Economics textbooks tell us that when you sign a contract with the government to supply goods, perform a service, or lend money, that contract carries no counterparty risk because the government’s “sovereign risk” is believed to be zero — it will always have the money to pay you. The sovereign cannot default!
The reality in this country is, of course, quite different. Across a range of sectors in the economy, companies have found the hard way that governments can delay payments for various reasons. Any company dealing with the government today (central or state) — whether a micro, small, and medium enterprise (MSME) or a giant Sensex firm — runs the very real risk that it will not be paid on time. And since government contracts are often worth hundreds of crores, these overdue payments quickly add up to a very large amount.
A recent business newspaper report estimated this amount at close to Rs 7 trillion on the part of the central government alone. The report created a flurry of denials and clarifications. In an interview to moneycontrol.com in June, Nitin Gadkari, Union minister for road transport and highways and MSMEs, said the dues from public sector undertakings (PSUs) to MSMEs were around Rs 5 trillion.
There are some well-known black holes — the most discussed is the power sector dues to be paid by state electricity boards to power generation companies. As of end-July this year, that amount, according to the PRAAPTI portal, which tracks payments by discoms, was around Rs 1.17 trillion (a substantial chunk of this money is owed to government companies themselves). As of September, the dues of states to sugar mills were around Rs 15,683 crore. However, state governments themselves are cash-strapped — they can now argue that the Centre has not cleared the full amount of GST compensation due to them.
The source of the problem is that there is no authenticated data on the amount overdue, and its breakdown by ministry or PSU. For instance, news reports say that the National Highways Authority of India (NHAI) owes close to Rs 1 trillion to construction firms and other companies in the roads sector, but it is difficult to verify this independently. The closest to a centralised repository of information on the outstanding dues is the Samadhaan portal of the Ministry of MSMEs, where companies can submit claims for overdue payments. But the amount on the portal is likely just a fraction of what is due. Even Mr Gadkari, in his interview above, qualified his claim about Rs 5 trillion outstanding dues to MSMEs, by saying it was not an official estimate. PRAAPTI, for the power sector, is an exception, and is a model to be emulated.
Information on PSUs and ministries is available from varied official sources such as parliamentary questions, but these hardly give a comprehensive overview. A report has been done by the NITI Aayog on overdue payments by ministries and PSUs but it is not available publicly.
What is needed is a source that regularly updates and authenticates information on payments from the body concerned, without having the finance ministry or the Prime Minister’s Office to prod it for data at frequent intervals.
Surprisingly, the simple solution does not involve any additional information gathering. The government can track invoices raised against departments and PSUs in the goods and services tax (GST) software. GST was introduced on July 1, 2017. Every invoice raised on a government institution is known within the GST architecture. These invoices need to be grouped under relevant institutional heads, and the institution concerned should be directed to update all payments made against the invoices, partially or fully. And presto, we have the full picture of entity-wise overdue payments. What is so difficult about implementing this? Such payments and dues can be tracked on a weekly or monthly basis. Penalties can be imposed for late payments — as these penalties begin to add up, they automatically create pressure on the government department concerned to move fast to resolve the issue.
Even such a simple solution can have major consequences. Given the government’s stated commitments to proactively clear the outstanding dues, this reform will provide a clear check on organisations that are laggards in this regard. It will also be the logical next step following the critical decision by the Cabinet Committee on Economic Affairs last November to clear payments up to 75 per cent of the amount locked up in arbitration disputes between public authorities and bodies like the NHAI, on one side, and private vendors, suppliers, and contractors, on the other, without insisting on bank guarantees.
The problem of non-payment of dues due to dispute, or simply late payment, may not seem a big policy issue, but as a previous Infratalk (December 6, 2019) pointed out, it is precisely such reforms that can have a major impact. This is true especially in the context that the official stimulus announced so far is believed to not have a substantive fiscal component.
It is indeed a reflection of the times we live in that the simple act of releasing payments in time by the government could serve as a fiscal stimulus!
The writer is the chairman of Feedback Infra