Animal Spirits Cannot Awaken When Businesses Finance their Distributors' Shaadis, Plots, and IPL Bets

Everyone loves talking about “animal spirits.”

Budget speeches. Economic surveys. Mint Opinion pieces. The phrase gets thrown around like it’s a magic switch. Just flip it and businesses will invest, hire, expand, export.

But nobody asks the most basic question. Why would a business take risk in a system where getting paid is optional?

I run a manufacturing business. We sell to distributors across India. And I can tell you - the single biggest drag on “animal spirits” is not taxation, not regulation, not interest rates.

It’s bad debts. And the system that enables them.

Here’s how it works.

You manufacture a product. You sell it to a distributor on credit. 30 days, 45 days, 60 days - depends on the market. The distributor sells it forward to retailers. Money flows back. Hopefully.

Hopefully.

Because what actually happens is this. The distributor holds your money. And the reasons are... creative.

1. The son gambled away the money on IPL. Your payment gets delayed.

2. Ghar mein shaadi hai. Your payment gets delayed.

3. Distributor wants to become a builder. Poured all the cash into a plot and construction. Your payment gets late.

4. Distributor got the distributorship of a bigger brand. Paid them in advance. Your payment gets late.

5. Garmi mein pankhe mein paisa daalna hai. Your payment gets late.

6. Distributor wants to start his own manufacturing. Your payment gets late.

7. Made a massive loss in his own brand’s business. Your payment gets late.

Notice the pattern? None of these reasons have anything to do with you. Your goods were sold. Your money is owed. But your distributor used it as working capital for everything except paying you.

And you can’t do much about it.

You can’t charge interest on overdues because “uss market ka bada distributor hai, woh kahin nahi jaayega.” You’d lose ₹15-20 lakh in future business over ₹10-15 thousand in interest. The competitive environment forces you to smile and wait.

Iss market mein hi rehna hai.

The only distributors who actually pay on time are either genuinely good people (they exist, and I salute them), or distributors where the brand is so large that it could appoint anyone in that region tomorrow and the distributor would lose everything. Or where the transaction is on advance payment.

That’s it. Genuinely rare goodness, fear, or advance. Those are the three reasons people pay on time in India.

Let me give you a specific example.

One of our distributors held ₹22 lakh in payments. The dispute? ₹20,000 in transportation expenses. Twenty. Thousand.

We had explicitly told him that transportation expenses would not be borne by us. He claimed our sales employee had committed to it. The sales employee said he didn’t. Classic he-said-she-said.

Now, we could’ve taken back the ₹22 lakh worth of material sitting with him. But the logistics of getting it back would have cost more than ₹20,000. So we agreed to bear the transport cost and move forward.

He still refused to pay the full outstanding until the matter was “resolved.” It took 5 months. He claimed he didn’t sell any goods during this period. And when the dispute was finally settled, he started counting his credit cycle from the date of resolution. Not from the date the invoices were raised.

₹22 lakh. Locked up. For 5 months. Over ₹20,000.

Bearing that loss was still better than escalating things.

That’s the sentence no economist puts in their model. But every business owner in India knows it by heart.

“But Aakash, why don’t you just take legal action?”

Great question. Here’s how that goes.

Civil cases: You file a case for recovery. The court gives you a date. Then another date. Then another. The average civil case in India takes years to resolve. Not months. Years. By the time you get a judgement, the money has lost half its value to inflation and your legal fees have eaten the rest.

Cheque bounce (Section 138): This is supposed to be the only real option. A bounced cheque is a criminal offence. Sounds scary, right? That’s why we take security cheques.

Here’s how it actually plays out.

You file a case. You pay court fees. You appear on the hearing date. The person is summoned. If he doesn’t show up, there’s another summon. Then another. The responsibility of getting the summon delivered? That’s on you. After 8-10 months - if you’re lucky - a non-bailable warrant is issued.

And then the fun part.

To actually get the person arrested, you have to bribe a local cop. About ₹50,000. Bear his travel expenses. Send your own person along. Go find the guy. Get him arrested.

“Bhai, main sirf apna paisa lene aaya tha.”

By this point, you’ve spent a year, lakhs in legal fees, a 50K bribe, and an extraordinary amount of emotional energy. All to recover money that was already yours.

And there is no database. No network. No system where you can report a defaulter so that his future business gets hurt. Your distributor who stiffed you for lakhs can walk into another company the next day and get a fresh distributorship. Clean slate.

The system does not punish bad actors. So the system creates more of them.

There are plenty of genuinely bad people out there.

But zero consequences create even more bad behavior.

In June 2020, the Ministry of Finance floated a proposal titled “Decriminalisation of Minor Offences For Improving Business Sentiment And Unclogging Court Processes.”

One of the “minor offences” they wanted to decriminalise? Cheque bouncing.

Let me say that again. The one criminal deterrent that businesses have against defaulters - the govt. wanted to remove it. To “improve business sentiment.” Whose sentiment? Not mine.

Finshots did an excellent article about it: To de-criminalise or not to de-criminalise?

I wrote to the Ministry of Finance opposing this.

I wrote to The Ken, hoping they’d cover the story. Give it some visibility. Generate a conversation. Radio silence.

The good news? The law did not pass. Thankfully, enough people - the Bar Council of Delhi, CAIT, the banking industry - pushed back. But the fact that the government even considered labeling cheque bouncing a “minor offence” tells you everything about how disconnected policy is from ground reality.

A bounced cheque is not a paperwork error. It is broken trust. It is someone taking your goods and refusing to pay. If you decriminalize that, you are telling every non-advance business in the country: “tumhara paisa doobega, aur kuch nahi hoga.”

In 2023, the government introduced Section 43B(h) in the Income Tax Act. The idea is simple: if you don’t pay your Micro or Small vendors within 45 days, you can’t claim that expense as a tax deduction.

Sounds good on paper.

Here’s why it doesn’t work in practice.

No linkage. The Income Tax portal doesn’t know if the filer belongs to a Micro, Small, or Medium enterprise. The GST portal doesn’t know either. The UDYAM portal (where MSMEs register) is a completely separate system. If the IT dept. doesn’t know who is Micro and who isn’t, how will it enforce anything?

No tracking. There is no mechanism to track whether invoices are settled and in how much time. The government has no idea if your customer paid you in 30 days or 300 days.

Voluntary compliance. The reversal of IT deduction is something the business is supposed to do on its own. Most CAs don’t even ask their clients: “Do you have any Micro/Small dues that you settled after 45 days?” Nobody checks.

And the worst part? It crushed medium enterprises like us at both ends.

We buy raw materials from large companies like Reliance, Vedanta, Indian Oil. They don’t offer credit. We pay them in advance. The 43B(h) rule doesn’t apply to us (we’re Medium, not Micro/Small), so our distributors don’t pay us any faster. In fact, some distributors now tell us they have less cash because they’re “forced” to pay their Micro/Small vendors early. Theek hai, convenient excuse.

Meanwhile, we used to take 60-75 day credit with our smaller vendors. Now, we’re supposed to pay them within 45 days. We’re not small enough to fly under the radar and ignore the law. We got compliant.

Advance payments going out. Delayed payments coming in. And the govt. rule that was supposed to help MSMEs actively hurt the ones in the middle.

Here’s my point. And it’s simple.

You cannot expect “animal spirits” from businesses that are everyone’s personal bank.

Every rupee stuck in a distributor’s plot, or gambled on IPL, or invested in pankhe for summer - that’s working capital that the business cannot use. Cannot invest. Cannot grow with.

We’ve had to write off crores. Not lakhs. Crores. You can’t really budget for bad debts. Indian margins do not support that. You just take the loss. The only saving grace is a set-off against income tax. That’s it. That’s the consolation prize.

We should create good jobs, not fake jobs. And good jobs come from businesses that aren’t bleeding hard-earned cash into a broken system.

What India needs is a mechanism where the loop is actually closed. Here’s what I think would work:

Link payments to GST, and GST to Income Tax. When a customer pays a bill, they report it on the GST portal - “I paid this invoice on X date.” The vendor confirms. If the payment isn’t confirmed within the statutory period, the customer’s GST input credit and IT deduction get automatically reversed. No voluntary compliance. No CAs forgetting to ask. Just a system that closes itself.

A defaulter database, on a PAN level. If a distributor defaults on payments to one company, every other company should know before giving him credit. Some people suggest CIBIL or CRISIL, but Proprietorships and Partnerships don’t have those scores available publicly. We need something purpose-built. And yes, it would need some working to weed out the non-genuine disputes from actual defaults. But the absence of a perfect solution is not an excuse to have no solution.

And for the love of everything, do not touch Section 138. The criminal penalty for cheque bouncing is the last standing deterrent. Remove it, and you might as well tell businesses to stop selling on credit altogether.

(Which, honestly? I fully support. Ban credit and see our animal spirits. 🔥)

But that won’t happen. So businesses will continue to take on risk. And more of that risk will get allocated to giving goods on credit - the risk of not getting paid, the risk of disputes, the risk of 5-month lockups over ₹20,000. The risk that could have gone into putting up a new plant. Or designing a new product. Or hiring more people.

That risk won’t get taken. Because at the end of the day, most people do not have an unlimited risk appetite.

“Pehle paisa toh de do. Phir animal spirits ki baat karte hain.”

Until next time.

P.S. The 43B(h) classification of Micro, Small, and Medium is based entirely on self-declaration of turnover and capital investment. No audited certificate. No verification. Just vibes.

P.P.S. Most businesses think the 43B(h) 45-day rule only matters at year-end. So every February, a WhatsApp forward starts circulating - “settle all 45d+ dues before 31st March.” But technically, every invoice must be settled within 45 days throughout the year. Not just before year-end. The fact that a WhatsApp forward is the enforcement mechanism tells you everything.