ECONOMICS – My blog- K. Hariharan

INDIAN ECONOMY -FOOL’S PARADISE

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With Amartya Sen, Montek Singh Ahluwalia, Man Mohan Singh, P Chidambaram all at the helm, Indian Government is literally living in fools Paradise

Indian economy comes to a fullstop

MR Venkatesh

A fairly large South-Indian group with varied business interests had invited me to a strategy session to turn it around. It was the first meeting and was to be preceded by breakfast. As we waited to be served, I perused their latest balance sheet.

Noticing that it was a profitable, tax and dividend paying company, where was the question of turnaround I wondered? Nevertheless, I instantly zeroed in on the balance sheet. I observed that the company had invested approximately Rs 700 crore on its subsidiaries and lent another Rs 300 crore — in the aggregate Rs 1,000 crore. Flipping across the accounts, I asked a simple question – what is the return from this investment of Rs 1,000 crore?(Amounts changed for obvious reasons.)

The CFO was silent. The executive director hummed and hawed. The body language of the rest was a dead giveaway of their uneasiness to discuss this matter further.

The junior-most amongst them blurted out, perhaps unwittingly, that it was virtually nil. His answer got a cold stare from his superiors. “Nil!” I exclaimed to the horror of my hosts. “You must be paying approximately Rs 150 crore as interest annually on this sum.” I commented, probably rubbing salt into their wounds. I went on to probe further, “Why, what happened to this money?

This time my question was followed by thundering silence. Even the junior one was quiet this time around. May be he had already got the message. As I helped myself to the breakfast I noticed radio silence at the table. Was I at a funeral?

Between mouthfuls, I attempted to be at my persuasive best. Probably my training as a chartered accountant helped me. Unable to bear my repeated questioning, the CFO finally broke down. “Sir, as you are aware we are in infrastructure. That requires tremendous pay-offs to politicians and bureaucrats. We have used approximately 150 subsidiaries, some of which are foreign ones, to route these payments.”

I was stunned. My jaw dropped. “Sir, we expected you to know all these practicalities of our business. The turnaround strategy needs to factor these ground realities.” Obviously, this time around I was at the receiving end. The breakfast meeting concluded abruptly.

Importantly, I understood that India’s outbound investment policy was not a liberalisation process, but a facilitation one – one that ensured smooth pay-offs! Importantly in this mess, businessmen, politicians, professionals, bureaucracy, judiciary and even the media are involved. No one can blame the other.

The economics of kickbacks and payoffs

Instantly my thoughts raced to the Nira Radia tapes. Fifteen per cent was the kickbacks payable to the Minister concerned for approving every road contract. Add another fifteen to the bureaucracy and local politicians. Add another five to seven to bankers, lawyers, consultants and agents to procure funds.

What we have is a staggering 35-40 per cent additional cost to every infrastructure project.

That implies a road project costing Rs 100 crore would in effect be a Rs 140-150 crores project. Naturally, the toll for the stretch would not be Rs 100 but Rs 150. This has profound implications for the Indian economy. This extra Rs 50 in toll levy for every 100 km has a cumulative effect on the manufacturing cost.

The net result – imports from most of our neighbors of several items [despite cost of transportation and customs duty] are competitive than manufacturing the same in India. Forget competing abroad, Indian manufacturing has become uncompetitive in India!

There is another dimension to this issue. Somewhere down the line these “costs” were funded, mostly by our banks. Corporates altered their top-line as well as bottom-line to keep their banks in good humor. The Banks in turn suspended their sense of disbelief. As chartered accountants we too played ball in creating a mini-Satyam in most of India’s corporates.

The impact of gold plating

But this gold platting of balance sheets cannot be done beyond a point. Everything has a breaking point isn’t it, especially as the economy tanked?

These developments were brilliantly captured by a Report by the Centre for Monitoring Indian Economy (CMIE)

“As the topline growth continued to slow down, the manufacturing sector as well as the non-financial services sector saw profits fall in the March 2013 quarter compared to the year-ago levels. Operating profits of the manufacturing sector excluding the petroleum sector fell by close to four per cent while the net profit fell by a sharp 23.2 per cent.”

The report goes on add

“The non-financial services sector managed to improve its sales growth from 3.2 per cent in the March 2012 quarter to 6.5 per cent in the March 2013 quarter on account of sectors like transport services and software. However, at the net level the sector saw a sharp 28.3 per cent decline in profits.”

Well, both the manufacturing and services sector are going bust.

Simultaneously the CMIE points out that the

“Commissioning of projects dropped sharply to Rs 337 billion during the quarter ended June 2013 from Rs 827 billion in the June 2012 quarter. This was lowest since quarter ended December 2006.”

Macro-economic data too corroborate these numbers. From a growth rate of 7.5 per cent in the first quarter of 2011-12 growth rate has witnessed a steady fall in the next seven quarters to less than 4.8 per cent in the fourth quarter of 2012-13.

If data released by the Finance Ministry for the first two months of this fiscal is any indication, manufacturing has recorded a negative – yes negative growth of two percent, mining a negative of 5.7 per cent, capital goods a negative of 2.7 per cent, consumer goods a negative of 4 per cent and consumer durables a negative of 10 per cent.

In short, when it comes to manufacturing, forget growth, we are in negative zone.

The net result – twenty per cent of lending by Indian Banks is stressed.Obviously, when banks end up funding pay-offs and kickbacks, this is the end result. And that is a whopping Rs 11 lakh crores – approximately $200 billion – a sum that even the banks in USA cannot afford.

Added to this is the stress on account of our external accounts.The foreign debt has risen to $390 billion. This was a mere $225 billion in 2008. What is galling is that the foreign exchange reserve has remained at a constant $300 billion during this period. Needless to emphasise, the ratio of foreign exchange reserves to foreign debt has deteriorated from 138 per cent then to less than 75 per cent now.

What is adding to the consternation is that in the short term – by March 2014 – we need to pay approximately $172bn of our foreign debts. This works out to approximately 44 per cent of the external debtand a staggering 60 per cent of the total foreign exchange reserves of the country.

The short-term external borrowings are surely the villain of the piece.Remember in 1991 the short-term external debt was a mere 10 percent of the total external debt. Now it is one-fourth.

Another important parameter – India’s net international investment position [the net claims of non-residents against external claims of residents] stood at a negative $225 billion as at 30th June 2012. This deteriorated to a negative of $307 billion by March 31, 2013. That implies an addition of $82 billion in a matter of mere nine months.

Simply put, Indian manufacturing by and large is uncompetitive at current exchange rates. And if Rupee is devalued, prices of imports, especially crude oil, would increase leading to an inflationary spiral. Either way, that means increased unemployment. The services sector too as pointed out above is spluttering. And remember agriculture has been historically recording sub-three percent growth in the best of times.

As we witness large-scale unemployment, purchasing power in the hands of the people is rapidly decreasing. That implies demand compression which in turns puts the economy once again on the downward spiral.

Add to this the absolute lack of governance, indecision and Governmental apathy – you would know what it means to do business in India. Whatever be the reason – political or otherwise — bureaucracy in Delhi has simply refused to function. Likewise every assessment with our revenue departments ends up as extortion.

Unfortunately the Government’s response has been pathetic. Surely, increasing FDI limits is not reforms. On this the UPA Government is completely off-target. What makes the set of reforms scandalous is that the Government is indirectly bribing foreigners to invest in India. The Jet-Etihad deal is a case in point.

Put pithily, we are witnessing a repeat of the 1991 crisis.

This time around, it is threatening to make the previous one look like a walk in the park. Well what makes the crisis different this time around?

Contrary to the popular belief this is not an economic crisis, this is a crisis of national character.

Forget fiscal, revenue and current account deficits –let us first talk about morality deficits.

(MR Venkatesh is a Chennai based chartered accountant.)

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Ranjani Geethalaya(Regd.) (Registered under Societies Registration Act XXI of 1860. Regn No S/28043 of 1995) A society for promotion of traditional values through, Music, Dance, Art , Culture, Education and Social service. REGD OFFICE A-73 Inderpuri, New Delhi-110012, INDIA Email: ranjanigeethalaya@gmail.com web: http://ranjanigeethalaya.webs.com (M)9868369793 all donations/contributions may be sent to Ranjani Geethalaya ( Regd) A/c no 3063000100374737, Punjab National Bank, ER 14, Inder Puri, New Delhi-110012, MICR CODE 110024135 IFSC CODE PUNB00306300

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Indian Economy and US Dollar

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So long as the US Dollar is considered as a world currency, the US can continue to live on the borrowed money. The US cannot sustain US$16 trillion debt for a long time. Once Euro or Yuan get accepted as trading currencies, the Japanese, Chinese and other creditors will shift their funds from the US. The US will also face the same problem that Greece, Spain, Italy and other European countries with very high level of debt are facing today once its debt/GDP ratio reaches these nations. The common economic sense demands that like individuals/families, every country has to live within its own means. The Japan’s problem is basically its high internal debt but it has a very large foreign exchange reserves and favorable trade balance and therefore Japan will not collapse.

India’s economic problems have nothing to do with its rate of savings. It is the corrupt and criminal politicians who have messed up the Indian economy. India has a huge internal demand which gets constrained by lack of the supply side, viz. essential commodities like food etc. More than 50% of people live below the poverty line and the money poured into different government welfare schemes is eaten up by the corrupt and criminal politicians and bureaucrats instead of reaching the poor & hungry people. Besides, a lot of subsidies are given by GOI because it is politically popular and which brings in votes for the ruling party. This has resulted in a large internal deficit leading to high inflation and slowing the economy.

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WHY WE ARE PAYING HUGE AMOUNT AS TAXES- THE INSIDE STORY

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WHY WE ARE PAYING SUCH HUGE TAXES?

Americanomics and europeconomics – simplified!!

Dummies guide to what went wrong in Europe and US.

Helga is the proprietor of a bar. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem she comes up with a new marketing plan that allows her customers to drink now, but pay later.

Helga keeps track of the drinks consumed on a ledger (thereby granting the customers’ loans).

Word gets around about Helga’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Helga’s bar. Soon she has the largest sales volume for any bar in town.

By providing her customers freedom from immediate payment demands Helga gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer – the most consumed beverages.

Consequently, Helga’s gross sales volumes and paper profits increase massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Helga’s borrowing limit. He sees no reasonfor any undue concern, since he has the debts of the unemployed alcoholics as collateral.

He is rewarded with a six figure bonus.

At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS. These “securities” are then bundled and traded on international securities markets.

Naive investors don’t really understand that the securities being sold to them as “AA Secured Bonds” are really debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

The traders all receive a six figure bonus.

One day, even though the bond prices are still!climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Helga’s bar. He so informs Helga. Helga then demands paymentfrom her alcoholic patrons but, being unemployed alcoholics, they cannot pay back their drinking debts. Since Helga cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and Helga’s 11 employees lose their jobs.

Overnight, DRINKBOND prices drop by 90%. The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Helga’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value ofthe bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations; her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the government.

They all receive a six figure bonus.

The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who’ve never been in Helga’s bar.

Now do you understand?

WHY WE HAVE TO PAY FOR THE CORRUPTIONS, SCAMS, UNDER PERFORMANCE, LOSS MAKING PUBLIC SECTOR UNITS AND MANY MORE MIS MANAGEMENT OF FINANCIAL MATTERS BY OUR PRESENT AND PAST GOVERNMENTS.

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