation fund of ₹3,00,000 crore. Of this, ₹1,00,000 crore should be for the Central government, divided into equal amounts for the State governments and the PSUs. The government can then use the mechanism of TREDS to clear all overdue payments of Central and State governments and PSUs with limits for each. The release of ₹3,00,000 crore of due payments into the economy over the next 60 days will result in an extraordinary change in sentiment and stimulate growth.
Many more companies will be enthused to work with the government resulting in lower prices. The release of this large infusion to the economy will have an immediate and lasting impact on both consumption and investment.
The cost of this measure will be around ₹12,000 crore annually, assuming the government will now pay immediately after the work is completed and certified rather than after 6-9 months, as per the present practice. Since the world is awash with liquidity and most government bonds are now at sub-zero yield, this cost of borrowing for the government will be insignificant compared to the benefits.
This one measure will transform sentiments, improve ease of doing business and bring a culture where payment terms are respected and held to be sacrosanct. The payment facilitation fund can be either a balance sheet obligation or be monetised to be paid over the next five years from improved tax collections.
A significant cause of NPAs in the banking sector are timing mismatches in payments which can also be significantly reduced. Many companies, which otherwise are healthy, have become sick in the past few years because of delayed payments from their customers. Several of these can still be revived if they receive their due payments in time.
The strength of this government has been to take bold measures along with the extraordinary trust enjoyed by the Prime Minister. An announcement of the PM that the government is reforming and making swachh its payment systems will lead to a transformation in business sentiment. We should take the challenge to improve our performance on delayed payment ratings where a promise to pay on a particular date is indeed an article of faith.
Globally, sovereign borrowing costs are always the lowest and its credit ratings are always the highest compared to any private entity in that country. It is time this trust is respected and practised.