Let failed companies fail

Ram Vilas Paswan's decision to merge the ancient Indian Iron & Steel Co Ltd (IISCO) with the Steel Authority of India Ltd (SAIL) is a particularly glaring example of populism at work.

The IISCO revival story, now decades old, has assumed the proportions of a saga, with farcical episodes""such as the attempt to float a global tender for the company""interspersed with desperate attempts to sell it to private companies.

The foreign companies were more interested in IISCO's coal and iron mines than in reviving its steel mills, which are obsolete. SAIL, too, has shown little interest in undertaking the huge investment required to modernise the mills.

When a private buyer was found many years ago, the state government and the trade unions played true to form and prevented the sale.

At one stage, an inspired BIFR had even issued the government a show-cause notice asking why IISCO should not be closed down. That piece of bravado yielded little.

Under the BIFR restructuring package now under implementation, the company's Kulti plant has been shut down and a VRS of sorts started. But the core problem""the need for a complete revamp of the steel mills""remains.

The company's workers will, of course, benefit from the merger, as will the West Bengal and central governments, which will be rid of a headache. SAIL will bear the cost of relieving that ache.

The IISCO-SAIL merger, assuming the Union cabinet approves it, is symptomatic of a larger problem""a marked reluctance to let companies fail. This fear of failure used to be the prevailing culture both in the private and public sectors, and the BIFR was the instrument used to underwrite that culture. The arrangement suited everyone""workers' jobs were protected, the government gained votes, and promoters did not have to bear the consequences of business mistakes or even outright skullduggery.

The big loser was the economy, because the culture blocked crores of rupees in obsolete equipment and uncompetitive firms. Thankfully, liberalisation has led to a change of outlook in the private sector, and changes in banking laws now make it possible for mortgaged assets to be sold without going through a tortuous legal process.

But even in the private sector, archaic laws have created insurmountable difficulties in the way of closing down companies. Contrast this with the situation in the United States, where filing for bankruptcy is the normal way of swiftly resolving a company's debts, reorganising its assets, acquiring new backers and, sometimes, even re-emerging as a stronger entity.

Sensible rules like these are the reason for the productivity, efficiency, resilience, and innovation that are so much a feature of the US economy.

India needs a culture that recognises that company managements will make mistakes, but society and taxpayers should not suffer endlessly for these mistakes.

Rather, the approach should be to not only get over these mistakes swiftly, but also to create an environment that encourages risk-taking and enterprise. Unfortunately, more than a decade after opening up the economy, we are still to get over our fear of failure.