Monday, December 09, 2019

Letting IL&FS fail was a policy blunder

(I return to my blog after more than 18 months. Several preoccupations, both personal and professional, kept me away from it. I hope to be regular hereafter. -TTR)

In September 2018, IL&FS failed. The consequences for the economy have been serious. It's not quite a Lehman moment in that we have not had a recession . But it's Lehman-like in the blow it has dealt to growth. The deceleration in growth - from 7 per cent prior to IL&FS failing to below 5 per cent in the last quarter- coincides exactly with the collapse. I am convinced that the IL&FS failure is the primary factor in the deceleration- never mind the babble about the lack of "structural reforms" holding up growth.

As in the case of Lehman, I believe policy-makers did not quite grasp the enormity of the impact the failure of IL&FS could have. Also, as with Lehman, they were wary of bailing out an allegedly tainted private entity at the cost of the tax payer.

There's a problem that is rather peculiar to our polity.Wherever there is a failure or loss, the media promptly raises the war-cry of 'scam'. That sends the government into a deep freeze. We saw this played out in the case of IL&FS. Whether there was a scam at IL&FS needs to be investigated by due process. But the perception that had been a scam should not have come in the way of a rescue- that was a decision to have been taken solely on the basis of the potential costs to the economy of a collapse.

It does appear that the failure on the part of IL&FS shareholders to infuse capital to deal with liquidity issues that had arisen contributed to the failure of the firm. Whatever the mismanagement at IL&FS, timely infusion of liquidity may well have averted the collapse

More in my BS column, IL&FS was  a Lehman-like moment.


4 comments:

Anonymous said...

What you say versus what I hear
Several preoccupations, both personal and professional, kept me away from it.
- Too many courses floated for PGPs, took too many FPMs to guide, tried my hand in consulting/ research


I hope to be regular hereafter.
- I have been fired :)

Anonymous said...

What you say versus what I hear
Several preoccupations, both personal and professional, kept me away from it.
- Too many courses floated for PGPs, took too many FPMs to guide, tried my hand in consulting/ research


I hope to be regular hereafter.
- I have been fired :)

Bengu said...

Mohan, Nice to see you back blogging! What do you think is the primary cause of IL&FS's collapse? Is it due to fact that the Government forced it to undertake unviable large infrastructure projects across the Hindi Speaking States, where th cost benefit ratios were miscalculated to benefit a few contractors? - Prasad, Salem

The Big Picture said...

Bengu, Good to hear from you! I doubt that IL&FS collapse was because it took up many unviable projects. I believe the problem was mainly one of liquidity. The principal investors, SBI and LIC, did not put in additional equity on time nor were they willing to allow a stake sale. The issues of governance that many have highlighted were, in my view, a secondary issue.

TTR