India needs a new round of bankruptcy reform that won't stiff creditors

 Political constraints have never allowed India's public institutions to save capitalism from powerful capitalists, something that tough bankruptcy law was supposed to change

Five years ago, India came up with a legal answer to its perennial economic challenge of rescuing the money stuck in zombie firms. Unlike China, which has the cushion of high savings, India’s inefficient use of limited domestic capital has meant a chronic inability to put its swelling ranks of youth to work. After toying with the idea for more than a decade, the solution New Delhi hit upon was a modern bankruptcy code.
The numbers have been a mixed bag. According to an analysis by REDD Intelligence, of the 4,300-plus stressed debtors that have been taken through the 2016 corporate insolvency law, 48% were liquidated, half of them under 314 days. Of the 13% that got sold to bidders, half exited bankruptcy in less than 425 days. These, as the REDD researchers note, aren’t bad outcomes, considering that wait times previously were five years plus.

However, if the insolvency law did indeed lead to the timely extraction of meaningful sums, one should also see redeployment of credit in new ventures. The evidence on this front is weak. At 6%, loan growth is anemic. Companies don’t want to borrow even at negative real interest rates; corporate leverage is at an all-time low of 0.46 times equity, according to the Boston Consulting Group.

Incomplete bankruptcy reform isn’t the only reason Indian banks aren’t lending more to new firms, choosing instead to finance unsecured personal credit, which doesn’t create any more new jobs. Over the past year, it could be seen as a confidence issue. As a deadly second bout of the pandemic recedes, firms probably need assurance that the economy won’t be hit by lockdowns again. That would require a far greater proportion of the population to be fully vaccinated than less than 5% at present.