Hello Greed; Goodbye Industry!

That seems to be the government’s current policy. These are tough times for the UPA government. It’s facing flak from the common man and the opposition for rising inflation and slowing growth, wrestling with private industry to keep prices under control, and walking the tightrope on fuel prices.
And with elections around the corner, the government appears to be more intent on keeping its vote bank happy. The greed for power has become overpowering.

It’s pushing ahead with an expanded Rs 71,680 cr farm loan waiver package, bringing more farmers into the relief net.

It’s thrown the cement and steel industry in a quandary, by ensuring that prices remain steady. Their grievances and complaints that such a freeze will hurt profitability have fallen on deaf ears.

Oil companies continue to bleed from mounting under recoveries, as global crude oil prices hit record highs above $135/barrel. But the government’s firm on its stand; it’s buried calls for a hike in petrol, diesel and LPG prices six feet under the folds of Babudom. Votes account for more, it seems, than the fate of the government’s own beloved “Navaratnas”.

But the most blatant illustration of the government’s preoccupation with power is the way the hands of the country’s largest public sector bank have been tied. SBI took a bold step to bolster its balance sheet and remain true to its shareholders. Faced with mounting defaults in the farm equipment loan category – the default rate of a gargantuan 17% could not, naturally, be brushed under the carpet — the bank issued a circular to its branches to stop granting such loans, till the default rate came to more manageable levels. BIG MISTAKE!

Call it bad timing. But the circular happened to come just as the UPA government’s brainwave of benevolence and generosity –its landmark farm loan waiver package — was taking root. The circular lived for all of 48 hours. The bank revoked the offending circular, and the bank management fell all over itself denying any rumor of Delhi’s intervention. “The circular’s been misunderstood,” is the bank’s official line.

But intuitive inference points directly and unwaveringly to government intervention. How else could a sound financial decision become a misunderstanding? Why else would a move to safeguard its profits and shareholders suddenly become unnecessary? It can’t be because the 17% default rate suddenly became negligible, or a clerical error to begin with!

It looks like the bank’s financial autonomy takes a back seat to the vote bank. Corporate balance sheets are relegated to collateral damage, in the race to reign the corridors of power, which threaten to echo with some other party’s footsteps.

Reforms indeed!

The entire last week was spent in asking or answering the logic behind the finance minister’s Rs. 60,000 crore debt waiver for farmers.

 
The reasons ranged from bailing out banks, starting afresh both for banks and farmers, compensating farmers for suffering the hardships of a weak agricultural system.

 
But the bigger question is never answered – is it going to stop farmer suicides?

 
Lets take the region with the largest number of farmer suicides - The Vidarbha region of Maharashtra where one may hear of a suicide each day of the week.

 
So where did it all start for Vidarbha? -  What triggered these suicides in the first place? It started over a decade ago. Farmers in RICH cotton growing Vidarbha were made poor by the government’s pricing policy, which failed to get them a market price for their cotton. Thus began their financial woes.

 
Sharad Joshi, a well known spokesman of farmers movement says that farmers can stand a certain level of indebtedness, what they have difficulty in withstanding is PUBLIC HUMILIATION AND SOCIAL STIGMA heaped on them by certain types of creditors – these being co-operative bank recovery officials.

 
Okay we know the start, so what course did the  government follow - Not difficult to answer - financial packages or dole outs.

 
In June 2004, the UPA government announced a package for the entire country comprising rescheduling of repayment of outstanding debt over five years with two year moratorium, rescheduling of loans in default, fresh credit for ineligible farmers and such other schemes.

 
What was the impact  – suicides from 2004 and now have merely increased.

 
So the government decided it needed to intervene again with another financial package  -  Our PM visited Vidarbha region and announced a package of Rs. 3,750 crore in July 2006.

 
So as of date around Rs. 30,000 crore or so farm loans have been rescheduled under  various schemes.

 
Surprisingly financial packages never give us an understanding of the co-relation of financial packages to farmer suicides. Did the package in July 2006 help reduce suicides in Vidarbha?

 
All this brings me to the chapter on suicides in the book Tipping Point by Malcolm Gladwell.. He talks of a South Pacific island Micronesia where a seventeen year old boy got into an argument with his father, father told him to get out of the house and he then committed suicide. For an island where suicide was unknown in 1960s, by the end of 1980s there were more suicides per capita in Micronesia than anywhere else in the world – RICH Vidarbha getting poor, social stigma and a suicide? 

 
The book says - The central observation of those who study suicide is that in some places and under some circumstances, the act of one person taking his or her own life can be contagious. Suicides lead to suicides. Thus as suicide grows more frequent in these communities the idea itself acquires a certain familiarity if not fascination (to young men in the case of Micronesia) and the lethality of the act seems to be trivialized. Especially among some younger boys, the suicide act appear to have acquired an experimental almost recreational element”

 
It concludes with - AN ACT THAT HAS BECOME AN IMPORTANT FORM OF SELF EXPRESSION” – people who die in highly publicized suicides – whose deaths give others “permission to die” serve as the Tipping Points in suicide epidemics. – is it then for our Vidarbha farmers?

 
Well our government only understands financial packages and all we can do is see if Rs. 60,000 crore is the answer to cease farmer suicides.

I was pleasantly surprised last week when I went to the BWSSB (Bangalore water and sewage board ) office to pay my water bill. The board, with a hand from TATAs, have installed an automated payment machine in all thier offices. It scans the bar-code on the bill, accepts cash you feed it and prints out a receipt. I didn’t even have to stand in line. But as soon as I reached for the machine a man ran out of the office screaming,“ Wait May-dum, I will do, Allow me”. He then grabbed the bill and the money from my hand
The brilliant TATA innovation, meant to eliminate the human element, was being manned to ensure it was not ruined by the human element using it! 
The office complex I work in houses several IT- MNC facilities and is populated by Bangalore’s, or should I say Indians intellectual pride and joy.

But my favorite worker here is the lift –man! Why you ask?
The lift-men (they work in sifts 24/7)

Job profile – To sit on a stool in a small 4x 6 space, pressing buttons, ensuring the lift is never ever handled by someone who didn’t understand its intricacies.

Job skills – The ability to promptly press buttons when requested.
Several vending machines we have around the country dispensing, magazines at airports, chocolates in malls and cigarettes in office buildings are all manned by someone who will handle the machine for you.
Makes you wonder. Should we consider manned vending machines and lifts an insult to our collective intelligence as a people?  Is Human labour in India cheaper than the machine meant to eliminate it? In which case vending machines have no future in our country but are still popping up all over the place
Never the less, I’d rather have a manned-magazine-vending machines at every street corner than young children running on to the road at traffic lights hawking magazines. If an automated-collection machine will reduce the number of jobs our government offices can offer and cheat the prospective 10-standard-pass babu out his livelihood. I’d rather have him operating the payment machine for me than him being unemployed all together.
As organized retail in India mutates into a monster no foreign marketing wizz can recognize, manned vending machines are probably the tip of the ice-berg. There will be several other battles between supermarkets and steer vendors, man and machine that will need to be fought. Jobs might be lost and entire communities might be hurt as the consumer and his convenience will prevail. 
 

Export organizations and industry chambers are never satisfied. They think the dice is always loaded against their members. Through experience, I suppose, they realize that only when they cry blue murder can they the lumbering apparatus of the government to provide relief.

So it is with skepticism that I began a series of stories on the impact of the rising rupee on exporters, especially those that are not import dependent. I thought FIEO, an exporters’ organization, had exaggerated the extent of likely job losses – 3.5 million. Textile Commissioner J N Singh also said that situation was not as bad as portrayed. I still think FIEO has overstated its case.

But, after visiting garment-exporting units in Gurgaon and Faridabad in Haryana, and talking to more than a dozen exporters, I think Finance Minister P Chidambaram, is unaware of the pain in some segments of the export industry. When he says exporters should learn to live with an appreciating rupee by cutting costs, improving productivity, and being content with lower profits, he might be having the software industry and BPO businesses in mind. Garment units are in real distress.

Whether it is Sudhir Dhingra of Orient Craft, Gautam Nair of Matrix Clothing, Rakesh Vaid of Usha Fabs (and a vice-chairman of Apparel Export Promotion Council), Rishi Vig of House of Pearl, Madan Kukreja of Super Fashion, Ravi Dhingra of Orient Clothing, Sanjay Gulati of Modelama and many more – it is the same story. They have, or are, laying-off workers, shutting down a part of their production, or moving it to countries like Bangladesh. I have spoken to workers themselves, and they have told me that their colleagues have lost jobs, they are not earning enough, there is not enough work to go around and they are sitting idle. And this, during the peak season.

Until 2005, garment exporters were complacent about costs. World trade in garments was governed by quotas, so foreign buyers had to buy from India. Competition for an Indian supplier was another Indian supplier, who operated in the same cost structure.

Since then the opportunities have expanded and so have the threats. US retailers are under pressure to hold prices. If Indians cannot match their cost, they will move elsewhere. They pay in dollars; they are not concerned that the same greenback fetches 12 percent fewer rupees. Or that minimum wages have been hiked by 42 percent in Haryana since July.

You cannot have a situation where investors in the stock markets are making piles of money because of huge capital inflows, and workers in factories are losing jobs. And these workers are the ones that the government wants to move out of agriculture. They also happen to be the more disadvantaged – Muslims, and those lower down in the caste hierarchy.

Both industry and the government must use this opportunity to create durable competitiveness. One exporter was saying that it is easier to divorce than to lay-off. The labour ministry is wary of trusting employers with the power to fire workers. Employers say if they can lay-off, they will have more comfort in keeping workers on their rolls and training them. That will enhance a worker’s employablility and deter employers from sacking them. Employees could also be given the option of working longer than eight hours – and earning more. Currently, they can do 50 hours of overtime in three months at double the hourly rate. Employers want this changed to 60 hours extra a month, with a 10-hour day, and proportionate increase in wages. Tax incentives for training and skill development, as for R&D, would help.

It is time the government woke up and smelt the coffee.

“Only Vimal” is back on the telly. It marks the revival of one of licence-raj India’s most prominent brands. With Reliance going full throttle on petro-chemicals in the ’90s, the brand first took a back seat, then disappeared off the consumer’s radar. Fewer people wanted to buy cloth, and take it to the tailor to stich. Readymade garmets became the order of the day.

Recently, Reliance revived its relationship with the textile sector with the Retail arm launching Relaince Trends. So will Vimal now focus purely on B2B operations? It seems not, because the brand’s exclusive showroom in Ahmedabad was re-opened recently. RIL’s textile business president says 22 more exclusive showrooms will re-open in the next 6 months.

Will Vimal drive Reliance Trends’ operations across the country, or will the two chart independent operations? Let’s wait and watch. 

Employers want labour laws to be as flexible as the Labour Minister himself, but with the government dependent on the Left for support, and review of the Industrial Disputes Act barred by the National Common Minimum Programme, they have not been able to have their way.

Minister Oscar Fernandes himself believes that in the quest for competitiveness, compassion has become a casualty. He is appalled at the difference in wages between regular employees and sub-contracted workers doing the same work.  The tendency of executives to reward themselves with huge pay and sumptuous benefits while tolerating bare-bone wages for those who cannot bargain for a better deal, suggests, in his view, that employers cannot be trusted with the unfettered power to layoff workers.
But to enable unavoidable layoffs, the minister is considering an insurance scheme, where upon payment of a premium, the employer would be able to pay 90 days wages for every year of service. This is six times more than prescribed by the Industrial Disputes Act, and double the amount suggested by the Second National Labour Commission. This is yet to become a ministry proposal, though the minister has held informal discussions with trade unions and some managements. During formal tripartite (between government, employers and unions) negotiations, however, employers offered that retrenchment compensation could be doubled to a month’s wages, but there was no consensus.
Even though a review of the Industrial Disputes Act is supposed to be off limits, the ministry has been able to evolve a consensus on six amendments. These include giving labour tribunals the power to enforce an award, rather than through the revenue authorities. There is agreement on increasing the salaries and allowance of presiding officers of labour courts and on relaxing their qualifications to make those with a degree and law and some experience, eligible. Direct reference of a dispute to the labour courts rather than on the recommendation of the labour officer is also a proposal that has been agreed upon.
But on empowering the government to declare, say an export industry, to be a public utility where strikes cannot happen without prior notice, there is no agreement. Nor on retrenchment compensation, or on giving governments the power to exempt an establishment from the provisions of the Industrial Disputes Act.  Unions have not agreed to waive the requirement of prior state government permission before a unit can be closed down, or on just informing the labour officer about changes in the terms of service of employees, without obtaining their consent. 
The other law that employers want amended is the Contract Labour Act, particularly for garment export units, so that they can adjust their workforce according to orders to be executed. The ministry and trade unions believe that this is an impediment on paper, and in actual practice, garments units do have flexibility. The Ministry says that labour unions want to be taken into full confidence before changes are introduced. They are said to be feeling shortchanged by the previous government, which apparently, notified fixed employment contracts without proper consultation, compelling the previous Labour Minister to declare in Parliament that the notification would be withdrawn. In all 12 bills are under revision. Many of these seek to extend benefits available to organised workers. The ministry has also moved a cabinet note to reduce registers, returns and queues. “Life is a whirl,” says Sudha Pillai, the Labour Secretary. You may not get that feeling from the outside, but the Labour Ministry is actually working. 

Have Prime Minister Manmohan Singh and UPA Chairperson Sonia Gandhi put expediency before principle in suggesting that they were willing to dump the nuclear deal to save the government?  The Prime Minister says the nuclear deal is an honourable one, it is good for India and the world, if it does not come through he would be disappointed but he would move on, there are other battles to fight.
 
Some other Prime Minister could have been accused of lacking scruple, but it is not a charge that we can stick on this one.  In governments, as in individuals, self-preservation is a virtue. People vote governments to last the full term. This government can argue that voters have not given it the numbers to accomplish it nuclear intentions, so it should not punish itself.
 
Dumping the deal to continue in office, is not the same as clinging on to power with unholy alliances like the one made by Janata Dal Secular with the party that it considers communal, the BJP. But the Prime Minister’s instinct for survival should come as no surprise. He has put up with criminally-charged ministers and also suffered the pre-emption of his prerogative to choose ministers.  He apparently believes that it is better to be in government than out of it.  Even earlier, he came close to resigning on many occasions while being Finance Minister but never pressed it.
 
Opinion polls predict that the Congress would improve its tally if there are early elections.  But it cannot be sure and take a chance. Polls also predict that the Left parties would be worse off.  The Congress should not be averse to inflicting such an outcome on those opposing the nuclear deal. But polls also say that Lalu’s RJD, K Karunanidhi’s DMK, S Ramadoss’s PMK and Shibu Soren’s JMM would suffer. They support the deal; they should gain if they went down fighting. The nuclear deal cannot be a poison pill for them. So the charitable explanation is that the Congress has not given in to the Left; it has lost the nerve because its deal-supporting allies do not have the stomach for early polls. That is the charitable spin. The Congress has never been known to put scruple before power.
 
One wonders why the Prime Minister disclosed his cards. He could have kept the Left parties guessing. In coalition politics there is no place for heroics. But one wishes he had the instincts and the cunning of Narasimha Rao.

In an interview to CFO Asia, a publication of The Economist group, Montek Singh Ahluwalia says there is no solid support for privatisation and one should not blame the Left parties alone. He says the public, in a “funny kind of way” associates large-scale privatisation with undervaluation of assets and that “someone - robber barons - will make a lot of money.”

My guess is that the public prefers the efficiency and enterprise of the private sector to the waste and sloth of public sector, but it does not want these benefits to come with greed and rapacity attached. Private enterprises should make fair money, not pull a fast one.

This is what makes me uneasy about the company that owns and manages the Delhi-Noida tollway, a world-class, 5.5-kilometre bridge across the River Yamuna. It is the only toll bridge stock to be listed on the exchanges, the first such public-private partnership project, which, it now turns out, is less about partnership and all about private gain.

A study done by Sheoli Pargal of the World Bank and posted on the Planning Commission’s website, says the company has won generous terms for itself. “Won,” would be a wrong term, because the project was not competitively awarded. IL&FS had conceived the project way back in 1992 much before public-private partnership projects caught on and because of the government’s inexperience in these matters, the sponsor virtually crafted the deal. ”The sponsor came with the draft and you know what that means,” says Gajendra Haldea, adviser to the Planning Commission’s Deputy Chairman. IL&FS has a strong conflict of interest as project sponsor, largest shareholder, lender and referee.

The concession allows investors to recoup their investment with 20 percent return over a 30-year period. The company says the deal was twice approved by the UP Cabinet and vetted by the World Bank and SBI Capital Markets. But they would have checked the projects ability to service debt, not whether the project cost and returns are reasonable. In fact the study says the project cost was open-ended giving scope for gold plating and overengineering. 

The concession allows investors to recoup the investment with 20 percent profit over a 30-year period, extendable in two-year increments. As a pioneering project, one can excuse 20 percent return on equity. But there is little reason to allow 20 percent return on debt as well, when the company itself contracted loans, initially at an average interest rate of 15 percent, now rescheduled to 8.5 percent. Not just that, if profits fall short, the difference is added to the project cost, giving  investors compounded returns.

Of course the project was executed in difficult circumstances. India was facing sanctions in 1998 following nuclear tests. In the initial years, traffic fell short of estimates. The company started started delivering profits only since the previous year. Users are not complaining. High charges will persuade them to avoid the tollway. The company charges Rs 20 per car ride and driving on the bridge is sheer pleasure.

But going by current projections, the company says it will make 13 percent return, even if the concession is pushed beyond the initial period fo 30 years to 70 years. In other words, the concession is virtually an exercise in perpetuity. Noida Adminstration is supposed to get the bridge for free once the investment is recovered. It will have to wait a long time indeed. 

In February this year, while presenting his budget, minister Lalu Prasad Yadav said the Railways would make history with a cash surplus  (before dividend) for the year of a little over Rs 20,000 crore. 

 But mid-September, The Indian Express said that the surplus (or earnings before depreciation, interest and amortisation), would have been less by Rs 2,690 cr but for three accounting changes.  The Business Standard in an editorial sounded dubious about the Railway turnaround story. The media scrutiny followed an audit report in May by the Comptroller and Auditor General. The Railways did not respond to The Indian Express, they have to us, and they say there is nothing dubious about the changes.
 
The accounting changes have the effect of depressing revenue expenditure or enhancing earnings. They do not falsify the statements, but burnish a key variable, i.e. cash surplus.  These pertain to treatment of compensation received from the government for losses on defence lines, interest on balances in pension and other funds, and the capital portion of lease charges paid for rolling stock being regarded as capital, not revenue, expenditure.

 
Sudhir Kumar, the hidden hand behind Railway reforms, and Officer on Special Duty to the Railway Minister says that accounting reforms are happening in the Railways, the changes were suggested by a consultant, and have the approval of the Finance Ministry’s Controller General of Accounts.  Of the three changes, the capital component of lease charges, Rs 1,720 cr, now treated as capital expenditure, prettifies operating profit the most. But the Railways say this is being done because rolling stock has a life of 30-35 years while lease charges used to be written off over 10-12 years, but the consultant had suggested that they be amortised over the life of the asset.
 
But more serious is the slowdown in freight traffic. In the first quarter of this fiscal, cargo carried grew by just 6 percent, against 9 percent in the year-ago period - and 9.3 percent GDP growth. Analysts suggest that the one-time gains of allowing higher load in wagons may be tapering off.

Kumar says the impact of higher axle loads is exaggerated. That measure does not contribute more than 20 percent to increased freight. He says the Railways are making a strong comeback in the second quarter of the year, and will exceed targets (loading of 785 m tons, expenditure to revenue ratio of 79 percent, and cash surplus before dividend of Rs 21,500 cr) by a decent margin. “I am giving an Infosys kind of guidance,” he says, “where we promise less and deliver more.”
 
That is a valiant defence of the Railways. But unless the Railways get cracking and cut the slack in adding new capacity, through dedicated freight corridors, Lalu’s magic might indeed be history.  

The Economic Survey is a keenly awaited document that precedes the Union Budget by a couple of days. It is a pre-Budget assessment of what happened in the economy in the preceding year. It is also a review of government policies. Researchers and economists prize it for its data. Journalists try to glean pointers to policy announcements in the Budget. In other words, our immediate interest is in the headlines it can yield.

We were pleasantly surprised when Chief Economic Adviser, Arvind Virmani, called us over to North Block for a two-hour session on suggestions for improvement. The last time such an exercise was done, was apparently in 1992. Apart from editors, economists from commercial and investment banks, multilateral agencies and from research institutes were invited.Almost everybody said that the Survey should not change, because it represents continuity. But they wanted it to be better written, edited and presented. Many felt that every chapter could begin with a summary. A chapter on state finances was high on the wish list. We were told that the data could not be current – it would not be less than a year old. And because the finance ministry deals with union government departments and not the states, there would be difficulty in collecting data. A suggestion was made that the data compilation be outsourced to a research institute.

Another suggestion that scored high on approval, was a global comparison, not only of commodity prices, but also of India’s economic performance.

Many of us felt that the chapter on infrastructure should be recast so that one gets an idea of capacity created and capacity needed.

As for me, I would like an executive summary. It would help also if the survey were prescriptive – in order to create public opinion around desirable policies. For instance, whether direct transfer of cash would be a better alternative to the rural jobs scheme. Or whether education vouchers could help improve primary education, in the light of experiences elsewhere. A chapter on state finances, and also best practices in the area of infrastructure and governance would also help.

One does not know how much of this can be implemented. A team of 10 officials works on the Survey and it has all of three months. The Survey is supposed to play the role of honest critique, though at times it has tended to gloss over uncomfortable issues. Still the effort of the Chief Economic Adviser is appreciable.