‘Arthashastra’ is a tome, comparable to the better publicised ones such as Sun Tzu’s ‘Art of War’ or Machiavelli’s ‘The Prince’ (which it pre-dates) and is about statecraft, economic policy and military strategy. It talks about ethics (a term forgotten by our polity), and the duties and obligations of a king, or ruler.
Sadly, an abject failure to live by the principles enunciated in the tome, our public governance today is ‘Anartha’, or a disaster! The primary cause is that public governance is not for the welfare of the people, as enunciated in Arthashastra, and as it should be, but for a handful of cronies.
The State (that is, king) is perpetually hungry for money, a lot of which is wasted and not for public welfare. The State then bends rules to favour its cronies. This greed and cronyism leads to bizarre consequences.
Witness the mess in YES Bank. After the cap on withdrawal limits and supersession of its board, the media wrote articles about why it was a disaster waiting to happen. The bank lent money to borrowers already in stress, based on a stupendous growth in deposits, and issuance of AT-1 bonds (Additional Tier-1 bonds) to institutional and large retail investors.
The question is: if the media could analyse, within days, the risky growth of loans to distressed borrowers backed by a large increase in deposits/AT-1 bonds, both significantly higher than the industry, why is it then that the regulator, the RBI, was unable to so analyse? After all, it gets periodic statements from all banks and is supposed to analyse and monitor these.
In fact, Andy Mukherjee’s article appeared in Bloomberg in January, recommending that the Government end Yes Bank’s theatre of the absurd. He correctly identified, two months before the RBI action, the causes of the malaise.
AT-1 bonds are bonds issued in perpetuity, under which the issuer has to merely pay the interest in perpetuity but not the principal. These bonds are thus quasi equity. Exit for investors is only via the open market.
The RBI announced that 100% of these bonds would lose their money; AT-1 bond holders rank after creditors, secured and unsecured, and prior to Preference shareholders. Axis Trustee, the trustee company, moved the Bombay HC, warning that cancelling 100% of the bonds would impact further issuances of such bonds. The Administrator is talking to holders to work out a deal, perhaps in which holders may take an 80% haircut and convert 20% into equity.
Here is where several questions from Arthashastra emerge.
Whilst RBI assured deposit holders of YES Bank full safety, there is no such assurance for, say, the PMC Bank (which is threatening legal action against discriminatory action) or, for that matter the NSEL and other Ponzi schemes. Why?
Similarly, the Board of YES Bank was superceded immediately, without murmur, but the Board of Financial Technologies, the 100 per cent parent of NSEL, was not, though recommended by the Company Law Board. It successfully launched a legal challenge which CLB could not defend.
Some animals, wrote Aldous Huxley, are more equal than others.
Good public governance calls for the guilty to be punished and the only reason we see so many frauds and failures, is the unwillingness of our Government and of our judiciary, to suitably punish them. The Government which promised to weed out corrupt practices, is not focussing on its ‘dharma’ to protect people from crime and so history is repeating itself.
Instead of good governance, the Government is seeking simply to squeeze, by means fair and foul, every drop of tax revenue. In so doing, it is ignoring the Arthashastra message for a taxation system that is fair and not burdensome. This has resulted in the total mess in the telecom sector, where the definition of what constitutes AGR (adjusted gross revenue) has been stretched to absurdity. The solution is to allow telcos to raise telecom tariffs. In short, the greed of the Government is being paid by the consumers, who once enjoyed the lowest tarrifs in the world.
Similarly fuel. As much as 50 per cent of the retail price of petrol is due to Central and State Government taxes. So, the fall in crude prices is not likely to provide a big relief to consumers, because the Government wants a large bite of the pie.
This is Anartha-shastra.
We are now facing a black swan event of the Covid-19 virus and the whole world is reeling. If ever there was a time when a Government reconsiders its priorities, its polity becomes humble and its actions become humane, it is now.
Else we can forget any hopes of becoming a $ 5 trillion economy.
The writer is India Head — Finance, Asia/Haymarket. The views are personal.