Sea Linked Spasms

The Bandra-Worli sea-link has now become a regular fixture on my commute to work and back. Hence, my attention is drawn to any new development affecting traffic on that short stretch (such as the recent drive by traffic cops to discourage speeding).
But, somewhere in all the hysteria surrounding the two recent and rather tragic accidents that prompted the recent drive, commentators have forgotten to ask two basic questions. Here they are:
1. Why does the sea-link, despite the huge cost and time over-runs, still have only four lanes open to two-way traffic, against the eight lanes planned earlier? The bridge (because that’s what it actually is) was originally supposed to be constructed at a total project cost of Rs 400 crore but has finally ended up costing Rs 1,800 crore, and the bill is still mounting. Plus, the original plans envisaged opening eight lanes to traffic, of which only four were opened to the public initially. The remaining four were supposed to come on stream in November, but still show no signs of nearing completion.
2. Who thought up the crazy toll structure on the link? You need to pay Rs 50 if you’re travelling one way only. This climbs to Rs 75 for a return journey. Fair enough. But, if you’re planning on buying a monthly pass, you have to shell out Rs 2,500. This one beats all logic. If we assume 26 working days in a month, at Rs 75 per day, the total bill should not exceed Rs 1,950. Even if they decide to charge for all 30 days, the total works out to Rs 2,250. So, why Rs 2,500? Somebody tells me that the bureaucrats, who finalized this rate, wanted to take into account the possibility of somebody making multiple journeys across the link on the same day!!
Typically, the toll structure is the highest for a single journey, with concessions built into the return journey and the monthly pass being issued at a deep discount. The idea is to lure traffic – and committed upfront revenues -- to the facility. But, the toll structure proposed on the Bandra-Worli Sealink might make it difficult for the concessionaires to achieve their targeted IRR.

Caffeine Redux

Absence is supposed to make the heart grow fonder, or so said some smart alec. I have been away from this blog for a while now, primarily due to growing pre-occupations with my new day job and the associated travails of getting used to new timings. Add a dash of laziness and a reduced (as well as a changed) reading diet and this blog became the first casualty. I am back now and I hope (fingers crossed) to keep this fire burning regularly. Hope to see you guys often, and fervently hoping that you'll also be adding some fuel to the blaze on a regular basis.

If It's Tuesday, It Must Be Time To Run Some Errands

Last Saturday (Aug 8), I presented myself to the hospital sharp at 8 am in the morning, doggy bag in hand. As ordered, I had been starving for the past 12 hours. For the next six hours, a steady procession of staff from the hospital proceeded to do things to me -- smear my chest and abdomen with sticky (and yucky!) stuff, attach coloured wires to my body, jab me, poke me with scary looking instruments, pull different parts of my anatomy, press some painful areas, shine a light into the darkest recesses, extract blood, and so on.

But, what I couldn’t understand was why did all of this have to take six hours? Truth be told, a lot of time was spent waiting in some antiseptic foyer or grey ante-room (thank goodness for the back issue of New Yorker which kept me enthralled through much of this). A lot of this wasted time was used up in waiting for some doctor or specialist to see me, a complete farce and a clever con job pulled off successfully by the hospital staff. These docs were not interested in sparing time for patients who were part of the executive health check-up system. The catch: the money paid by out-patients is shared with the docs, which is not the case with executive health check-up. One doc even summoned me to the Operation Theatre, stepped out in the middle of a surgery on some hapless soul, flipped through my records and advised me to eat well and sleep well and rushed back in to stitch up whatever parts he’d left open on the operation table! Great!

When we complained, we were told curtly: “It’s Saturday! You should’ve come on a weekday!”

This is where I have a beef. Everybody – especially those in the service industry -- expects you to spare their weekends by investing your work-days. The school insists on holding its periodic parent-teacher meetings on a weekday, when it could be probably done on a Saturday. Once when I mustered up enough nerve to murmur a feeble protest, I was promptly silenced by a stentorian voice: “It’s your child; you can’t even spare a day for her?” I felt like a heel, with the other parents immediately fixing me with an accusing look.

The refrigerator repair chap, the disembodied voice at the numerous call centres, the local MTNL office, and many others do not want to service you on a weekend. They are appalled when you gently inform them that you won’t be available on Monday, Tuesday or even the next four days because you are working. The PSU guys in the service industry even feign offence when you suggest that they should keep their customer complaint operations open throughout the weekends because that’s when people really have time to pay their bills, register their complaints or even follow them up. Everybody wants you take one day off during the week so that they don’t have to work for you on a weekend.

Just a random thought: Can this be called an HR challenge?

Capital Dilemmas

The capital markets have a new kind of beast: QIPs, or Qualified Institutional Placements. As soon as the key indices started looking up post April, the market witnessed a deluge of issues. A lot of companies raised money from the markets because they desperately needed new capital to finish pending projects. But, then, some companies also raised cash because it was available. This is a dilemma that probably all companies face today: raise money when you need it or scoop it up only because it’s freely available, even if you don’t need it.

Capital market dudes from investment banks are back, casting a long shadow on the doorsteps of many companies. They are persuading managements to take advantage of the current downturn and scoop up truck-loads of capital from the system. The rhetoric intensifies when it is a bank, which is forever capital-hungry. The logic: you’ll never get capital in such abundance in a long, long time to come. Stock up and use it during the go-go days (which are bound to come back, never mind all this talk about brown weeds). The hidden logic: after a dismal 2008, time for some fee-generation and ensure some year-end bonus.

On the other hand, the broking guys are watching carefully – the moment you raise additional equity capital (through whatever form, whether it is warrants or convertibles), they ready to put a sell on your stock. Reason: any capital raising exercise dilutes the shareholding of every large shareholder, an event that is unlikely to go down smoothly.

What’s more, here’s the dilemma within a dilemma: even assuming you bite the bait, and you do pick up equity capital from the market today, then is your company in a shape to service this additional capital? So, should companies raise capital just because liquidity is sloshing around in the system or should they wait till they are ready to put to those funds to good use? Conversely, premium might be low today, than some unpredictable time in the future, making servicing of capital easier. In the end guys, here is what this column feels is necessary: don’t fall into the trap of the smooth-talking, silver-tongued, cloven-hoofed, snake-oil salesmen. Remember they sold derivatives of derivatives of derivatives...and see where it’s got us today. Raise capital only if you need it; if it has no immediate deployment strategy, it’s going to sit on your books and force people to ask questions.

The ICICI Itch

Being big is not always such a good thing. For starters, you become an easy target for peashooters who give expression to their envy through feeble pot-shots. But, there’s another danger: size also invests people and organisations with gratuitous arrogance which manipulates them to view all criticism through a prism layered with suspicion and contempt. ICICI Bank has been at the receiving end of two comments made by its rivals. Here they are:

• State Bank of India chairman O P Bhatt is a man not normally given to controversial public statements, unlike some of his other worthy predecessors. Yet, about three weeks ago, during the bank’s annual general meeting, he allowed himself one uncharacteristic wisecrack – call it a sarcastic side-swipe – that got picked up a grateful media and was reported with great relish. Mr Bhatt is reported to have said that ICICI Bank was an “unfit” candidate for acquisition and State Bank had no plans to acquire it. According to Chinese Whispers column (dated June 23, 2009) in Business Standard newspaper: “He said, tongue firmly in cheek, that his bank had no plans to acquire ICICI Bank as it was not advisable to take over the country’s largest private sector bank in its present state.” What does “present state” really mean, pray?

• The second instance is a comment allegedly made by Mandeep Maitra, head of human resources at HDFC Bank. In a story on HDFC Bank, Business World magazine wrote this: It (HDFC Bank) also has the people, managing to get nearly 900 ICICI Bank staffers every year over the past three years. In some places, almost the entire top brass of an ICICI Bank branch would walk in for interviews. “Of course, the first thing I ask is ‘how many of you are from ICICI Bank?’ I do not want that culture out here,” quips Maitra. Of the people hired in the past three years, about 40 per cent came from other banks.
ICICI Bank has responded by sending a legal notice to Maitra, seeking an apology for the statement.

What do these two stray, and definitely unrelated, incidents indicate? One, has ICICI’s phenomenal growth, or pace of expansion, left the banking and financial services industry with many green faces and are they venting their spleen at the first inopportune moment? Or, has ICICI’s supercilious behaviour really got everybody’s goat and a general industry-wide repugnance is now finding expression through every available public forum? You decide.

Two Big Bs -- Budget & Babu

Now that the media dust is beginning to settle on the Budget, here are some random thoughts and observations.

• The sleight of hand on Fringe Benefit Tax sucks. Making a grand announcement in Parliament (“I propose to abolish Fringe Benefit Tax”) while slipping in a proposal through the Explanatory Memorandum (to shift the burden to employees) not only stinks but reeks of traditional Congress behaviour – double standards and hypocrisy. It is also symptomatic of the party’s historical political culture. One would have expected the Ministry and the Finance Minister to be a bit more transparent. If this is how the government of the day behaves – surreptitiously, hiding behind opaque deals while making pious announcements in Lok Sabha – then one wonders what kind of example they’re setting.
• The market has come under heavy flak, and rightly so. It overplayed its hand and came up short. But, the market never seems to learn – this is a kind of behavourial pattern that keeps repeating itself. Many institutions published reports stating that the government was unlikely to accelerate its reforms programme from 0 mph to 90 mph in just a month after getting elected. And, that sounded pretty logical. But, markets never leave anything to chance – what in case Pranab-babu has a change of heart? What if Rahul-baba weighs in? Buy now or repent later. Interestingly, it may be instructive to read some of the Budget reports published by the broking houses – both foreign and domestic – the next day. Almost all of them have taken this holier-than-thou attitude and have roundly criticised the market for over-reacting. If everybody in the market is criticising everybody else, then who – in the name of the sweet lord -- sold? Somebody’s gotta come clean soon.

• Some governance rules never change. When not in favour of fast-tracking a proposal or an idea, set up a committee. Pranab-babu has announced a huge number of committees in his budget speech. Mocha Master’s pick from the many committees announced – an expert group “to advise on a viable and sustainable system of pricing petroleum products”. Which means: free pricing in petroleum products is unlikely till the Maharashtra Assembly polls next year.

• And, finally, this is what a friend and former colleague, who now lives in Hyderabad, had to say about the Budget: “Pranabda was doing more than just sniffling behind his hanky...he was playing hanky-panky..!”

Time For Another Spring Thunder?

Somewhere, something doesn’t seem to be adding up.

The zeal and alacrity with which the Centre has invoked the ban against the Maoists seems a little strange, leaving many questions unanswered. The Centre, on its part, seems to be maintaining a deathly silence on many of the prickly questions raised by civil society.

The questions being asked are:
• Was the centre left with no choice but the extreme step of banning CPI(Maoists)? Sure, violence cannot necessarily be the answer to all problems (unless the violent business model perpetrated by the lumpen elements of the fascist right-wing parties also appeals to the Maoists), but the Centre’s misguided development story seems to have provided a legitimate raison d’être for the Maoists.
• Wouldn’t dialogue be a better path to rapprochement? The Centre doesn’t seem to be listening to the high-decibel hints in this struggle.
• Why is it that the government has not shown the same promptness in banning certain political formations which destroy public property and kill people in the name of linguistic identity or religion?

But, this column has been intrigued by something quite isolated and seemingly unconnected. If you read the interview given by CPI (Maoist) politburo member Koteshwar Rao’s to Mint newspaper (http://www.livemint.com/2009/05/29001232/Mainstream-politics-not-for-us.html), there is a portion which makes an amazing allegation: Rao claims that the cache of arms with the Trinamool Congress party is in multiples of the Maoists’ arsenal. Here is what he says in the interview: “Majority of our weapons have been seized from the administration. In (West) Bengal, for instance, 60% of our weapons have been snatched from the police. We have bought only 10% on our own; the rest has come from other states. Yet, I would say we don’t even have a small fraction of the cache of arms and ammunition that parties such as the Trinamool Congress (it won a significant victory in the recent Lok Sabha polls and is a rival to the Communist Party of India-Marxist, or CPM, one of the ruling parties in the state) and the CPM have.”

The question is this: if the Trinamool and the Maoists cooperated against the Marxists in Nandigram (leading to Koteshwar Rao’s discovery of Trinamool’s munitions store), then the political equations are getting a bit blurred now with Trinamool partner in Delhi, Congress, rushing to ban the Maoists. Or, was Nandigram a one-night stand, so to speak? Strangely, nobody in Trinamool seems to be denying Rao's claims, unless there is great pride in owning such a arms hoard or people in Trinamool don't read newspapers.

There are other small niggling issues that also beg answers. For instance, the government has already individually banned the three extreme Left outfits – Communist Party of India (Marxist-Leninist), Peoples’ War Group and Maoist Coordination Centre -- which merged to form Communist Party of India (Maoist). There’s a lesson here: the ban seems useless since the executive action is only against a name, not against a political movement or aimed at addressing a socio-economic malaise. The ban might not achieve anything: the party will change its name and carry on with life.

There’s another side-story developing: A political drift seems to be developing between the CPI(Marxist) members of the Left Front who can win elections (which might need some pragmatism from time to time) and the ideologues trying to run the party from distant Delhi. This will be interesting to watch. Time for another spring thunder?

Fishing For Votes in Schools

It is common knowledge that Mumbai suffers from a serious infrastructure deficit. Actually, most Indian metros suffer from the same malady – haphazard planning, serious shortage of civic amenities, transport squeeze, and so on. But, Mumbai’s politicians probably take the cake – they have discovered ways of adding to the deficit rather than remedying the situation. Scraping the bottom of the vote barrel, they have dredged up a desperate scheme – reserving 90% of junior college (or institutions that offer Plus-2 courses) seats for students from schools affiliated to the local SSC board. This leaves almost nothing for students from the other central boards, such as ICSE or CBSE.

Why is this an infrastructure issue? Actually, unbeknownst to many, Mumbai has only a few good schools. Most of the other metros can proudly boast of a large number of good schools. And, among the few good schools that the “Maximum City” city has, most are affiliated to the central boards. It has also probably escaped everybody’s notice how the city has ceased to be attractive for new business investments. The reason? Among the many irritants that confront newcomers to the city (such as, traffic), lack of a wide choice of good schools figures pretty high on the list. In fact, one expat Citibank CEO opted to relocate to Delhi because his kids had a wider choice of so-called good schools in that city.

The hare-brained 90% reservation scheme has been challenged in court, as it should be. This column suspects that Maharashtra’s Ashok Chavan government may not even be serious about implementing it – make the announcement, allow the bile to rise, encourage protests, fight the court cases, sit back and see the brownie points roll in. First, the education minister announced this scheme and caught everybody by surprise. This was roundly pooh-poohed by his senior party colleagues. Then, suddenly -- one could almost see the bulb light up as realisation of the political dividends dawned -- even the chief minister parachuted into the controversy by expressing his approval.

But, this is a cheap stunt. And, parents of children in SSC-administered schools should be careful before endorsing the scheme. They should see the idea for what it actually is – a cheap vote-catching gimmick. If this government is really serious about SSC students, it should first improve the syllabus. It has now been established beyond any doubt that SSC standards have fallen way behind the central boards, or even some of the other state-run education boards. Most of the SSC schools are in a state of disrepair, and many of them are owned by the state government. The quality of teachers is dropping in all schools, but at a faster rate in the SSC schools. The SSC board needs a long-term fix, not band-aid and plasters.

Budget Badinage

First, my sincere apologies to all readers. Travel schedules and attempts to understand the vagaries of my new daytime job have kept me slightly busy. Promise to be more regular in the future.

The approaching Budget and speculation about its format is occupying the minds of most market observers. That is not surprising. Given the mandate won by this government, everybody is keen to see what form and shape this budget takes. Everybody also has his pet hypothesis. So, as all eyes converge on Pranab Mukerjee, here is this column’s take on the Budget (which is a bit of my own loud thinking and a bit of mish-mash from all that’s appeared so far in the media).

First, the man himself. Pranab Mukherjee is a seasoned politician and not an “economic technocrat”. This is sure to reflect in the Budget. Those hoping for a reforms blitzkrieg may be in for some nasty shocks. Those hoping for a totally populist budget without any market-friendly giveaways may also have got it wrong. The answer might lie in the way the political landscape has shifted.

First, the FM has to mend the gaping hole in the fisc. 'We have to deliberate on ways and means to bring back the economy to higher growth trajectory without fiscal profligacy,' Mr Mukherjee is believed to have told a conference of state ministers. So, out with all hopes of heavy tax cuts. Any substantial tax cuts would have to be substituted with increases in indirect tax rates, an utterly undesirable proposition. But, there are likely to be some tax changes – such as, some tinkering with Fringe Benefit Tax or Securities Transaction Tax which leave an okay taste in the mouth without upsetting the consolidation process.

He may also look at some new tax exemption schemes on a prospective basis to keep the household spending engine on track. Increasing the threshold level for tax breaks on interest paid for new home loans is something that’s already figured in the media. More of such similar schemes might worm their way into the document.

But, he also has to think of the forthcoming assembly elections in some of the states, such as Maharashtra. Therefore, food guarantee programmes, higher procurement prices for rice and other such schemes might find mention in the Budget document. Plus, given the way this monsoon is behaving, Mr Mukherjee might be forced to provide some rural handouts and concessions.

Think state-wise, especially about states that are likely to go to the polls in the next couple of years, when you read the Budget document. The Congress party, emboldened by its improved performance in Uttar Pradesh and some other states where it had reached rock-bottom, will want to consolidate its hold in many states before its current allies (Mamata or Karunanidhi) get too strong or some of the existing political opponents can regroup. See how quickly CBI has acted in arresting NCP man Padamsinh Patil. Or, witness the alacrity with which the Kerala governor has acted against Pinarayi Vijayan, supposed to be close to Prakash Karat. That should provide some clues about not only the shape of politics to come but also hold some pointers to the nature of this year’s Budget document.

Two-Bit Theory

Monday Morning and yet another epistle on the latest election results. I know, I know...there have been too many of these post-election analyses and I can even hear you groan, but this had to be written. Here are a couple of my observations.

* This general election will go down in the history books as the election of spoilers. Look around you. In state after state, whether it’s Andhra Pradesh or Maharashtra, some spoiler or the other has eaten into traditional vote banks and screwed someone’s chances. There are two ways of looking at this development. One is to assume that they are working under the umbrella cover of some large party and have been created to spoil another large party’s prospects. Second, if not, then these elections were the just the semi-finals, they were testing the waters and are now preparing for the next elections.

* The overwhelming support for Congress is, I think, is the voter’s way of showing his middle finger to all the various fronts and two-bit parties hoping to trade their four-five MPs like bargaining chips. The voter saw through the game when pre-poll alliances went out of control.

Turkindi

Here are some words we heard on the streets of Turkey, while trying to keep up pace with the dramatic changes in the Indian political landscape:

Çay – Tea (with the ‘C’ pronounced as “ch”)

Dukkan – Shop

Terzi – Tailor

Dikkat – Danger

Meshur – Famous

Gul – Rose

Sarap – Wine

Sehir – City

Shikayet – Complaint

Turkish Coffee -I

My Istanbul flight timings made sure Monday Mocha gave way to Turkish Coffee on Tuesday. So here are some initial impressions from the land of doner kebaps and koftes.

First, all compliments to the new management at the Mumbai International airport. No more sweaty queues to get into the airport terminal or to get the luggage screened. Smiles all around, courtesies extended and no more desperate crowding. Probably it’s because the air-conditioning was working. But, on a more serious note, the change now makes the flying out of Mumbai a pleasurable exercise.

And then to Istanbul. Somewhere I had been expecting a bleak city, with emotions ruling between the grey and the black, the burden of history weighing heavy on the ordinary Istanbullus’ shoulders. Maybe that’s what happens when you try to see the world through the eyes of Orhan Pamuk. According to him, there is a common leitmotif running through the city’s intricately intertwined genetic lattice – melancholy, or huzun, as a predominant cultural identity. But, on the surface, that somehow seems absent. The city looks bright and colourful, with the people eager to succeed, though the strains of balancing the plethora of competing cultural strands that make up modern-day Istanbul do break through the surface sometimes. But then, this is just a superficial impression gained from spending just one day in this great city. More later. Some pictures too coming up soon.

MID-WEEK MACHIATTO – I

The Reserve Bank is one governor short this week. Deputy governor Rakesh Mohan is heading out to Stanford University as Distinguished Consulting Professor, taking a break from his long stint in public policy to return to academia. But, it is not only RBI which will miss him.

Over the past few years, the top layer of economic policy-making in India has seen the entry of a large number of engineers, with many of them having graduated from the prestigious Indian Institute of Technology. Look around. Rakesh Mohan obtained his Bachelor of Science in electrical engineering from the Imperial College of Science and Technology, London. Then, there’s the man who is increasingly driving changes in the micro-structure of the financial markets and the macro-design of the financial system – Raghuram Rajan, former chief economist with International Monetary Fund and currently a professor with University of Chicago. He is an alumnus from IIT. Even current RBI governor Duvvuri Subbarao is an IIT graduate, though he majored in physics (Bsc from IIT Kharagpur & MSc from IIT Kanpur).

In the immediate vicinity outside the policy-making circle is a bunch of advisers and critics who play a very important role. One of them is Ajay Shah, who has also served as officer-on-special-duty with the finance ministry. He graduated from IIT Bombay as an aeronautical engineer. Ajit Ranade, chief economist with the A V Birla Group (apart from being a columnist with Mumbai Mirror), is also a graduate from IIT Bombay.

Most of them then went on to study economics at the post-grad and doctoral level. That raises two questions. First: Do engineers bring some special insight into economic thinking and policy-making? Second: why are so many engineers keen to jettison their first choice of academics and move to economics? Insights anybody?

Voting Holiday

Why are people so surprised that the voter turnout was so low in Mumbai? Wasn’t it kinda expected?

For one, the newspapers were pretty sure that this was going to happen anyway, the day the Election Commission announced the final dates. The long weekend was visible to calendar-watchers even then. Wonder why the EC missed it?

But there are other reasons too. This is Bombay (no matter what other names you use for it) and the city breeds an animal instinct in you, teaches you to look out for yourself, from the moment you enrol into school, or start taking the 8:10 fast to college. You squeeze in, you elbow somebody else in the ribs, you stamp on somebody else’s feet if necessary, but you have to be on that train and you can’t afford to miss out on the first lecture. As Bob Dylan sang out, rather dryly: “Now, they take him and they teach him and they groom him for life./And they set him on a path where he's bound to get ill...” No wonder then that the Mumbai voter thinks – somewhat erroneously perhaps -- national duty or governance issues are not his concern.

But, this seems to be too easy an answer, almost like a politician’s glib reply to the question. Undoubtedly, the city does encourage self-aggrandisement, but that’s only part of the whole picture and it might be downright silly to cast all Mumbaikars in the same mould. Part of the reason also could be the low Muslim voter turnout, as pointed out by M J Akbar in latest column (http://timesofindia.indiatimes.com/Columnists/M-J-Akbar-The-missing-Mumbai-voters/articleshow/4477185.cms). But, this column feels that the main reason for voter apathy is the little choice that politicians and political parties have left on the polling booth table. The absurd drama of pre-poll alliances, the naked greed on display for power and pelf, the glaring absence of issues, the puerile name-calling...all of these reasons (and then some) added up to provide voters with the tipping point. Short holiday? Of course. Voting? Bah!

Taxing Half-Truths

This is election season. So, in keeping with the mood of the day, we’ll deal with the familiar area where economics and politics interact and blend into each other. Every now and then, some politician will stand up and berate the centre for not providing enough funds for Mumbai city. The logical course for this now-so-familiar harangue is as follows: highlight the city’s enormous contribution to the centre via direct taxes paid and then blame the centre for usurping these funds without spending a dime on the Mumbai’s development. This gets repeated often and – like any other fragment of gossip -- acquires some modicum of legitimacy.

The truth is often far removed. Let’s tackle the issues one by one. First, the tax contribution. It is entirely true that Mumbai city collects and provides huge amounts of income tax to the centre. Figures and percentages keep varying, depending on which report you are reading or which politician you heard last. It is also true that only a fraction of that money gets back to the city for its further development. But, here begins the smokescreen.

The income tax collected by the city is indeed huge. But, is all of that generated by Mumbai city alone? Not really. Take the case of some of the highest corporate tax payers. For example, the country’s largest bank, State Bank of India, is among the top tax payers from Mumbai city. But, are its profits derived from this megapolis alone? Hardly. The bank has thousands of branches spread across the country, conducting banking business, making profits, which all show up in Mumbai because the bank’s headquarters are based in the city.

Take the case of another large private sector company, Hindustan Unilever Ltd. The company makes soaps, detergents, toothpastes and other such products across the country and sells them widely throughout into every corner of this vast landmass. But, when it comes to paying taxes on its total profits (which includes contributions from each and every sale that occurs in some village or tehsil), the lump-sum amount seems to emanate from Mumbai only because the MNC’s India headquarters are located in the city.

But, have you ever wondered why does everybody harp about direct taxes only? Why does nobody actually talk about Mumbai contribution to, say, the total excise duty kitty? The reason is: excise is collected at point of manufacture and most factories are spread out across the country, instead of being concentrated in one city or state or region.

The second part of the half-truth: does the government spend very little on the city’s development? Absolutely, no doubt about that. But, again there’s more too it than meets the eye -- under the federal structure of the country, the centre pools all the central taxes received from the different states and then allocates resources from this pool to different states, based on a formula devised by a finance commission (which is changed every five years). In addition, the centre also launched a scheme called Jawaharlal Nehru National Urban Renewal Management to improve the civic infrastructure of all major metro in the country. Resources are allocated based on certain criteria. People should ask: have the state government, or the city authorities, met all the conditions?

People should not get sold on half-truths about the city. Or get swayed by emotion-tweaking statements about the city’s contribution. In all of this, the city’s actual problems get dwarfed and its real contributions obfuscated.

ROI: Rely On Inspiration

In corporate finance, ROI (or, return on investment) is a well-known and quantifiable ratio. It has no ambiguities and has very little room for negotiation. But, the concept of ROI is now being extended to other areas as well which have ample space for manoeuvre and, sometimes, can even evoke the involvement of the super-natural. The on-going general elections have invested the temporal ROI concept with an otherworldly veneer.

In accounting terms, ROI is used to measure how effectively a corporation is using capital to generate profits. In simple terms, it is measured by dividing a company’s operating profits (adjusted for taxes) by its outstanding equity capital plus long-term debt. But, then, there are other versions of ROI as well. For example, in the stock market, return on investment measures the net gain made from investments compared to the cost of investments. And, then there is an ROI definition tailor-made to fit the IT department too, which presumably computes the efficacy of investment in all kinds of boxes versus the improvement in productivity or gains in efficiency, or whatever.

But all these measures are quite solid and leave little room for uncertainty. But, once the finance guy’s ROI concept travels to the advertising industry, it acquires a wee bit of grey zone. In traditional advertising, the ROI concept tried to measure the efficacy of advertising by pitting the bucks spent on advertising versus the money it generated by an increase in sales.

Now, this is not so easy to determine. Sales can increase for a variety of reasons, including the influence of advertising. There is no scientific method to prove that ‘x’ dollars spent on advertising and marketing leads to sales increasing by ‘y’ dollars. Then came the internet and the guys hit pay dirt. It then became easy to determine which banner ads got how many clicks, and how many of them then were converted into online sales. But, there still existed some room for doubt – there is no way of knowing how many people saw a banner ad on an internet site and then went purchased the product advertised from the shop on the street-corner.

To be fair, the guys with the calculators and the fancy spreadsheets seem to have made some progress and today there exist some proximate formulae for figuring out the ROI of an advertising campaign. While the ROI concept is basically a qualitative one in finance and accounting, in advertising and marketing it acquires a qualitative hue.

But, the general elections in India have imparted a completely speculative ring to the ROI term. The Times of India edition dated April 14 had an interesting, Hyderabad-datelined story on the front page: “In an agenda-less election, with political parties forced to bank only on the promise of more goodies, the crackdown on the flow of liquor and cash being transferred in vehicles is proving to be a big dampener for aspirants. Every car moving around in the city, and especially its outskirts, is being stopped at various points by cops led by the Election Commission-appointed DGP A K Mohanty, its licence plate noted and the boot and space under the seats thoroughly checked. Such checks have yielded a booty of Rs 23 crore in the last week, leaving many of the candidates apprehensive.”

It is well-known that currency in circulation shows a sharp jump in the weeks preceding an election. It has been noticed this year too. Writing in The Economic Times, dated March 6, Gayatri Nayak and Gaurav Pai observe: “As the world’s largest democratic exercise unfolds, parties and candidates are expected to mobilise and spend thousands of crores as part of their campaign. An immediate impact of all the spending by political parties is an increased volume of cash in the form of currency. This year too, like every other year, there has been a sharp jump in currency in circulation. Some traders in the foreign exchange market feel that with political parties reaching out for overseas funds, there will be a rise in remittances before the elections , as in most years when the country goes to the polls.”

The moot point here then is: how do candidates know whether the cash spent (or liquor bottles -- the proxy for currency in many areas of the country -- handed out) is actually translating into votes or not? In some areas, some political parties possibly ensure that through muscle power and the menacing barrel of a gun pressed against the temple. But, otherwise, it is damn difficult to figure out the ROI on the cash doled out. The logic must be: Pay the cash and hope for the best. In poll parlance, ROI probably stands for Rely On Inspiration.

THREE JOKERS IN A PACK!

Finally, it all boils down to only three variables – politics, monsoons and the budget in July. A combination of these three in varying degrees is going to determine the future of the economy – as well as the speed of recovery from the current economic slowdown. Brrrr... that’s a damn spine-chilling, peace-of-mind-wrecking thought!!!

First, there is no way you can avoid the political fallout of the impending elections on the economic future of this country. Whichever political blend rises to the top after the electoral churn -- whether it is the Congress (in various combinations with its old allies, including with or without the Left Front), the NDA, the Third front, or even the Fourth Front – their economic policy, and their strategy to extricate the economy from the current morass, is going to be closely watched.

This political combine’s socio-political philosophy – some of which is nothing but a vulgar manifestation of crony capitalism -- will also be critical in framing the July budget, which also has a large role to play on how the economy pans out in the next couple of years. Suppose, in a replay of the 1996 freak outcomes, what if some poor, hapless soul gets chosen as the consensus prime minister? Will you trust your economic policy to him?

The current source of economic pride – that India’s GDP is still growing at over 5% -- lies in the villages and the semi-urban settlements. Their source of consumption power flows from a number of propitious barrels – the loan waivers (which has spotty distribution), the NREG, the rising minimum support price for rice and wheat, etc. But, god forbid, one bad monsoon and it all goes...poof!...up in smoke.

The frightening bit about all the three variables is that you and I seemingly have no control over any of these factors. But, we do have control over one lever. And, that’s our vote. Make it count, guys .

Statosphere: Where The Figures Don't Meet

There are many jokes about statistics and the tricks that numbers play. Behind any jumble of numbers, what you see is not always what you expect to get. Any arrangement of numbers can be interpreted differently by different people. So, it was not entirely surprising when the telecom ministry last week ordered an audit of the country’s top mobile operators. The beef? The ministry feels that mobile operators, to avoid paying the government a higher licence fee, are misrepresenting their revenues. Telecom operators are expected to pay a licence fee to the government, which is calculated as a percentage of their revenues. Some services attract a lower percentage compared to some others – for example, while revenues from long distance services attract a licence fee of only 6%, some other mobile services attract 10%, leaving ample room for arbitrage. But, what’s surprising is the discovery made by the ministry – some mobile companies were reporting one set of numbers to the Telecom Regulatory Authority of India, and a completely different set to stock exchanges.
Today’s column is not concerned with the telecom regulatory infractions but is suitably spurred by the interesting example of two sets of balance sheets, representing the same core numbers. Statistical discrepancies have become a way of life in this country. At the platinum jubilee celebrations of the Indian Statistical Institute in Kolkata, in December 2006, prime minister Manmohan Singh observed: “Another key issue has been the discrepancy in the estimates of the same variable from two different sources. The classic example is the difference between the National Accounts and National Sample Survey estimates on consumption expenditure. The present system has also not been able to provide adequate information on basic socio-economic indicators that are crucial for micro level planning.”
This is a concern expressed even by the high level committee on estimation of savings and investment, chaired by C Rangarajan (former chairman of the prime minister’s economic advisory council), which submitted its report recently. At the macro level, the report traces how committee after committee has pointed out the statistical discrepancies between savings and investments estimates, with savings far exceeding investment numbers. For example, the report notes how the Chelliah expert group had noted that the order of discrepancy in 1994-95 was almost 2% of GDP. Many other similar examples abound in the macro-economy.
At the micro level, there is the absurd situation of the same issue being reported differently by different ministries. Take the example of the cotton crop. Curiously, both the textile ministry and the agriculture ministry provide their own estimates on the annual cotton crop and, predictably, both are widely divergent. This has been happening over many years and arises primarily because the two ministries use different methodologies. For example, take the crop estimate of 2004-05: the textile ministry reported it as 243 lakh bales of 170 kg each, while the agriculture ministry number was 16.43 million bales (of the same size, or 164.3 lakh bales). The advance estimates for 2007-08 were similarly at variance: 315 lakh bales versus 258.1 lakh bales, respectively.
The same kind of statistical discrepancy has existed even in the trade deficit figures presented by Reserve Bank of India and the numbers generated by the commerce ministry, with the central bank’s trade deficit estimate typically being higher than the ministry’s. The difference arises largely in imports estimates, with the RBI number based on foreign exchange paid on the day of the import rather than the year’s average rate used by the commerce ministry in its calculations. But, more importantly, the RBI’s numbers include defence imports, which never have to pass through customs scrutiny (and therefore escape getting caught in the commerce ministry’s statistical dragnet) but have to be paid with hard foreign currency.
But, despite these manifest discrepancies (some of which exist even in the developed economies), this column’s heart goes out to the unseen and unheard class of professionals called statisticians who have been given the unthankful job of collecting data from across this vast country, teeming with diversity unknown to any other nation-state, using technology that’s horribly outdated and given budgets that are constantly shrinking. And, despite all this, the fact that they still manage to distil some semblance of sense into that thicket of numbers -- which is then used by policy makers to drive decisions and massaged by politicians for gaining mileage – is creditworthy. Spare a thought for them too when you next boast of how India’s going to grow by over 5%, when the rest of the world economy is shrinking. Without them, you wouldn’t have had a clue.

Keep A Close Eye On The Middle

Somewhere between the late eighties and the early nineties, a new word — “disintermediation” — was silently introduced into our collective consciousness and vocabulary, especially in the context of the financial sector. It was a bit like how the words “paradigm” and “synergy” have attached themselves, uninvited and somewhat unobtrusively, to our conversations. Disintermediation is no longer restricted to the financial sector and it is changing many parts of our familiar world. Many other unfamiliar parts will also alter immutably. But, yet, there might still be some parts of this world that will continue to require a middle tier.

Disintermediation, when it was introduced into the Indian market jargon, simply meant savers taking their hard-earned savings directly to those who needed it most — that is, companies setting up projects — instead of lending it to intermediaries (such as banks), which then eventually lent it to the companies. The word was used repeatedly in the perspective of developing the Indian capital markets. It is another matter that in the meantime a larger number of intermediaries have reinforced their presence in the capital markets.

But, beyond the framework of the capital markets, the word “disintermediation” found new currency during the internet boom and, once the dust settled, in all kinds of consumer offerings. The term also inspired new theories on organisational structure and management strategy. What disintermediation simply meant was cutting out the middleman from — or delayering — a company’s supply chain or distribution networks. For example, Michael Porter’s value chain concept became the foundation for re-engineering corporate structures to e-commerce applications.

Two examples of disintermediation are threatening to change two industries beyond recognition.

Reams have already been written about Apple’s iTunes and how this business model has changed the music industry. Apple realised early on that the internet would modify the music distribution business forever. That model — which has the sale of hardware layered on the software promise — has now become the defining template for music distribution. It peeled off many layers — such as, the music stores and the distributors, all of whom meant additional costs for the ultimate customer. But, there are further changes coming, which drive the disintermediation process further and promise to even do away with the need to buy hardware to access the software. A new service called “Spotify” allows users to hear songs of their choice from a virtual jukebox, all free, provided they agree to listen to 20 seconds of ads between 30 minutes of uninterrupted music. The songs can only be heard, not downloaded, reducing the piracy threat for music companies. The promise becomes attractive, given the easier access to the internet today, especially through mobile phones. It not only does away with the need to carry an iPod around or manage shelf-space overflowing with CDs, but it also has music labels signing on to offer their music. The service is still developing, but it has already created a buzz.

The second example is “Kindle”, an e-book reader launched by Amazon, which is now in its second version. It would be instructive to remember that Gutenberg’s invention freed ordinary people from the tyranny of priests and godmen, when he made available printed copies of the holy texts and scriptures at affordable prices. That was disintermediation 101. With Kindle-2 comes the second phase. With the help of the net, readers can download books, magazines and newspapers on their e-reader, which can then be read at leisure. Most importantly, if Amazon becomes a publisher also (which is not too distant a likelihood), the Kindle would have eliminated — in one stroke — the whole middle kingdom of agent, publisher, distributor and book shops. Sure, the Kindle-2 still has a long distance to travel — readers are unlikely to give up the printed, paper version completely in favour of a Kindle (at least, not yet), or eschew the option of browsing in a bookshop. But, the field has been set and a game is certainly afoot. Watch this space to see how traditional publishers respond to this challenge, especially with Google and Sony also adding their hats to this e-space.

But, despite the seeming invincibility of disintermediation as a business process, a few things in life will always come with middle-men. For instance, our desire to live a life of good health is no longer within our control. Doctors have taken over every aspect of our health and maintain a stranglehold over the whole medical well-being business. With all of us leading complex lives, there is no way we could even begin thinking of a disintermediated surgical procedure.

There is another category which we love to hate and yet cannot eliminate from our lives — politicians. Post 26/11, many embittered citizens asked resentfully whether we needed politicians at all. The emotional outburst at that moment was understandable, but we elect politicians to govern on our behalf. If they’re abolished, we have to police ourselves, clear the garbage, or finance and oversee road-building through mosquito-infested swamps. The least we could do is elect the right guy and then monitor his work, his questions in Parliament or the quality of his debate. Since we have to live with this devil, we might as well keep an eagle eye on him.

(Courtesy: The Economic Times)

It’s High Time ICAI Set Its House In Order

A incident is usually one which alters the course of events forever. Champions for improved corporate governance norms had hoped that the Satyam episode would probably turn out to be a defining moment in the history of Corporate India, a turning point that would help introduce better compliance and disclosures. What a delusion, a load of nonsense, that’s been!

Soon after the Satyam episode came to light, the most indignant lot seemed to be some of the regulators. For instance, the Institute of Chartered Accountants of India (ICAI) — which regulates all the auditors in the country and lays down all accounting rules and audit norms — tried deflecting the blame by pointing fingers at certain firms and individuals, instead of introspecting about the quality of accounting and reporting norms that it endorses. Sure, there is the possibility of an unholy collusion between the Satyam management and its auditors — which is still the subject of an investigation by the police — but in the absence of any proof, ICAI launched a broadside, through calculated leaks to the media, about the culpability of certain individuals, some of whom are important elected ICAI members and have therefore cultivated bitter rivals, eager on usurping those coveted positions.

In the meantime, the minister for corporate affairs PC Gupta also publicly lamented the lack of corporate governance in many Indian companies and dropped broad hints about how his ministry would vigorously pursue and bring to book some 100-odd companies that had violated accounting guidelines blatantly. It did not occur to him to also add that this broad-based abuse of regulations had transpired under his watch as minister over the past five years, and that they had gone unnoticed, unreported and unpunished by his ministry. Or, that these “gross” violations had been endorsed by numerous auditors, who remain affiliated to — and licensed to practise by — the ICAI. To the astute and the cynic, the outpourings seemed to have been made with an eye on the forthcoming elections, rather than with an honest intention of improving corporate governance or the state of disclosures in Corporate India.

One of the issues with India Inc that will continue to plague investors will be the extent of comfort they can draw from the published accounts and the degree to which they can trust these numbers. In this high season of righteous anger, one doubtful accounting practice continues unabated and untrammelled. This is writing off impairment to assets through the balance sheet rather than bringing it to the profit and loss account. While the bull run was rampaging through valuations, many companies used this accounting sleight to botox their revenue and profit numbers. And, minister Gupta, as well as, ICAI continue to look the other way as camouflaged corporate numbers hide losses and dupe investors.

Here’s how it happens. Suppose, Company A bought 75% of Company B, which is a foreign company, about 18 months ago. At the time of acquisition, an exuberant A had paid $500 for B. But, given the economic cataclysm in the global system, B’s value today stands reduced to $100. In effect, what A bought for $500 has now become $100. How does A account for the $400 that has vapourised because of the global economic meltdown? Well, normally, best practice should have required him to deduct that amount from his net profit, or add to the loss. But, since he’s in India, he does things differently — he deducts the amount from the share premium reserve, an account created from the money that a company receives for issuing shares at a premium — the face value is credited to paid-up share capital and the balance goes to share premium reserve. In short, the loss in the value of A’s investment is not reflected in the bottom line at all.

The objective of such account-brushing is to get a better reception at the fancy ball, known as the stock market. Companies relentlessly pump up revenues and profits while masking losses and brushing accounting misdemeanours under the carpet. Sure, some auditors do raise some flags, but companies are able to use the legal cracks in the system to wriggle out. In such cases, the auditors should voice their reservations loudly and clearly; the ICAI should back them with clear rules that favour investors and not audit firms that tone down their criticism for fear of losing a client. So, the issue here is: does ICAI frame rules and guidelines that eventually benefit its member firms over the interest of minority shareholders? That raises another pertinent point: should ICAI then be governed solely by elected representatives from member firms, as is the norm for all other self-regulated organisations? These questions must be answered if we are serious about corporate governance, and if we want to avoid the next Satyam.

(Courtesy: The Economic Times)

Rural Job Schemes Are Cool, But They Too Have Problems

Economics has a strange way of looping back and whacking you on the back of your head. Governments take great pride in formulating grandiose schemes that are purportedly pro-poor but end up hurting the intended beneficiaries. Sometimes, the intentions are honest but the execution is poor, without much thought given to entire chain of consequences.

With the election bugles having been sounded, speculation is rife about the contents of each party’s manifesto. Some of it will be very predictable. For instance, the Congress will definitely try to display two large feathers — one for claiming to have sewn up the nuclear deal with the US and another on the spectacular success of its rural employment programme, the National Rural Employment Guarantee Scheme. Time for a quick look at the last one.

The NREGS was implemented nationally through an Act in 2005 to provide a social safety net for the most vulnerable section of rural society. The scheme’s operational guidelines define the NREGS goals: “Through the process of providing employment on works that address causes of chronic poverty such as drought, deforestation and soil erosion, the Act seeks to strengthen the natural resource base of rural livelihood and create durable assets in rural areas. Effectively implemented, NREGA (NREG Act) has the potential to transform the geography of poverty.”

The Act also stipulates that every worker be paid minimum wages fixed by the state for agricultural workers. This is where economics starts playing up — unseen and unheard. It works in two ways. One, where market wages are higher than the minimum wage rate (or, even the wage rate fixed under the particular works programme), the demand for labour for NREGA projects is never met fully. But — and this is the fun part of economics — the converse also holds true. In many cases, where the state has fixed a high minimum wage rate, which then acts as the floor in that localised market, other agricultural enterprises find it difficult to employ labourers at economical rates.

One can argue that providing minimum wages isn’t such a bad thing. For one, it provides an administered floor — beyond which wage rates can’t possibly fall — to minimise economic exploitation. But, where political compulsions and oneupmanship lead to rising wage rates, it could even affect the cropping pattern of that state and lead to shortages of certain crops.

A recent report by Swiss bank Credit Suisse predicts that many farmers in western Uttar Pradesh are likely to replace their sugar crop with a rice-wheat crop. One of the reasons responsible for the crop-switch is the rural employment scheme. The report says: “The government’s national rural employment guarantee scheme (NREGA) has resulted in shortage of agricultural labourers in this region. Migration of labour from eastern UP and Bihar has slowed considerably as work is easily available under NREGA. The average daily labour cost has increased from Rs 50-60 per day to Rs 80-100 per day (NREGA daily wage is Rs100 per day in UP). Labour shortage and cost affect cane more than R-W (rice-wheat). For one, cane requires about 75-90 man days of labour per acre per year, while R-W requires about 60 man days per acre per year. Moreover, many jobs in R-W cultivation is readily mechanisable (harvester combines, threshers, etc, readily available for hire in the region), while cane is not amenable to mechanisation (due to lack of or high cost of machinery in the area or due to lack of technology.

There is another government policy — ostensibly to insulate poor farmers from the vagaries of an unpredictable marketplace — that is also boomeranging on the people it’s supposed to protect. Many years ago, the government introduced the minimum support price (MSP) to assure farmers of a reasonable price for their produce. The government announces a price at the beginning of each crop cycle, thereby providing an artificial and administered floor price below which market prices can’t fall. Sometimes, competitive politics forces the government to announce further price increases in mid-season.

Again, nothing arguable with this noble objective. But, as the report from Credit Suisse says: “Over the last four years, the increases in rice (+61%) and wheat procurement prices (+69%) have significantly outpaced the increase in cane prices (+31%).” The end consequence of this shift in cropping pattern is already showing up in the inflation indices where, despite the downward pressure exerted by petro-products prices, inflationary pressures exist for food items. For instance, the category “sugar, khandsari and gur” has been showing a very high rate of price rise among all the food categories that are included in the inflation index.

But, that is not all. These same high procurement prices also result in food prices rising across all categories. Since the poorest — the NREGA target — have no access to the public distribution system (which is well documented), the high MSP for staple food items leaves daily-wage-earning rural poor with a lower disposable residual income for healthcare, clothing or any other contingency. So, should NREGA doles be indexed to minimum wages or inflation rate, or even MSP? You can bet your bank passbook that there will be lots of research coming up on this, but what’s going to be even more interesting is to see how the NREGA beneficiaries vote.

(Courtesy: The Economic Times)

Taking Up Aam Aadmi’s Cause Just Can’t Add Up

The government ads disappeared as soon as the model code of conduct kicked in. No longer is the public being subjected to ads highlighting government did this, or achieved that unique record. But, one category of state-sponsored ad continues to play on — those nudging consumers into wakefulness, to be aware of their rights. These use examples from a wide variety of industries where consumers run the chance of getting short-changed — telecom, retail, consumer durables, and so on. These ads are beyond the sweep of the Election Commission’s eagle eyes because they purport to serve public interest and do not applaud the feats of any government ministry, department or politician.

All very nice. But are they appropriate? Or, timely? Actually these ads are quite evergreen but on the scale of priority, may be the government seems to be missing out on something. The strategic thing to do might be underlining corporate mis-governance and pressing investors to exercise greater discretion while choosing their investments. A series of ads highlighting how to detect corporate fraud, or how to see through accounting sleight, might have also provided the right kind of learning for the wet-behind-the-ears stockpickers. No one is saying remove the consumer awareness ads. But, post Satyam, there is simmering anger against what is seen as government’s tacit support for corporate malfeasance. A series of ads asking ordinary Indian savers and investors to awaken to their rights might have struck a right chord with a certain section of the electorate. In one stroke, not only would the government found resonance with voters but would have also been able to distance itself from the perception of being too close to the perpetrators.

But short-sighted politics refuses to relax its stranglehold over common sense. Despite all that has happened, the government continues to send out signals that it’s still strongly on the side of the majority shareholder, that its policy-making apparatus is still guided by the interests of the politically marginal, but influential, pressure groups. This is a calculated gamble, but can have disastrous results as has been experienced by many in the past. In the past couple of months, some government ministers have occasionally used the media to threaten punitive action against certain companies with suspect governance practices. But, these ministers are blind to the other side of the coin — that their threats raise questions about why were they sleeping at their jobs for the past five years. But, in the end, politics of expediency triumphs and government chooses overt action only for the consumer, and reserves covert support for the majority shareholder.

One would have expected some accelerated regulatory action after the Satyam episode. Take a look at the Institute of Chartered Accountants of India (ICAI). It has shrugged off any culpability for the Satyam scam. Sure, global audit firm Price Waterhouse was remiss in its duties as statutory auditor, but no one at ICAI stood up and declared that there’s probably something intrinsically wrong with, or missing in, the ICAI rules, regulations and guidelines. Most recently, in the accounting norms for foreign currency convertible bonds (FCCBs), instead of acting as the regulator, the ICAI is once again capitulating to the demands of its clients and is planning to relax the accounting rules.

Most FCCB issues were made in the heady days of the bull run and the continuing sensexual fizz gave issuers the confidence that their share price was divinely destined to move in only one direction — up. This belief then propelled many issuers to promise to redeem their FCCBs at a premium to face-value, in case the conversion to the underlying shares did not take place. Unfortunately, that dream run is now over, most bonds are trading at a discount to their face value and, given the depressing state of the stock market, are unlikely to get converted into common stock. Consequently, issuers now have to get ready to start redeeming these bonds, which will require large amounts of cash. What’s acted as a double whammy is the appreciation of the dollar, requiring companies to pony up greater sums of rupees. Prudent companies have been squirreling away money for this contingency from their profit and loss accounts over the past few quarters.

But, these are only a handful. Most of the companies are not recognising this impending liability; they are deluding themselves that the bonds will get converted into shares and, therefore, there is no need to set aside cash for redemption day. The compulsion to show higher profits today, in disregard for the tomorrow’s looming danger, is playing havoc with investor sentiment. Has the ICAI descended like a ton of bricks on these companies or the auditors that have chosen to ignore this phenomenon? You must be joking. It is instead studying the possibility of giving the corporate sector some relief on cash that was provided earlier. Investor sentiment be damned. As long as the investor population does not become a powerful voter lobby, don’t expect any meaningful corporate governance.

(Courtesy: The Economic Tiimes)

The Trouble With Expectations

Late Freddie Mercury, who fronted for British rock band Queen, once crooned “crazy little thing called love”. That song has found a secure spot among the alltime favourites of pop/rock history, but its claims to an enduring place in the list of crazy and strange things may have to confront some occasional challenges. One of the peculiar things that demands immediate enlistment is the indefinable, indeterminate and intangible concept called “expectations”. It’s playing havoc with the economy and all the strategies conjured up by planners. It is time to get hold of this slippery creature.

The government has announced three well-publicised stimulus plans so far. These include duty cuts on manufactured products, tax relaxation for services provided and a host of other measures designed to spur people into spending more and companies into investing money for building new production capacities. Unfortunately, none of these seem to be working — consumers are not buying and companies are resisting new investments. Planners are perplexed (despite their brave public visage and statements), commentators foxed and politicians scared by this inexplicable systemic obstinacy. What they don’t realise is that, unseen and unheard, a phenomenon called “expectations” is at work below the surface.

So, what is this strange thing? The answer might be available in contemporary macroeconomics. It is a technique called the theory of rational expectations and is a device used in building models that try to predict a series of future decisions likely to be taken by consumers, investors or companies. This theory was first proposed by John Muth, a professor with Indiana University in the US, in the early 1960s. In the words of New York University professor Thomas Sargent, Mr Muth used the concept to “describe the many economic situations in which the outcome depends partly on what people expect to happen. The price of an agricultural commodity, for example, depends on how many acres farmers plant, which in turn depends on the price farmers expect to realise when they harvest and sell their crops. As another example, the value of a currency and its rate of depreciation depend partly on what people expect that rate of depreciation to be. That is because people rush to desert a currency that they expect to lose value, thereby contributing to its loss in value. Similarly, the price of a stock, or bond, depends partly on what prospective buyers and sellers believe it will be in the future.”

The theory also posits that future outcomes do not tend to vary greatly with the general expectations of the people. This means that some people will always get their forecasts wrong, but generally the majority’s assumptions of the future tend to be right. If that is so, this understanding might hold some keys to sorting out the clogged economic arteries. People are probably not spending because of expectations that things might get worse in the next few months, and that their uncertainties about job losses might, unfortunately, come true. Therefore, they feel it is better to save today, rather than indulge in discretionary spending, in case the climate gets cloudier tomorrow.

But what might be interesting to note are two related theories that are based on the theory of rational expectations or contribute to its development. The first one is the “permanent income” theory of consumption formulated by Milton Friedman. The Chicago-based economist used this theory to strengthen John Maynard Keynes’ consumption function that showed a positive relationship between people’s consumption levels and their income. This might sound a bit like stating the obvious, but this was a necessary development in the realm of theoretical economics to understand what drove people to consume and to formulate policy around it. Mr Friedman said that people consume based not only their present income but also on their perception of what their future income is likely to be. Hence, expectations.

The second hypothesis built around the expectation theory — and which seems important from the economy’s standpoint — was the “policy ineffectiveness proposition”, which said that if policy-makers attempt to manipulate the economy by encouraging people to have false expectations, they are unlikely to succeed. This derivative theory — first articulated by Robert Lucas — argues that if people have rational expectations, it will be difficult for policy-makers to improve the economy’s performance by inducing false expectations. These two important theories lead to two inferences. One, the government needs to start working on those building blocks of the economy that create jobs, capacities and thus future incomes. A start could be the infrastructure sector, which is still under invested and tangled up in bureaucratic knots. Second, the excise duty cuts and the service-tax reductions are like the false promises described above. They try to induce false expectations and, therefore, do not lead to an improvement in the economy.

It may be instructive here to notice that the dismal third quarter GDP numbers — which showed that the economy had grown by only 5.3% — has one silver lining. While agriculture and allied activities contracted by 2.2%, and manufacturing grew by only 2.37%, services growth at 9.85% seems to have saved the day. As part of services, social sector spending grew by 17.3% reflecting the impact of the sixth-pay commission and the national rural employment guarantee scheme. There might be some clues here.

(Courtesy: The Economic Times)

Economic Growth: Luck By Chance

As the government prepares to empty its filing cabinets and heads for the hot and dusty plains to solicit votes, it is visibly exuding optimism about the economy. According to its non-elected representatives, all the lead indicators seem to be showing some signs of a revival with the first glimmer of some incipient growth pushing through the enveloping gloom. Steel, cement, auto, fast moving consumer goods (such as soaps and detergents), food items, beverages, volume of goods moved by the railways, have all shown some improvement in January, after having shrunk in the previous two months.

With the government and other political parties having begun their courtship dance with the ballot box, this feat is sure to figure high on the Congress’ list of achievements. The economic slowdown in the past six months has certainly become a sore point with the Congress and threatens to blot its legitimate bragging rights of delivering an average growth rate of 9% year on year over the past four years. This year it may drop to 7%.

But before we start congratulating the government for its excellent economic management, let’s hit the pause button (a la P Chidambaram) for a moment. How much of the Indian economy’s resilience is owed to governmental intervention? Which parts of the successful India story can be credited to government strategy? Or, is there a strategy at all? Let’s find out.

• One of the economy’s mainstays for over a decade has been services. This contributes to over 50% of the country’s GDP and has been providing enormous growth impulse over the past few years. If you were to listen to the government representatives, it would seem as if they had foreseen the coming age of services and had designed this structure. The truth is somewhat different. There are many reasons behind the extraordinary growth of services. One of the reasons is the kind of elaborate rent-seeking structures erected by the government in the manufacturing sector. Any person wanting to set up a manufacturing facility in India still has to fill a large number of outstretched palms, making the operations costly from day one.

• Here’s another unique aspect of the economy for which politicians routinely take credit. One of the saving graces for the Indian economy during this episode of the downturn is the safety net expected to be provided by Indian consumers, even as the international economy winds down and eschews consumption of goods made in India. This has had a deleterious impact on Indian exports, leading many exporters to scale down their operations and restructure their businesses. Fortunately, for the planners and the administrators, the impact of the global slowdown is likely to be cushioned, to a large extent, by the gigantic Indian domestic market, which will continue consuming and providing the growth push to the economy. Again, it’s not as if some wise person in the government woke up one morning and presciently decreed that henceforth the country would focus only on the domestic markets. The government has always felt that exports should be the apposite strategy for economic growth, just like some of the other emerging countries. Guess what? Exporters also have to manufacture and that, as we said earlier, is quite an endurance test in India. Plus, the intricate structure built around promoting exports also worked as a huge deterrent. The government also did not quite see exports as an alternative, viable economic growth model till the Southeast Asian success story burst on to the scene. Hence, till then exports did not quite get the required push. So, no grand design here too.

• Savings, especially by households, is another strong point for the economy. But, there is a difference here. This strong economic foundation has developed for two reasons — partly by government design, and, partly because of deficiencies in services that governments elsewhere in the world provide to their citizens. The government in the 1960s and thereafter made a huge push to develop the banking branch network to funnel savings into the formal system. While that is good, the same savings were then used to finance the government’s various profligate expenses. The government harvested savings not to strengthen the economy but to finance its populist policies. Secondly, savings also grew in the economy because the Indian government has failed to provide any social safety nets for its citizens. Unlike in USA and various other European economies, where the government provides unemployment benefits as part of their social contract, Indians have to fend for themselves. In the current downturn, for example, many Indians – especially in the urban and semi-urban settlements — are wary of spending because of uncertainties surrounding their jobs. This has impacted consumption but, conversely, is bound to improve the savings rate.

The credit, therefore, should go to the Indian citizen who, despite the various hurdles and inconveniences, is using his ingenuity to improve his lot at all times. This collective strength has not been forged by some steely policy push, but has developed by default, almost in line with Charles Darwin’s theory of survival.

(Courtesy: The Economic Times)

Budget: Will It Poll-Vault Or Prop Up The Economy?

What rotten luck! Writing a column for a business newspaper on the morning of major policy announcements is replete with its own peculiar set of hazards. Damned if you write about it, and double-damned if you don’t. Look at the quicksand here. Speculate and you could end up with egg on your face. Ignore it, and readers wonder if you’ve finally tipped over to the other side. The only way one can salvage the situation is by moving beyond the present and the immediate.

Today’s column will try to raise some issues that might help readers determine whether the measures have enough horsepower to drag the economy out of the quagmire. Given that there is a general election coming up, it might also be useful to differentiate between prepoll bluster and genuine economic largesse. It might also help to remember that this is going to be one hell of a tightrope walk for this government — throwing cash at the economy at a time when its finances are deteriorating and the global economic environment is in crisis.

The first, and most obvious, question is: will zapping the economy with large doses of stimuli really help? The only way to find out is if the measures announced in the interim budget by stand-in FM Pranab Mukherjee really induce you to go out and spend some of your savings. Given the uncertainty over retaining jobs in most of the urban centres, consumption spending in the metros is likely to remain tardy for some time to come. The next best bet therefore is the rural areas, where the successful monsoons of the past few years have left many people with some disposable incomes. And, there is no immediate threat of layoffs here. So, how does the budget address this constituency? Another broader question: does the interim budget do anything to boost overall consumption — whether it’s rural or urban — and does it manage to put more money into wallets?

Remember, there is a hidden layer just below the level of economic stimulus, and it is called elections. It might be interesting therefore to see how they camouflage some of the political handouts as a part of the stimulus package. Here’s a pointer: with crude oil prices now crashing below $40 per barrel, the government might have slightly greater leeway in their spending plans over the next 15 months. Lower oil prices have direct and indirect effects. It not only reduces India’s import bill immediately, but will also reduce the subsidy bill that the government incurs for compensating oil companies (which had to sell petroleum products to the pubic at a price below their raw material cost). Ditto for fertilisers. So, despite the larger-than-estimated total subsidy bill by the end of the year — primarily because of the high food subsidy bill and the huge oil and fertiliser subsidies incurred in the first six months — the government will have acquired some headroom on the fertiliser and oil subsidy bills now. The question to ask is: are funds being spent on growth-inducing areas, or are they being diverted towards expenditure under the spurious head of “social sector expenditure,” that does nothing to the economy but pays enormous political dividends?

Which brings us to the next question: will this budget create some long-term fiscal burdens? You bet! Government finances are already creaking under the strain of so many stimulus packages and give-aways. Tax collections have already slowed down. The government has already revised its tax collection estimates downwards once. Given the continuing slowdown, experts are wondering whether the government will need to recalibrate its tax revenue estimates further downwards. Whatever might be the analysis, one thing is sure — the government’s tax collections will not only miss this year’s target, but will most certainly further dip in the next financial year. At the same time, with so much money being spent on prodding the economy, the government will have to keep borrowing to finance its ballooning expenses.

The trick might therefore lie in additional revenueraising strategies. One, there is a sure source of revenues in the scheduled auctions for 3G spectrum. The second is, of course selling some of the family property — it is high time the government resumed its divestment programme. The pause button was pressed on this revenue source soon after the UPA government got the Left Front on board. As a result, it missed out on the bull run and an excellent opportunity to bolster revenues. It may not be too late even now. In fact, the government’s selective divestments also could, theoretically, even give the stalled stock markets some sort of a push. Did you spot any additional revenue-raising items?

Finally, it might be a fun idea to try and use the interim budget document to figure out if this government is confident of returning to power. Who knows what clues might be available here. Have fun.

(Courtesy: The Economic Times)

Altering Tax Rates To Prop Up Economy

Tough times call for tough measures. One of the greatest advantages of being in a soup is that the means of getting out of it are never questioned. So, too, with the economy. Bushwhacked by an economic ice age that has frozen all economic activity, governments across the world are now adopting methods that were held in great disdain till the other day to thaw the chill. That also gives the government of the day in India some elbow room to try out stuff that they otherwise would have balked at even touching with a barge pole.

Former finance minister P Chidambaram let the cat out of the bag a couple of days ago, when he said that constitutionally there is no bar on the government altering tax rates to stimulate a decelerating economy. The same day in another location, the minister of state for industry Ashwini Kumar told reporters that the government was indeed drawing up a sector-specific stimulus package that would be presented during the “interim” Budget on February 6.

Hence, it does seem that the government might arm itself with some extraordinary economic tools to stir a recalcitrant economy into some sort of movement. Whether these will take the form of tax breaks or not is still too early to say. But, one thing is for sure — these exceptional circumstances warrant exceptional actions. And, the Opposition might be willing to relax its traditional, and probably perennial, hypercritical role in the run-up to the elections. In all the demands made for tax breaks made by industry, including the one submitted by the textiles and the gems and jewellery, there are some other tax issues that might have got obscured in the avalanche of sector-specific demands. There might be some stimulus potential in them, too. Here they are:

• The former finance minister introduced a tax called “fringe benefit tax”, which sought to tax companies offering their employees fringe benefits, or perquisites, in addition to the monetary wages and salaries. In short, “fringe benefit” as defined by the Finance Bill, means any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by virtue of them being employed. The benefits also include reimbursements, made by the employer, either directly or indirectly to the employees for any purpose, contributions by the employer to an approved superannuation fund as well as any free or concessional tickets provided by the employer for private journeys undertaken by the employees or their family members.

There were many arguments made in favour of the new imposition, especially since it was also in currency in the US, Australia (on which the Indian structure is modelled), the UK, Canada, Japan and some other countries. There were also some arguments made both in favour and against the new levy, citing the constitution as the reference point. However, even if we are to ignore all these arguments for the moment — since they have all been made by learned people — there is only one teeny-weeny case that can be made in favour of scrapping or lowering FBT. And that is this: the tax is actually levied on expenditure at a time when the government is struggling to induce people to spend. Therefore, there seem to be adequate reasons — especially of the “exigent” variety — that warrant a rationalisation, or even a drastic reduction in FBT.

• As part of the two stimulus packages announced a few weeks ago, the government sharply cut excise duty to spur consumption in the economy. This was widely expected and had been demanded by both experts as well as industry lobbies. The impact of these cuts might take some time to play through the various layers of the economy (especially since some of the companies might still be holding old inventory, either in the form of finished goods or raw materials), though the industry analysts seem to think that the auto industry might have benefited from it already. But, there was unanimity that the excise rate cuts were indeed the right thing to do, since the levy is a pass-through and, eventually, it is a tax on consumption.

But, just like excise duty is a tax paid on manufacturing, which finally is borne by the consumer, the government also introduced a tax on services soon after it became well established that services were contributing to almost 50% of the country’s GDP. But, while the government has been reducing excise duties to spur consumption of products, no thought has been given to its equivalent in services. There is a possibility that some cuts in service tax might also help bring about a spurt in consumption.

(Courtesy: The Economic Times)

Omission, Commission & All That Election Jazz

Strange are the ways of events which unravel with close proximity to each other, as if part of a greater design that is unfurled slow-mo, screen-by-screen, denying us an opportunity to determine whether a bigger picture exists behind the sequencing of the frames or actions. Just when the public has started feeling nauseatingly overfed on stories of Ramalinga Raju’s fraudulent practices, and was eagerly looking forward to some sort of retribution, comes an unguided missile from the Election Commission of India.

Or is it a guided one, of the political-heatseeking variety? That will be tantalisingly revealed as the slides change on the projection screen, but it is definitely a peculiar coincidence that around the same time that the Satyam incidence has turbo-charged all corporate governance discussions, questions are also being raised about “governance” at a more general level, in one of the unimpeachable institutions of the country. The Chief Election Commissioner, a constitutional authority, has written to the President suggesting that one of his Election Commissioners should be retired before the next general elections to be held in April. The grounds: the CEC suspects the man to be close to the ruling party and is, therefore, concerned about the Election Commission’s ability to discharge its duties without prejudice or bias during the coming elections.

This column will — rather sanctimoniously, one must add — refrain from taking any sides in this debate or sitting on judgement on any of the parties concerned. But, it will certainly point out to some existing facts — which seem like a strange quirk of fate (or, call it an odd twist to events) — and let readers reach their own conclusions. Case in point is a document that was prepared by the commission in 2004, which outlines all kinds of electoral reforms required in the country. In one part of the report, there is a section titled “Composition of Election Commission and Constitutional Protection of All Members of The Commission and Independent Secretariat for the Commission.” Rather mouthful, what?

But it contains one precious gem. This section outlines how the CEC can be removed only on certain grounds and only through a certain process, as laid down under clause (5) of Article 324 of the Constitution. It is similar to the grounds and processes applicable to judges of the Supreme Court.

Here’s the clincher: the Election Commission had suggested in 2004 that the two Election Commissioners too be granted the same immunity available to the CEC. The report on electoral reforms reads: “However, that Clause (5) of Article 324 does not provide similar protection to the Election Commissioners and it merely says that they cannot be removed from office except on the recommendation of the Chief Election Commissioner. The provision, in the opinion of the Election Commission, is inadequate and requires an amendment to provide the very same protection and safeguard in the matter of removability of Election Commissioners from office as is available to the Chief Election Commissioner.”

The President, in 2003, fixed the number of election commissioners, under the CEC, at two — one of whom is under the spotlights now. Under the existing rules, they cannot be removed unless suggested by the CEC in writing. Had the proposed changes been carried out by the current parliament, the process for expelling the two election commissioners would have become long-drawn and cumbersome. In which case, then the current CEC might not have been able to write such a letter and trigger off such a public outcry on both sides of the aisle. The important issue is what happens after the CEC writes the letter: does it become binding on the president or the government?

The other important point is: who won? Nobody’s sure, because the election commissioner in question does not seem to be anywhere near the exit points. Even the CEC, who retires before the next round of elections commence, might not have hoped for much through his letter. But, he surely has stirred up a hornet’s nest and ensured that his letter—and the paper on proposed electoral reforms—gets some more attention.

So, let’s turn our attention to some other important recommendations, which too have rather far-reaching implications. There is one which forms the cornerstone of all electoral reforms, and should be the starting point for all reforms process. The section is titled “Compulsory Maintenance of Accounts by Political Parties and Audit Thereof by Agencies Specified by the Election Commission.” This is something that has been considered to be the root cause of all corruption in the country and changes have been demanded time and again by all members of civil society. The suggestion is simple. It demands that all political parties, first, keep proper accounts of monies received and spent and get them audited, and second, make them available to the public. These accounts could be audited by any agency approved by the Comptroller and Auditor General.

Unfortunately, not only have the political parties stubbornly refused to implement this significant piece of reforms, they have also been reluctant to engage in an open debate about it.

(Courtesy: The Economic Times)

Kick Off Interim Budget With Cut in Income Tax

AH, IT’S time for Indians to indulge in their four-year itch again. It’s once again time for that great, once-in-four-years festival called “general elections”. Some starryeyed call it a celebration of democracy, some see it as an opportunity to escape the long arm of the law and gain respectability, some see it as a time to forge new alliances, and then some see it as an opportunity to extract some fresh commitments from politicians when they are at their most vulnerable.

While in this high season of corporate governance, the government-in-power’s balance of achievements and failures is expected to come under close scrutiny. But, the one other balance sheet of greater importance will escape inspection. The elections have given the government an escape route — it will now have to present only an interim budget, which is a vote-on-account asking Parliament for funds to tide over all the must-spend expenses till the next government takes over and presents a full budget. So, this government can only use the VOA opportunity to tom-tom its achievements, advertise its success with the economy (before the current downturn upset all their plans) and make some noises about how it cares for the poor, the farmers, the marginalised (in all its forms — gender, religion and caste). With the Election Commissioner watching hawk-eyed, it cannot actually implement new taxes, though it can announce new economic measures. While presenting the interim budget in 1991, former finance minister Yashwant Sinha (as part of the Chandrashekhar government) had, for the first time in Indian economic history, announced the government’s intention of divesting its equity in public sector units.

This government probably doesn’t need to do much about indirect taxes since it has already implemented some tax cuts through its two stimulus packages. But, surely, the finance minister should be allowed to make some course corrections where gross anomalies exist. Here is the Mocha Master’s list.

The government has loaded one cess after another on the income tax paid by individuals. This is taxation through the backdoor, using a surreptitious route to milk the most under-represented political class. This also exhibits how the government, unable to stem the rot in its finances, is passing on its burden to the salaried class. The education cess, for instance, is the government’s admission that it is squandering away the tax-payer’s contributions and needs more funds to fulfil its basic duties. In the debate over stimulus packages in the US, some economists feel that tax cuts might achieve much more in reviving the economy than throwing money into one project after another. The Indian government could examine the option of removing the cesses as one of the viable alternatives for firing up the economy.

Some sanity might also be required in the levy of service taxes. No one is complaining about the basic concept of service tax. If excise duty can be levied on manufacture of goods, then service tax is also logical, especially when services contribute to a good 50% of GDP. But, just like small-scale units enjoy tax breaks, there should be some service tax relief for home offices, to nurture entrepreneurship. In these times of economic upheaval, the government will have to devise some strategy that encourages entrepreneurship, especially one that supports people who have been either laid off from their jobs or those who opt to work from their homes. And, service tax breaks for small-officehome-office can be a great booster shot, even if they are for a limited period.

The time has also come to think of a maximum retail price for some services. Just like there is MRP for a wide variety of goods, which restricts the exploitation of the consumer in the hands of the manufacturerwholesaler-retailer nexus, some kind of a similar arrangement is required for services also. For instance, take the airline industry. Although many of the private airlines are advertising low fares, these are deceptive. For instance, if a private airline advertises a Rs 2,500-fare for Mumbai-Bangalore, the actual money paid by the passenger works out to Rs 5,500.

Out of the hidden difference of Rs 3,000, a major component is scooped up by the airlines as something called “fuel surcharge”, which was imposed when oil prices had shot up. Now that the prices are down, the airlines are reluctant to pass on the benefits to passengers.

Utilities, especially power suppliers, too have hidden costs. Today your power consumption might be just worth, say, Rs 2,800. But, your total bill might end up being as high as Rs 4,500 on account of various cesses, and cross-subsidies loaded on you. For instance, a typical Mumbai electricity bill includes the following items, over and above the “energy charges” which is based on your consumption of electricity — standby charges, cost of expensive power, fixed charges, fuel adjustment charges, electricity duty and tax on sale of electricity.

If the government is serious about reviving the economy, the time might be right to review some of the hidden taxes, charges, levies that turn the economy into a highcost island. The start could be made with some of the cesses on income.

Courtesy: The Economic Times