Opinion Concurrent problems
We should get rid of barbaric colonial legacies,but there are ones more important than convocation gowns.
We should get rid of barbaric colonial legacies,but there are ones more important than convocation gowns. For instance,restriction on Money Bills by Rajya Sabha is also a colonial legacy,though one might not use the adjective barbaric. Even better examples are laws on bankruptcy and insolvency.
Bankruptcy and insolvency are not identical,though the terms are often used synonymously. Apart from anything else,their legislative origins are different. Bankruptcy requires legal determination,when insolvent debtors (individuals or organisations) are not able to pay creditors. Had it been 16th century England,debtors would have been thrown into prison and their families forced to pay their debts. Had it been ancient Greece,insolvent debtor households would be forced into slavery and compelled to repay debts through physical labour. Insolvency means inability to pay debts,without a court of law having declared bankruptcy. In general,barbaric laws on bankruptcy were biased in favour of creditors. It was presumed insolvent debtors were criminals and deserved to be in prison. There were no provisions for voluntary declaration of bankruptcy by debtors. In Italy,banks initially operated on benches (the Latin word bancus means bench or table). When a banker went bankrupt,he broke (ruptus or broken) his bench and we thus have the word bankrupt.
In competition,there must be free entry and free exit. Entrepreneurs who fail must exit and the system must punish the failed enterprise,not the failed entrepreneur. If the entrepreneur,rather than the enterprise,is punished,we kill entrepreneurship. There are assorted figures floating around on the importance of SSI (small-scale industry),although after there was new legislation in 2006,we now call them micro,small and medium enterprises (MSMEs). If entrepreneurship is defined as risk-taking,small farmers and MSMEs display far more entrepreneurship than large-scale corporate India does. Almost tautologically,risk-taking can imply success. But it can also imply failure. It is a separate matter that the educational system,another barbaric colonial legacy,hedges against failure and biases mindsets against entrepreneurship. The London Business School and Babson College produce an annual Global Entrepreneurship Monitor (GEM) and India performs better than one might have expected a priori. This might well be because of negative correlation between educational attainments and entrepreneurship and our low educational outcomes. For small farmers and small businesses,entrepreneurship is a matter of survival,not high-flying corporate strategy. In 2008,an RBI report told us there are 114,132 sick SMEs.
Sick doesnt necessarily mean they have to be liquidated. It might be possible to restructure them. But the point is that when their benches are broken,we break their backs too. About 125,000 people commit suicide annually in India and we are legitimately upset when around 15,000 of them are farmers. The National Crime Record Bureaus classification of suicide data could be better. However,41.9 per cent (2007 data) of victims describe themselves as self-employed 13.6 per cent in farming/ agriculture,5.9 per cent in business and 2.6 per cent are professionals. Around 3,300 committed suicide because of the reason bankruptcy or sudden change in economic status.
But surely we have civilised provisions on exit and bankruptcy the Board for Industrial and Financial Reconstruction (BIFR),provisions in company law and SICA (Sick Industrial Companies,Special Provisions Act) and SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests) Act. Yes,we do. But only if an enterprise is registered under company law 97.3 per cent of MSMEs are proprietorship or partnership firms,not registered under company law,or any law for that matter. High procedural costs work against registration,even if assorted incentives are conditional on registering. In an ideal scenario,all informal/ unorganised enterprises will become formal/ organised and all MSMEs will be registered under company law. But such a transition isnt likely overnight. Informality exists in developed countries too. Besides,even when MSMEs are registered under company law,promoters or directors may have to provide personal guarantees to banks and financial institutions,so that liability becomes unlimited and there is blurring of liability of the enterprise with liability of the entrepreneur.
Whats the problem? When an enterprise is insolvent,it defaults on indirect taxes,electricity,gratuity,provident fund,wages,bonus,employees insurance and payments to banks and financial institutions. While specific legislation differs,in each case default is treated as arrears of land revenue. Precise land revenue laws vary from state to state. But irrespective of state,they are barbaric colonial legacies too. The entrepreneur is picked up and dumped in jail under the criminal provisions,typically under orders from a district collector. De jure,there is some discretion,since arrest and detention are not the only options. However,de facto it becomes the only option,since the mindset of these laws is that any defaulting debtor is a criminal by definition. Such defaulters deserve to be in debtors prison. The first English bankruptcy law was enacted in 1542,under Henry VIII. Lest we forget,Henry VIII was also famous for executing whoever he disliked. Circa 2010,Indian legislation isnt remarkably different,though legislation has evolved in England,the US and elsewhere. Perhaps one should mention that many English debtors fled to the US,such as states like Georgia and Texas,which came to be called debtors colonies.
But lets be fair. Entrepreneurs possess some protection. For Presidency Towns,there is the Presidency Towns Insolvency Act of 1909 and elsewhere there is Insolvency Act of 1920. While the former is marginally better than the latter,one shouldnt really suggest these as credible alternatives. Other than their antiquated provisions (too many to quote),the time consumed through the usual court system is horrendous. Effectively,post-1991 entry and exit has been about large and corporate India. For MSMEs,there isnt an entry policy (restrictions still remain). And there isnt a satisfactory exit policy either. Why hasnt impetus for change occurred? Part of the reason is MSMEs dont have high decibel levels (unlike corporate India) and the concerned ministry has not exactly been in the vanguard of reforms. MSME associations are typically more concerned with lobbying against free entry,rather than lobbying for free exit. Plus we have the Constitutions Concurrent List problem. Entry 9 in the Concurrent List of the Seventh Schedule says,Bankruptcy and insolvency. For understandable reasons,reforms have worked better when an item is cleanly on the Union List or the State List. There finally seems to be a Task Force in the PMO to address the issue,19 years too late. We know the task. What has been lacking is the force.
The writer is a Delhi-based economist
express@expressindia.com
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