DONOR AT LARGE: Finance Minister Jaswant Singh

It could well be dubbed the annual bailout mela. Such is the soporific regularity that bailouts of banks and institutions have almost come to be expected and even seem normal. The truth is, the Indian taxpayer is paying to witness what can only be described as a serial scandal. In fact, when the bailout packages for IDBI and IFCI (estimated to cost Rs 12,000 crore and Rs 9,000 crore) pass through the portals of North Block, the Central Government would have pumped in over Rs 76,000 crore into sick institutions in 10 years.

The UTI -which has been provided Rs 14,561 crore this year-has alone in less than three years sponged a sum of Rs 22,661 crore in cash and credit. Indeed, 2002-3 could easily qualify as the year of bailouts. In less than two months, three institutions-UTI, IFCI and IDBI-would have cost the exchequer more than Rs 35,000 crore.

To understand the magnitude of the expenditure, compare the outlays with a few budget allocations in 2002-3. The Rs 22,661 crore dole pumped in to save UTI's two crore-plus investors is more than the Rs 21,410 crore allocated to the Ministry of Defence for acquisition of new weaponry. And the total bailout package of Rs 35,000 crore this year is a little less than the Rs 38,923 crore the Government has earmarked for food, fertiliser and petroleum subsidies, almost twice the primary deficit and nearly a fourth of this year's Rs 1,35,525 crore gross fiscal deficit.

The Ministry of Finance (MoF), however, contends that the bailouts will not add to the Government's burgeoning fiscal deficit because the packages are in the nature of guarantees to institutions and bonds. But as Ila Patnaik, senior fellow at the Indian Council for Research on International Economic Relations, Delhi, points out, "It all adds to the public debt. When you borrow, you pay back with interest." Adds Jairam Ramesh, secretary of the Congress' economic affairs cell: "The Centre counsels state governments not to go in for contingent liabilities but doesn't follow its own advice."

Simply put, the bailout will add Rs 35,000 crore this year to the Government's liabilities and is more than what the Centre spends each year on poverty alleviation programmes. It is what Rashtriya Janata Dal chief Laloo Prasad Yadav calls "the robbing of Sudama". "When farmers are given subsidies, the middle class wants a debate on expenditure control. Now thousands of crores are being doled out without any debate. Who is paying for whom?" he asks.

There is a growing perception that the poor are paying to bail out the rich. In other words, the Rs 35,000 crore bailout will directly benefit investors in UTI, IDBI and IFCI, but the money will be paid by the taxpayer.

The MoF, however, looks at it differently. A senior MoF official says the "contra-factual" or the cost of not bailing out the institutions proves the case. HDFC Chairman Deepak Parekh agrees and points out that "governments are duty bound to ensure financial stability via a bailout even if the institutions are privately owned". Parekh cites the bailout of privately owned savings and loans institutions by the US government.

To be fair bailouts have been part of the financial system. In recent times, governments in South Korea, Thailand and Japan have bailed out ailing institutions to prevent a systemic stink.

This year, India will spend Rs 35,561cr to rescue three ins titutions, more than what it will spend on the social sector.

UTI: Rs 14,561 cr CONDITION: In the ICU. PRESCRIPTION: Assured schemes to be managed by the Government and NAV schemes to be sold out. SIDE-EFFECTS: Damodaran wants to encash hidden values through strategic sales, MoF insists there won't be distress sales.

IFCI: Rs 9,000 cr** CONDITION: Terminally ill. Nearly half its assets feared rotten PRESCRIPTION: Euthanasia. Bad assets to be transferred to. Asset Reconstruction Company and quality assets to be sold. SIDE-EFFECTS: Singh believes IFCI continues to have a role to play and that liquidation can cause systemic risks. **Estimate

IDBI: Rs 12,000 cr** CONDITION: Under severe stress with NPAs of Rs 6,355 crore. PRESCRIPTION: Amputation of rotten assets followed by a merger with a healthy bank. SIDE-EFFECTS: Suitors find Vora's baby badly infected by NPA and its exposure to steel and power sectors problematic.

In a presentation to the CCEA (Cabinet Committee on Economic Affairs), the MoF argued that delivering public good is part of governance and financial stability is public good. Denying the institutions the ability to honour commitments could lead to a systemic failure and consequent crisis as has been witnessed in South-East Asia and Latin America.

As arguments go, it cannot be refuted. IFCI has raised Rs 1,237 crore through public issue and Rs 13,689 crore in private placements. IDBI has raised Rs 13,012 crore in public issues and has privately placed debt worth Rs 16,788 crore. The two institutions have raised a total of Rs 44,726 crore for their lending operations which has to be paid back to public-sector banks, mutual funds, trusts and provident funds that invested in these tax-free instruments. Any default could wreck confidence in the system.

It is not the need for bailouts as much or the regularity that is a cause for concern. Could this be the final bailout of UTI? The UTI is being split. Saleable NAV-based schemes are to be privatised, while the Government will administer the loss-making assured returns schemes, including US-64. But the problem is that while UTI Chairman M. Damodaran wants to encash value for investors through sales of its strategic holdings like ITC, Finance Secretary S. Narayan promises that "there will be no asset bleeding". The Government is also yet to decide on selling off UTI's stake in UTI Bank, which could be worth over Rs 700 crore.

So where will the money come from? If the UTI is prevented from realising the value of its investments how will it pay up Rs 12 per unit of US-64 in May 2003? Secondly, as Dhiren Kumar, director of Value Research, points out, "The basic assumption of the bailout package is that either the market will go up or it will stabilise around a Sensex of 6,000. But what is the guarantee it won't tank? The final bailout of uti will cost another Rs 6,000 crore."

By definition, capital infusion should lead to either resolution of problems or a wind down. Interestingly, the MoF too would like to believe that these are not bailouts but winding down and restructuring of institutions. But given the resistance of IDBI and IFCI to change, the proposed bailouts would seem only one in a series. Their exposure to problematic sectors like steel and power as also 698 sick companies registered with the Board for Industrial Finance and Reconstruction make a turnaround unlikely. Neither is in a position to survive in its current avatar. IDBI is rated AA, lower than the AAA rating of the corporates it wishes to lend to, and must find a healthy bank to merge with but there aren't many suitors for Chairman P.P. Vora's baby given the risk of the NPA virus.

The IFCI is worse off. Its rating has plummeted to default category which means it can't raise funds to lend profitably and bad loans are suspected to be well over the declared Rs 3,897 crore. But IFCI Chairman V.P. Singh disagrees, "IFCI is still relevant. Banks are not equipped to lend long term." Singh also warns that "liquidation of IFCI will only cause a systemic risk."

The irony is that its continuance is also a systemic risk as is the existence of Rs 83,000 crore worth of bad loans in the books of banks and institutions. Add Rs 11,472 crore of NPAs in the 2,090 urban cooperative banks to get a picture of the systemic risk. The banking system may not recover three fourths of this or Rs 70,000 crore. Mercifully there has been some progress. Last year, PSU and scheduled banks managed to recover Rs 17,588 crore but more needs to be done. While the Government has introduced a law to enable lenders recover monies faster, the perception is that defaulters seem to get away. Samajwadi Party MP Amar Singh puts it rather succinctly, "For the poor there is byaj, jabti and kacheri (interest, seizure and courts) and for the rich who are robbing the banks there is a bailout. Why should the public pay for the crimes of others?"

Till such time defaulters start paying up, bailouts will continue and be seen as a tax for the crimes of the rich.