Thursday, December 28, 2017

Thoughts on NCLT and GST

The two biggest economic reform events in India in 2017 have been the roll-out of the Goods and Services Tax (GST) and the operationalisation of the Insolvency and Bankruptcy Code (IBC) through the National Company Law Tribunal (NCLT). A few observations on both. 

On GST, the government faced two challenges. One, achieve consensus among States through protracted negotiations involving give-and-take so as to get the Parliamentary approval. Two, operationalise GST among millions of enterprises through a very intrusive IT solution, the vast majority of whom had never used such systems.  

Both these meant that the best GST policy design and implementation plan was off the table. The challenge was to negotiate and ensure the most satisfactory second-best solution. 

In a raucous democracy with high-stakes negotiations conducted in full public glare, that too in real-time and at frenetic pace to meet an imminent deadline, and given the confrontational collective attitudes and behaviours of all parties concerned, the government cannot be faulted for prioritising the achievement of consensus to get legislative nod over the purity of the GST design. After all, nothing about the design is set in stone. 

The implementation plan, while largely a bureaucratic exercise, is critically dependent on the design. When the design features were subject to negotiations till the last minute, the challenge of incorporating the changes, and testing and validating them in very aggressive timelines becomes formidable. In any case, as countless examples of such massive project roll-outs show (recollect the chaotic roll-out of the Affordable Health Care Act insurance exchanges in the US), the challenge is not so much to get the best solution out, but to respond swiftly to emergent challenges and rectify them at the earliest. The initial few months of adoption chaos is par for the course. 

A very active GST Council has been consistently refining the GST design elements since its roll-out. Given that these changes have to be incorporated into the IT system, almost in real-time, the implementation challenge looks even more daunting. 

I am not well-placed to comment on the basic software design features (not related to emergent GST design changes), including ease of use for the largely IT illiterate users, of the GST solution or on the implementation processes. On the former, given that one of India's leading software companies has been in charge of its development for a long-enough time, I would be inclined to hold them responsible for such technical failings. On the latter, we need to examine the robustness of decision-making and process protocols, within the implementation Secretariat, as well as engagement with State Commercial Taxes departments. Was the commitments made for incorporation of GST Council decisions into the IT solution based on judgements that accounted for technical considerations? The bureaucracy cannot absolve itself off the blame on failings in these areas. 

It would be very useful to study, compare, and learn from the decision-making protocols and processes associated with Aadhaar and GST, the two big IT solution roll-outs in the country's history.

More changes on the GST design features are on the anvil. In any case, a year-long iterative process and an implementation stabilisation period of 12 months is not at all unreasonable for such roll-outs. The verdict on the whether GST roll-out was done well or not will have to wait till then. 

My initial reaction after the disastrous first case resolved under the IBC was one of dismay. But the government reacted swiftly to make changes to limit promoters gaming the resolution process and gaining control through the backdoor, including prohibiting promoters with non-performing loans for more than a year from bidding with resolution plans. One can argue that those changes could have been easily anticipated while framing the original regulation and that the response in terms of completely shutting out promoters, and not just "wilful defaulters", from even placing proposals before creditors is too restrictive

On the former, I am sympathetic. But on the latter, I am not sure whether India's corporate eco-system is mature enough to responsibly engage with such flexibility and not abuse it. Any regulation is a trade-off involving flexibility that can be embraced or abused. A consistent feature of India's business landscape, across sectors, has been the egregious gaming of regulations, not so much at the margins but by large and responsible sections of corporate sector. In the circumstances, the standard bureaucratic response has been to err on the side of caution with restrictive regulations. The universal voucher reconciliation requirement or the Anti-Profiteering Agency in case of GST are examples. I feel that while reasonable people can agree or disagree on the specific set of restrictions in each case, it is important to appreciate the bureaucratic line of thinking in such cases. 

As Livemint reports, the IBC appears to have already triggered some changes in the behaviours of errant promoters. That is welcome news. And I feel this deterrence taking root and shaping debtor attitudes, could become the biggest achievement of this reform. But on the substantive part of resolution, I foresee challenges ahead with the capacity of the system to execute the resolution process with fidelity and that of the market to absorb these transactions. I foresee challenges and struggles. 

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