IL&FS Economic Crisis: A Multi Dimensional Major Economic Threat to Indian Economy

By Faiz Askari, Founder of SMEStreet

The IL&FS crisis is getting considered as one of the biggest economic threat which can lead to a bigger financial turmoil in the country.  As we all knew that IL&FS is a private organization with over 40% of the shares held by government-owned firms. This means that the government needs to ensure the solvency of IL&FS to maintain financial stability in the country. From example, safe government investments such as EPF etc were all investing in IL&FS. Also, this organization has the infrastructure and financial assets worth more than Rs. 1,15,000 or $15.77 Billion but its debts are the results of "mismanaged borrowings in the past, this was mentioned by the government.

Moreover, Finance Minister Arun Jaitley said the government is determined to contain the crisis at the IL&FS at the earliest so that it does not leave any adverse impact. The government earlier this week superseded the board of IL&FS, which has a debt burden of Rs 91,000 crore and has defaulted on a series of loan repayments. The crisis at the IL&FS has triggered concerns of a liquidity squeeze in the NBFCs and mutual funds.

Scale of IF&LS Crisis

Now understanding the length and the breadth of this economic crisis, we must know a few more points, IL&FS and its subsidiaries have a total debt pile of nearly $12 billion or Rs. 91,000 Crores. On IL&FS, the government says the management had "lost total credibility" given the fact that "huge managerial pay-outs were made despite a looming cash crunch." The government has ordered a fraud inquiry for IL&FS.

The Govt.'s Action PLan

Now as an immediate remedy for this IL&FS crisis, the government has put in place a new board led by eminent banker Uday Kotak. The new board held its first meeting on Thursday. “The government is determined to make sure that since this is an internal factor to India this should be contained quickly so that no adverse impact of it is left,” Jaitley told media here. He said there has been a “significant impact” on the markets in last few days on account of the contagion effect that took place on account of uncertainties over IL&FS. “The government has taken a decisive step in that regard, replaced the board and of course under the new board now it would take various decisions,” he said.

This also means that the government has tried to take control of IL&FS this week by replacing the board of IL&FS with six selected nominees. According to the government officials who are taking care of this matter, it would ensure IL&FS has the liquidity needed to ensure no more defaults take place and the infrastructure projects are implemented smoothly. However, the journey or the process of government taking full control to revive any crisis gripped business is not very easy. Leading media newswire Reuters already made a claim that the new six-member IL&FS board will prepare a revival plan, but it is becoming clear some of its lenders will need to suffer major losses.

It is also noteworthy that the ultimate governments' blame are pointing out the failure of the board and management. It is important to know that, Ravi Ramaswamy Parthasarathy who is one of the longest-serving Whole Time Directors resigned in July as the group's chief. Just weeks later, in August, group companies began defaulting on loan repayments to the tune of hundreds of crores.

Now by the virtue of the overall impact of the IL&FS crisis, we should know that 4,000 Crores are needed urgently to pay IL&FS' debts is really not much for cash-rich giants like LIC and SBI. Recently, LIC began the takeover of IDBI for an estimated 13,000 Crores to save the government bank from collapsing. LIC and SBI are cash rich on the back of, to a fair extent, small investors' savings. If you have investments in stock markets and equity mutual funds, these have taken a pounding in the last few weeks. In September alone, BSE-listed companies lost Rs. 14 Lakh Crore in market capitalization.

The overall crisis of IL&FS is sort of multidimensional and serious. One must understand that really smart economic tricks are needed. Such tricks which may never be used to revive. So, if we have to search for an example, we can refer to India’s foreign reserves crisis in 1993, when Manmohan Singh gave an innovative solution of bringing foreign reserves through the software route.