What’s the buzz?

Food security, electioneering, bad loans, interest rate cuts, and M&As are the talking points for 2012

By Mohan Sule

Some countries and companies attract the buzz. Some do not even on trying. For instance, money managers are eyeing Africa as the next big story even as China and India desperately try to remain relevant. Russia is increasingly talked about for its lawlessness in spite of riding an economic boom fuelled by oil prices. Every move of Steve Jobs was monitored with excitement, but does anyone care  who is the boss of Samsung, the largest consumer durables company in the world? Many were prepared to write off Apple after the demise of its flamboyant founder late last year. Defying pessimism, the iconic company is attracting buzz in the blogosphere in anticipation of the third version of its tablet that is likely to be unveiled this month. Will it have the voice recognition software that made its latest smartphone a killer device? There is unanimity among analysts that China is poised to become the largest economy in a decade. At the same time, it is attracting attention for its ‘khoka’ companies and growth driven by investment and exports rather than consumption and its capacity to face an Arab Spring type of revolution. The India buzz centres around policy paralysis as amplified by lack of decision on infrastructure projects and the suspension of foreign direct investment in multiple-brand retail and the anti-corruption movement. With budget day a couple of months away, the expanding fiscal deficit is providing fodder to the chattering class, which is also betting on the central bank embarking on interest rate cuts but is divided on what this will mean for the equity markets in the absence of foreign fund inflows.

Right-wing economists, bankers, corporate honchos and investors may protest, but the Food Security Bill is creating a buzz around the world just as the unique identity project and the cheapest tablet, Aakash. Not only poor nations but even the rich world are watching in awe how India is going to extend the right of cheap food to millions of its hungry citizens. If its execution is as successful as that of the national rural employment gurarantee scheme providing 100 days of wages to the rural poor, Sonia Gandhi is sure to find a place among the pantheon of India’s deities. The buzz is that 2012 marks the beginning of the election cycle for India. Whether the campaigning will go on till May 2014, when the term of the present parliament expires, or ends early hinges on how the Uttar Pradesh results turn out. The low base effect will magnify every additional seat won by the Congress and will be taken as a stamp of approval for the Junior Gandhi-led campaigning. A snap poll could be in the pipeline as the UPA coalition, emboldened by the good showing, might want to break the parliament gridlock created by allies as well as the opposition. The March 2012 budget can provide answers. Introduction of stalled reforms will imply the government’s confidence of lasting the full term. A manifesto couched in a fresh salvo of subsidy programs, however, will signal imminent general election.

The buzz about divestment of PSUs has flared up after Sebi recently tweaked rules to allow companies to offer shares directly on the stock exchanges. The market is talking about the beneficiaries of rural power. Good monsoon, cooling of food inflation and employment programs are being credited for the surge in FMCG stocks. In contrast, the buzz about the IT sector is mixed: the blessing of rupee depreciation is blunted by the uncertainty in spending in the US and euro-zone. The slowdown is likely to see heightened M&A activity. Will troubled portal Yahoo! and Blackberry maker RIM change hands? In India, acquisitions would not be restricted to the telecom sector, which is disappointed by the department of telecommunications opposing the rules proposed by the telecom regulator to facilitate consolidation. Many companies from other sectors that had recklessly taken debt in their quest for expansion and diversification, too, could be on the block and so also some of the casualties of the steep depreciation of the rupee. Exotic derivatives that were supposed to provide a buffer instead have become a burden. The first deal of the year involving a complex web to rescue the drowning TV18 promoters has baffled the market about the real ownership of the media group. The bottom line is the company has replaced one set of lenders with another: RIL. As the buzz about real estate companies’ crash-landing due to pricey properties and huge debt is gaining momentum so is the talk about banks’ soft-landing despite inadequate capital and ballooning bad loans to state-controlled sectors as the government prepares to infuse cash. 2012, thus, will be the year when contradictions play out without anyone blinking.

Mohan Sule

Clash of idea

The India story is grappling with opposing ideologies of welfare schemes v reforms, entitlement v meritocracy, inflation v growth 

By Mohan Sule

The tearing down of the Berlin Wall in November1989 signalled the end of textbook Communism as spelt out by Karl Marx and Frederick Engel and also the Cold War that was triggered after World War II in March 1945. The ideological clash hinged on the best way to prosperity. The developed world credited freedom of choice for its success. In contrast, Communists believed the state had to take care of its citizens by ensuring equitable distribution of wealth. With the disintegration of the Soviet Union, the debate appeared to have been finally sealed in favour of the ways of the west. As it increasingly looked that the world was once again going back to being a peaceful place, bothered about bread-and-butter issues, political scientist Samuel P. Huntington in 1992 disturbed the complacency by warning that another clash was imminent. He explained in detail his thesis in a 1996 book, The Clash of Civilizations and the Remaking of World Order.  Post 9/11, Huntington’s exposition gained gravity.  He predicted India would swing between opposing cultural and religious identities. Looking at the current situation, it looks like India instead is wrestling with an identity crisis of being a superpower in the making to being a perpetually developing economy.

What are the crises that India is grappling with? The notion that elections can be won on welfare schemes guaranteeing employment and food security rather than boosting investment is being severely tested. To run a benevolent state, the treasury has to be in surplus. This is possible only in a booming economy, when tax revenues are buoyant. As it is, the subsidy on petroleum products has been causing a severe strain on finances as crude oil prices are never static and, in fact, tend to rise when demand surges, throwing into disarray all calculations made in the budget document. Another source of revenue is from sale of assets. A good price can be fetched only when the stock market is in a cheerful mood. The bottom line is that even to dole out handouts, the investment climate has to be conducive. In fact, a measure of a country’s outlook is to examine how the assets of the state are used, resources allocated and prices of services and products determined. As is seen from the examples of PSU aviation, banking and oil marketing companies, interference in the demand-supply equation can be at the cost of the health of the supplier. Another controversial idea that has caught the fancy of some people with influence on policy making is to make the private sector pay the bill for social services. Mining companies have to share royalty and profit with those displaced, and the price tag for land acquisition to build factories comes embedded with a premium. The new Companies Act awaiting parliament’s approval mandates a share of profit on social programmes. The best way to make companies conscious of their environment is by recognising that all the stakeholders — clients, suppliers, employees and shareholders — are important. The IT sector offers competitive rates, is run by professional managers, and has turned employees millionaires through stock options. In the bargain it has provided handsome returns to the shareholders. Many IT bosses are active in charity work.

It is also common for policymakers to allow concerns of containing inflation to subvert policies to promote growth. However, this way of thinking met with a neat burial post Lehman Brothers’ collapse in September 2008, when governments announced fiscal stimuli packages and central banks injected liquidity to enable investors to take on risk, which is essential to promote growth. It is now conceded that some amount of inflation is good as it signifies positively on the investment climate, indicating scope for further expansion to match the growing demand. Yet, our Reserve Bank of India has been proclaiming that it is willing to cap growth to bring down inflation. Pricey onions have known to cost an election but not unemployment. So seems to be the muddled reasoning just as promoters grooming their children to occupy the corner cabin feel nothing wrong in keeping a company run on public money family-controlled. Even first-generation entrepreneurs who have made it big are laying the groundwork for the second tier to take over. This practice is equally rampant in politics, mostly in Congress (the next generation of Deoras, Dixits, Scinidas, Pilots, and Gandhis are waiting in the wings), reinforcing the view that in India bloodline counts though royalty has been abolished (by the same party). In contrast, many MNCs, PSUs and even private sector firms are being managed successfully by professional CEOs. Whether India’s growth engine can run without any bumps will hinge on how this clash of ideas is resolved.

Mohan Sule

Crisis and celebration

Why India’s rupee dive and succession at the Tata group should be viewed as opportunities to strengthen their balance sheets 

By Mohan Sule

It takes a crisis to jolt the government into action. In May 1991, with foreign exchange reserves barely enough to meet three weeks of imports, India had to mortgage 47 tonnes of gold with the Bank Of England and 20 tonnes with Union Bank of Switzerland to raise US$ 600 million. The national outrage that followed led to the collapse of the government led by socialist Chandrashekar, resulting in the selection of P V Narasimha Rao as prime minister, who appointed former Reserve Bank of India governor Manmohan Singh as the finance minister. The ‘reformer’ liberalised the economy at the behest of the IMF and not due to his own initiative. This time, the decision, now put on hold, to open multi-brand retailing to 51% foreign direct investment was spurred by the rupee hitting a lifetime low of 52.7 a US dollar on 22 November 2011. Other sectors waiting on the sidelines include insurance, aviation and banking. Global retailers have mastered the art of transporting products from their sources to the consumers at minimum cost. As automation, refrigeration and good roadways are essential ingredients, many supporting industries will benefit. Leveraged organised retailers will get an exit route. It could also boost real estate developers sitting on a pile of inventories. The pop-and-mom shops, whose survival is at the centre of the current storm, should be offered financial assistance to upgrade and not used as votebank. Many of them sit on prime real estate with proximity to consumers that large retailers can never enjoy. The aviation sector is a good example of how a promising industry is in the danger of getting grounded because of the inhibition in inviting foreign investment. The reluctance of the Tatas to start an airline without a foreign collaborator (Singapore Airlines) should have offered hints to the government as well as the Indian promoters  of the difficulty in going it alone.

Like the retail sector, FDI in aviation will help in sprucing up the logistics of running an airline but will not guarantee profit. Otherwise, there would not have been so many bankruptcies in the business, the latest being that of the parent of American Airlines, the last of the legacy US airlines to have survived without undergoing restructuring. Yet there is no luxury of choice. The diminishing attraction of India to foreign investors and the resultant increase in inflation, embedded in the import bill, should speed up the unlocking of the residues of a bygone era. The fear of foreign ownership compromising India’s security had been raised while allowing foreign equity in the telecom sector. This apprehension seems to have ebbed now. Vodafone’s Indian operation is majority owned by the British company after buying out the Ruias of Essar. Uninor, a joint venture with Unitech of India, has nearly 67% stake by Telenor of Norway. In fact, fending the united opposition to FDI in retail and other sectors could be a test case for prime minister-in-waiting Rahul Gandhi, who so far has displayed poor judgment  (the anti-investor land acquisition bill has his stamp) and tends to keep aloof from national crises (Lokpal, terrorism, inflation, economic slowdown).

Rajiv Gandhi realised the importance of computers, despite resistance from trade unions, for India’s growth. A window has opened for his son to rebrand his left-of-center image by convincing the skeptics that reforms rather than a food security law or rural employment schemes are the best option for inclusive growth. On his success in this battle will hinge his smooth succession. The painless passing of the baton from the CEO to his successor is always a cause for celebration. The mood, however, was subdued at the recent Bombay House transition. For one, the successor to Ratan Tata is untested apart from helping manage his father’s construction business. Doubts persist about his ability to steer a conglomerate, which has acquired the complexion of an MNC. Tata, too, had no experience when he took over in 1981. That was a different era, when Indian industry was untested by foreign competition. To his credit, he consolidated the group’s global credentials through acquisition of well-known brands. Cyrus Mistry does not have to face the kind of dissidence Tata had to encounter from powerful chieftains, resulting in the unceremonious exit of Tata Steel boss Russi Mody. Nonetheless, there is disappointment at the missed opportunity of paving the way for a professional CEO instead of appointing the son of the largest individual shareholder. Perhaps that was the reason the market has decided to wait and watch rather than react hastily either way. What will be seen is if Mistry follows the footsteps of his predecessor, who divested loss-making businesses like textiles and computer hardware, by shedding some expensive properties.

Mohan Sule