Should we water a plant essential to our sustenance?

 

'To Bail' or 'Not to Bail'

One of the main issues in economics is the extent to which the government should intervene in the economy. Some economists may argue that the government should intervene with the free market and save failing businesses of a large size that through failure can send a recessed economy into a depression. Others are against the idea of propping up struggling businesses with government bailouts and might argue that the bailouts will only push the country into further debt and more importantly, why should the taxpayers help a mismanaged company? 

In April 2020, RBI released the information in response to a petition filed under the Right to Information (RTI) Act that said Indian Banks have written off outstanding loans of top 50 wilful defaulters amounting to Rs 68,607 crores till September 30, 2019. A "wilful defaulter" is the one who does not repay despite having the capacity to pay, divert, or siphon-off funds. So is this argument to bail out the companies on the verge of bankruptcy justified? 

In this article, we will discuss whether bailing out is the right option for the government to help companies from bankruptcy, and if yes what should be the parameters.

In finance, bailout is defined as an act of giving financial assistance to a failing business or economy to save it from collapse. Recently, the Indian government has seen some big players in telecom, aviation, banking, and real estate that have sought a bailout. Also, the government has been taking some serious steps to help the companies and keep them afloat. We have seen that the bailouts in the case of banks(e.g. Yes Bank) are not uncommon but the circumstances are very different for each of them. In March 2020, RBI superseded the Yes Bank’s board and appointed as an administrator, Prashant Kumar, who was serving as CFO & Deputy MD at SBI and proposed a reconstruction scheme under which SBI could take a maximum 49% stake at a mere Rs. 7250 crore in the restructured capital of the bank. 

There are a few factors that justify governments' interventions one of which is a presumption on the part of the public, who deposit their money with banks, that the regulator (RBI in the case of banks) has ensured the adherence of procedure. Does this mean every private player producing goods and services in this competitive market be treated the same way as banks?

This tweet from Mr. Sajjan Jindal, Chairman & MD at JSW group, came after the telecom carrier reported a heavy loss of Rs 25,460 crore for the June-end quarter. 

Some analysts think that any steps are taken by the government towards a financial bailout of Vodafone Idea ultimately won’t be enough for the struggling telecom to compete effectively against Reliance Jio Infocomm and Bharti Airtel. Vodafone Idea faces over Rs 53,000 crore in AGR-related statutory dues, and its chairman Kumar Mangalam Birla has said the company will shut down without government or judicial relief. Now, this makes the bailout game much crueler as competitors may even consider getting Vodafone Idea to go into bankruptcy on the chance that it may be able to repurchase the rump of the business. 

A lot of modern economic management is about managing expectations, as expectations can often be self-fulfilling and therefore, measures such as capital injections or government intervention can help in stabilizing sectors through difficult periods. While government intervention is required from time to time for free markets to truly remain free, some of the arguments for government intervention in the free market economy are:

• 1. Maintain law & order
• 2. Raise taxes
• 3. Protection of environment
• 4. Regulate labors market
• 5. Macro-economic stability
• 6. Reduce market failure
• 7. Reduce inequality

With the businesses running smoothly in a strong economy, disposable income is high, unemployment is low and consumer confidence prompts people to pump their money back into the economy through the purchase of essential and nonessential goods and services, thus helping the GDP to grow. Therefore big businesses play a huge role in the development of a nation. Without government intervention, firms can exploit monopoly power to charge high prices to consumers and pay low wages to workers. In this case, we would completely agree with the above tweet by Mr. Jindal, because without government intervention, we are liable to see the growth of monopoly power. Therefore government intervention can regulate monopolies and promote competition, promote greater equality of income, which is perceived as fairer.

Government intervention in Macroeconomy

During recessions, there is a sharp fall in private sector spending and investment, leading to lower economic growth. If the government further reduces its spending at the same time, there is an even bigger fall in economic growth and collapse in confidence.
The macroeconomic objectives for the government include, but are not limited to:

• 1. Low Unemployment
• 2. High but sustainable economic growth.
• 3. Low Inflation
• 4. Minimizing current account deficit

Ideally, there is no real model of a society that runs in the absence of government intervention. Therefore, one must evaluate the cost of the lack of an intervention with the cost of an intervention. In other words, the cost of the bailout shouldn't be bigger than the cost of the failure. Some "too big to fail"  businesses have paid their way and helped the government operate. So, does it imply we should socialize losses and privatize profits? Of course not! Any such bailout must be designed in a manner that ensures the recovery of public funds once the company starts generating profits.

Biting the silver bullet and going ahead with the bailout in the interest of people and economy may be necessary at times, but they must always be the last policy intervention. However, whenever a bailout it necessary it must be adequate and swift to send a strong signal to everyone. Lastly, the government should also focus on improving the regulatory frameworks that accommodate the dynamic economy as every failure is a new learning!