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

Jai Ho! It’s Time for Bollywood to Globalise

Danny Boyle’s Slumdog Millionaire seems to have left Bollywood redfaced and indignant. At least, that’s the impression one gets after hearing all the noises emerging from this sprawling, and largely unorganised, industry. But seen in the broader perspective of India’s journey into globalisation, it somehow seems to make some sense. And, seems somewhat predictable too.

Marque voices and some leading purse managers in the industry have been grudging in their praise of the movie, particularly after it swept the gongs at two global film award ceremonies, the Critics’ Choice Awards and the Golden Globe Awards, and looks well on its way to sweeping many other honours. The carping is about how the movie exploits Mumbai’s slum life and its squalor. This complaint is not new. Bollywood has often taken exception to renowned Indian film directors winning awards overseas for depicting real Indian life, as distinct from the reel life that launched many spurious dreams.

Broaden the debate a bit and it has an uncanny similarity to the voices one heard when India embarked on its economic reforms and liberalisation programme. Home-grown Indian companies, till then cocooned and sheltered by the governments’ protective policies, initially formed informal clubs to lobby for a continuation of the old policies or for special preferential treatment to Indian companies. Later, when that didn’t help, they pooh-poohed the chances of any foreign investor succeeding in the Indian market. Their common refrain: they do not understand the Indian market, they do not understand the granularity of different cultural strands that together make up the complicated Indian tapestry, or worse, they did not understand the “environment”. The last one is obviously a euphemism — what it meant was that the multinational corporations didn’t know how to finesse the Indian political-bureaucratic nexus to their own advantage, thus giving the Indian companies an inherent edge.

How wrong all those assumptions have been. First, many smart Indian promoters sold away their brands and companies to MNCs as soon as the gates were flung open, thus inviting criticism from some of the more patriotic industrialists. Then, most of the foreign investors found willing joint venture partners among Indian companies, eager to lend their names for a onetime fee. These “invading” companies also were able to “understand” the Indian market better by hiring the relevant local talent, at times by offering salaries and working conditions far better than the Indian companies. The same tactic was also used for massaging the environment.

All this is also symptomatic of Corporate India’s reluctant acceptance of the phenomenon known as globalisation. In the end, though, parts of India Inc have come out smiling. That’s because the inherently strong companies realised competition is a way of life and greasing palms cannot become an organisation’s core competence. In fact, many Indian companies also took advantage of globalisation to acquire brands, companies and markets overseas.

Cut to Bollywood, which also seems to be in the early phases of denial. Slumdog Millionaire probably represents, in some ways, the initial stages of the entertainment industry’s globalisation pangs. But, globalise it must, whether it is kicking or screaming. Bollywood is suffering from a valuation crisis, especially after the market meltdown. Many home-grown studios — which opted for a corporate structure to facilitate access to cash and to leverage the euphoric bull run — have now become easy pickings for foreign studios. Most of these studios had earlier promised foreign studios either joint projects, or even joint ventures with substantial stakes. Unable to wriggle out of these commitments, many of these studios are bound to lament - somewhat true to form — the erosion of Indian cultures, ethos and values.

Slumdog Millionaire also represents a different way of doing things, in sharp contrast to Bollywood’s entrenched practices. Take casting. The film crew scoured countries and cities to search for the right faces; the boy, in fact, is a non-resident and the girl is a totally new face. The film producers and director even auditioned the young boy and girl together to see if they had the right chemistry on screen. In Bollywood, the leading man is decided mostly on a whim and a fancy, long before the screenplay is finalised. If it’s a big budget film from a well-known studio, the lead role is then usually reserved for the son of the studio promoter. In many cases, the leading man also dictates the choice of the female lead, script be damned.

In this case too, as was the case with Indian industry, the foreign studio has found Indian talent and financiers willing to risk their gifts and their finances on Danny Boyle because he comes with a past, a successful track record of having directed some very cutting edge cinema. Danny Boyle’s nationality — or his lack of Indian roots — never made any difference. What mattered was his craft.

There are many Indian companies which are happy to cater to only a market niche and do not desire global markets, but are eager to run their companies on global best practices. Likewise, there will be cinema that will cater primarily to Indian audiences but will be produced by implementing global best practices. And, that’s going to make all the difference.

Courtesy: The Economic Times

Spot A Corporate Scam

FOR some it’s clearly winter, for those spoiling for a fight with neighbouring countries it’s a time for bellicosity and for many it’s a period of abstinence and renouncement. But, for Corporate India, this is, undeniably, a season for corporate governance. The nice-sounding, and sanctimonious, phrase moves from conference halls to board rooms this month as Satyam occupies business mindspace, boggles the popular imagination and becomes the new “shock-and-awe” item of the season.

The term ‘corporate governance’ tends to make an appearance and leave a strong impression mostly during times of market crashes and slow economic activity. During go-go times, no one cares. Even the Satyam skeletons would have stayed firmly locked up, rattling some consciences occasionally.

But, this time, long faces are discussing the issue seriously on television channels, equity analysts are saying they knew all along that India Inc was seriously in deficit and many company promoters are looking over their shoulders every so often.

Does this end here? Hopefully. But, if one is to hear all the doomsday artists and professional corporate watchers, this could just be the beginning of a long procession of companies waiting to be outed. So, here’s a favourite parlour game: how to spot and detect the next wrong ones. Look out for these traits:

* This one is a sure give-away. Be suspicious of companies suddenly launching on unrelated diversifications with great gusto. For instance, a chemicals processing company starting a floriculture project is a sure sign that it is planning some land-related scam or is using up shareholder’s money for a hare-brained project to be launched by the promoter’s son.

* Beware of companies which have huge related-party transactions. This is one old (and successful) model of siphoning off cash from the company. It is also a not-sosubtle way of ‘inflating’ sales. About 50% of one large, and listed, real estate company’s sales are to a group company (which stays resolutely private), but the money to be received from the same company somehow does not jive with the sales number. In this way, the listed company uses public money to build projects, sells them to the private company, shows pumped-up sales, but the buyer (the private company) is over time shown as incapable of paying up, the receivable is written off from the listed company and when the sales eventually happens, the shareholders of the private company gain the most. Cost is borne by the public, but profits stay with only the promoters.

* Keep your antennae up for companies which suddenly change their accounting policies. Many companies suddenly change either their depreciation policy or even their revenue recognition policy. A change in the depreciation policy allows many companies to either reduce their actual losses or helps balloon profits. Many corporates also suddenly change how they acknowledge revenue accretion. In many cases, this helps show a sudden increase in sales, resulting in better valuation on the stock markets.

* Another red flag: Companies that suddenly show a dramatic jump in sales, when nothing extraordinary has happened in the economic environment to justify the spurt in growth. One media company which went public a few years ago, showed a spectacular jump in its total revenue a couple of months before filing its prospectus. Recently, another technology company showed a 900% jump in sales over just six quarters ended September 2008! People should be beating a path to this company’s door for some clues on how to locate undiscovered multitudes of buyers.

* Many companies, during good times, entered into some exotic foreign exchange derivative contracts, hoping to punt on the movement of currencies they had no clue about, such as the Swiss franc. In good times, all’s acceptable. But, come crunch time and all these derivative contracts have now shrunk in value. But, the companies that bought these fancy products are yet to recognise the forex losses on their profit and loss accounts. It’s a bit like a time bomb ticking away in the accounts. Some companies have disclosed their exposure, but are refusing to provide for it, hoping it will go away one day like a bad dream.

* Ditto is the case with many companies which had loaded up on forex debt, like a famished urchin landing up at a free, five-star buffet. Today, they are shying away from showing the losses on these debts, especially since the rupee-dollar has moved adversely from the time they had contracted the debt. Expect to hear more about a fancy term called Accounting Standard 30 in the coming days.

So, what’s the lesson from this time? Sorry to sound cynical, but as long as the system stays what it is, there might be just a few more revelations, and then it’s back to business as usual. C’mon, we’re all forgetting the basics. Can you ask people to keep a tight rein on greed in a market that’s asking everybody to buy that fancy yacht, or that bejewelled watch, in the space of a heart-beat? Perhaps, it’s better for all of us if we were to accept this silver-tongued beast as an irrefutable part of our lives.

Another to-do list for politicos in New Year

RESOLUTIONS, promises, to-do lists. January always finds human beings indulging in some temporary exercise of will power, a willful abandonment of hedonism and a self-imposed regime of restraint. Some soldier on with their resolve, but most dump their long lists of self-imposed asceticism in a couple of months. That’s the beauty of these pledges—it’s like emerging from a crash purgatory course, all cleansed, radiant and beaming. In contrast, politicians take important vows only once in five years, and don’t even need to make any pretences of keeping up with them. But, they should see January 2009 differently.

A lot of expectations have been built up this year and the political class would do well to heed them. This year, in keeping with the season’s overdose of optimism and goodwill, might also just be that inflection point when the first strains of change become visible. Barack Obama’s “YW-C” call-to-arms seems to have had some impact in India as well. If politicians don’t want to be swept aside by a historical tide of anger washing up against their indefensible citadel, now is the time for them to draw up their own list of undertakings, thing to do over the year, in addition to their normal duty (which is, governing, eradicating poverty or strengthening the economy). Here are a few items from that list.

* Get the municipal corporations back in order. If necessary, legislate or amend existing legislation. It all begins here, whether it’s the citizen’s disenchantment with the system or the seeds of corruption, which then flower elsewhere. Most voters think at two levels — his immediate environment and then policies at the national level. The evolved ones may squeeze in a state-level tier. But, unhappiness with the immediate civic administration usually also gets expressed at the state level, as Sheila Dixit understood so well and Vilasrao Deshmukh refused to countenance. Look at the mess in the country’s richest and probably the best civic bodies (which is not saying much, given the abysmal state of all of them), Brihanmumbai Municipal Corporation. The muni has suddenly woken up to the prospect that the city’s water requirements is far higher than what can be supplied. The reason? Lack of co-ordination between the department that sanctions construction of new buildings and the one that’s in charge of water supplies.

* End the illegal trade in arms. It is true that, since 1990, this country has moved towards a liberal economic regime that puts great store by free markets. The shift in policies was spearheaded by the current PM, who was the FM then. But that doesn’t mean that we also believe in the laissez faire powers of an unfettered arms bazaar. It is common knowledge that firearms of any make, with matching ammunition, is available to anybody willing to shell out the cash. And, the hardware is available everywhere — Bihar, UP, Bangalore, Punjab, Maharashtra. Plus, corruption in the ordnance factories that allows leakage of ammo has been reported extensively. It’s time we ceased talking of Peshawar’s arms bazaar when our politicians and the police have been turning a blind eye to the thriving underground trade in armaments.

* There’s another business model crying out for state intervention. It’s called forced abductions, or kidnappings, which usually finds closure with the payment of a ransom. This is routinely practised by powerful thugs and patronised by politicians (in some cases by powerful ministers) and given free rein by the police force. Some times, in certain states, if the kidnapped person’s family is willing to pay the police a handsome percentage of the ransom amount, or the abductor fails to pay adequate commissions, then the kidnapped person might be rescued earlier than expected. This has turned into a perfect fund-raising exercise for political parties in the heartland and doesn’t require killing hapless PWD engineers. Surprising, Harvard or Wharton are yet to write a case study on this.

* Implement the National Police commission’s report at the earliest. The speed with which 26/11 has spurred the political class to rush through legislation (such as the National Investigation Agency or the UPAA amendment) or to create new wings of the police force (such as Maharashtra government’s decision to create an NSG-lookalike at the state level) invests the populace with a scepticism and a cynicism borne from years of misguided policies and corruption. Everybody is keeping his fingers crossed, hoping that these decisions do not become another opportunity for kickbacks or authoritarianism. There is a feeling that even if half the commission’s report is implemented, many of the problems bedevilling the police force could be sorted out. But, first, the police appointments have to be depoliticisied. A former home minister of Maharashtra was known to have opened a small time business in transfers - a literal version of the pay-as-you-go model. This arbitrary power needs to be taken away from ministers and vested with an all-party committee, probably headed by the CM.