Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Two major economic reforms in India that have been pending for more than a decade were done over just two days this week. First, New Delhi persuaded Mauritius to stop allowing domestic Indian money from leaving the country and coming back in the garb of tax-free foreign investment. Now, India's parliament has passed the much-awaited bankruptcy code, finally embracing a modern solution to the twin problems of corporate indebtedness and loan under-recoveries.

Put the duo together, and India should have the basic elements in place for a capital market that's got less dodgy money and treats gains on capital equally, regardless of whether the investors are locals or foreigners. The second measure won't yield immediate results because the infrastructure needed to run the new bankruptcy law is still some years away. But if it all goes to plan, the ignominy of being ranked 136th in the world for resolving insolvency, with the World Bank estimating recoveries of under 26 cents on the dollar after four years, should see a dramatic improvement.

At the minimum, bizarre situations, like India's service tax department holding a garage sale for beer baron Vijay Mallya's confiscated private jet as state-run banks hawk the tycoon's mortgaged Kingfisher Airlines brand, would be confined to the annals of India's economic history.

Most Asian countries grasped the importance of creditor rights after the 1997 financial crisis. It took New Delhi another 20 years, but the message has finally hit home. How could it not? Take just the 45 publicly traded Indian non-bank companies for which Bloomberg's proprietary metric assigns a default probability of more than 10 percent over the coming 12 months. These are either already insolvent, or teetering on the edge. Together, they have almost $15 billion in debt, according to their latest filings. Most of it is a write-off.

Credit Score Fail
Distressed Indian firms haven't been very proactive shedding their debt loads over the past four years**
Source: Bloomberg
** Distressed companies defined as having a Bloomberg one-year default probability of more than 10%.

This is just the tip of India's $167 billion bad-loan juggernaut, which has spun out of control because of banks' extend-and-pretend habit. Inordinate judicial delays, combined with pathetic recovery rates, give lenders little reason to be proactive.

While they might still remain behind the curve in sensing signs of potential credit stress, or choose deliberately to ignore them, the new law also gives unpaid employees a chance to initiate bankruptcy proceedings. Given that their claims of unpaid wages would have had the same status under liquidation as those of secured creditors, Kingfisher's employees could have used this power to bring the carrier to the operating table. With some luck, the airline would still be flying.

Misery Index
Shareholders in these struggling companies can't be very happy
Source: Bloomberg
Note: Rebased to 100 as of May 12, 2011.

Critics argue that in its impatience to make stress vanish, India might have slipped a time bomb into the new bankruptcy code. Just 270 days to liquidation may kill salvageable companies. Still, it would have been unreasonable to expect the pendulum to swing by exactly the right amount. That it's moving decisively away from crony capitalism gives Prime Minister Narendra Modi bragging rights as his government completes its second year in power.

Since investors received two good reforms in one week, they should push for two more: the long-promised nationwide goods and services tax, and a permanent fix for state-run banks, including consolidation and closure. Neither will be politically easy. On second thoughts, the bragging can wait.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andy Mukherjee in Singapore at

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