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