|
|
V.K.Madhav Mohan - The Leader : Mentoring Services, Mentoring Workshops, Mentoring products- Articles / Audio / Video/ Posters, Lectures |
|
|||||||||||||||||||||||||||
|
|
 |
Published Articles | |||
Trying and traumatic times Published in The Week, December, 28th, 1997 The market place is no respecter of persons and reputations. Even as the antics of our politicians are raising questions on how serious we really are about putting our economy in order, competition in the marketplace is separating the performers from the also-rans and forcing decisions on the government that is slowly widening the gap between politics and the economy. This is perhaps best illustrated by the fact that for all the worries about recession, the economy fundamentals are still fairly well placed. True, our growth this year may be half what we have become used to in the last 5 years. True, there are unmistakable signs of a slowdown in many sectors of the economy. And true, also, that many businesses find themselves up to their eyeballs in a sea of red ink. But on the positive side, growth is still expected to be around 4 per cent, inflation is al it’s lowest in living memory (below 4 per cent) and forex reserves are around $26 billion. Exports (April-October 1997) are running 5 per cent above last year while imports are up 6.5 per cent in the same period. However, what really worries me is that indirect tax revenue is some 16 per cent below expectations - which means the fiscal deficit this year may exceed the target of 4.5 per cent of GDP. Any increase in the fiscal deficit will put strong upward pressure on inflation. Reasons for slowdown: If the fundamentals are strong, what then is the reason for an economy-wide bearish sentiment? Part of the reason is the political uncertainty that has dogged the county for over a year now. But perhaps a more important reason is that economic reform and globalization have finally begun to bite. Specifically, the reform program has resulted in vastly increased competition from within and without, in the economy. Indian consumers are now fully exposed to international quality and are demanding no less from businesses they deal with. At the same time, even long established companies are suddenly finding new upstarts who are upstaging them with better quality at lower prices. For the first time, the Indian customer has choice and he has not been shy to exercise it. No longer does he have to put up with tired brand extensions that are high on hype and low on additional benefits; nor does he have to be satisfied with price extortion and poor quality. The writing is clearly on the wall - only he who satisfies rapidly changing needs of customers best, will survive. It is therefore, no wonder that many corporate are stuck with unsold inventories and erode profit margins. Soon, we may well witness the demise of many established 'large' companies who lost to much smaller competitors. Impact of forex turmoil: The downslide of the Indian rupee in recent weeks has provided an opportunity for the new Governor of the Reserve Bank of India Bimal Jalan to test his market intervention skills, direct and indirect. So far the policy approach rather than the direct intervention (selling dollars) approach has worked rather well and the rupee has confined itself to the sub 40 level. Perhaps the rupee might even stabilize around Rs. 40 to the dollar. Given that the rupee is still not fully convertible and there is no outflow of domestic capital, the depreciation in the rupee is qualitatively different from the currency crises in South East Asia. Fortunately, the strong economic fundamentals have contributed to a more positive prognosis for the rupee than for many of its counterparts in south and south-east Asia. Be that as it may, the substantial decrease in the rupee's external value has important implications. Firstly, the higher value of the dollar means lower prices of Indian products in world markets. To the extent that these products are price-elastic, this will translate into increased exports and much higher export earnings. Indian exports will become more price competitive with exports from the South East Asian region which enjoyed till recently a substantial price advantage because their respective currencies had fallen sharply.
But this new-found competitiveness is only based on price; competitiveness based on quality is quite another issue and on this area we have still some distance to go. For a lasting and long-term increase in our share of world markets, there is no alternative to continuously improving our quality competitiveness. Secondly, the cost of imports will shoot up. To the extent that out industrial growth depends on imported raw materials equipment and technology, the lower rupee value means higher prices and lower margins of profit as it is no longer possible to palm of increase in costs to customers.Thirdly, the bright, arbitrageur-managers who wanted to make a killing for their companies by arbitraging on interest rates have landed their companies with higher debt costs. This is quite the opposite of what they were trying to do.In the last six months, many companies have opted to convert their working capital loans from rupees to dollars as the dollar loans carried lower interest rates. They have aggressively demanded fine rates (in the 150 to 200 basis points above LIBOR range) in their negotiations with banks and on many occasions, played one bank against the other in the race for dollar conversions. But with the rupee depreciating, all hopes that the companies had of reducing their high cost borrowings with lower cost foreign currency debts are likely to dashed. On the contrary, many companies could end up incurring heavy forex losses. For example, a Rs 1 crore working capital demand loan which was converted into a foreign currency loan at a competitive rate of say 175 basis points above LIBOR some six months ago could saddle the borrower with an exchange loss of between Rs 10 and 12 lakh! So, what was gained by lower dollar interest rates is more than wiped out by the exchange losses. Indeed, this may put additional pressures on the bottom lines of many corporates. Companies are therefore learning costly lessons in coming to terms with the global markets. The FCNR loan misadventure for many companies exposes the danger of arbitrage. It also drives home the lesson that focusing on core competencies is the only way to increase profits in the long run. As RBI governor Bimal Jalan indicated recently, trying to make a quick buck is an invitation to disaster; however, striking a moralistic tone when we are dealing with markets has little relevance. In any case, patriotism is not the monopoly of governments and bureaucracies. My own view is that the rupee may now be near its current real value and the Rs. 40 to the dollar mark reflects not only the linkage between interest rates, current account balances and inflation but more importantly, the real competitiveness of the Indian economy based on productivity. And it is productivity that is the real concern.
Interest rates & productivity: Take for instance the behavior of interest rates. Over the last year or so there has been a steep fall in interest rates. This is mostly because of the decline in inflation, which has prompted a series of easy money monetary policy initiatives. What economists call the nominal component of interest rates is actually the inflation rate, which is already in the low three to five per cent per annum band. Therefore there is very little scope left for an inflation driven decline in interest rates. Any further reduction in interest rates can only happen if the real rate decreases. And since the real rate depends on productivity, it can decline only if productivity increases. So any additional interest rate cutbacks can only result from productivity improvements. Productivity is a medium and long-term phenomenon even though information technology is threatening even this bit of conventional wisdom. Increased competition in the economy provides a fillip to productivity. The structural reform program began in 1991 does just that. It is only now that the real impact of the reform program has begun to take effect. Unfortunately, this is also the time that the politicos have decided to play their power games. The danger that India will miss the boat again because of political instability is once again very real. Some approximations based on rather loose assumptions give an idea of the cost the country has to pay for the ambitions of our politicians.Opportunity Cost of Political Uncertainty: With the GDP of India being around some 270 billion dollars, if we had had a stable government at the center though 1997-98 which had pressed ahead with the structural reform program resulting in infrastructure projects taking off, financial sector (including insurance and banking) reforms being stepped up, external trade becoming more unfettered and milestones on the road map to capital account convertibility being passed without delays, it would have been reasonable to expect that the economy would have grown at eight per cent. This would have meant a 21.6 billion dollar addition to the GDP, in the current fiscal year. But a combination of factors has led to the economy achieving a growth rate of just 4 per cent; this means an addition of just $10.8 billion to the GDP. In effect this means that the other 10.8 billion dollars is the 'loss' in growth that has been missed out. This is the opportunity cost of an expected growth of eight per cent falling to 4 per cent.
It is difficult to quantify exactly how much political stability contributes to growth, but even if it accounts for just half of one per cent of GDP growth, the amount lost is still 1.35 billion dollars. At a dollar rate of Rs.40, this would translate into a staggering Rs. 5400 crores loss. This of course does not include the cost of conducting a fresh general election. Overall, I would estimate that the cost to the nation of the recent political machinations (via opportunity cost and cash for the election) at anywhere between Rs. 5,000 and Rs. 7,000 crores. Priorities for 1998: Considering the weight of past baggage of the past, any new government will have its work cut out for it in 1998.
Firstly, next year, serious attention will have to be paid to the size of government itself. India can no longer afford to incur over Rs. 50,000 crores per year in interest to service debt that is mostly incurred to meet non-plan government expenditure. This means that downsizing of government will have to be attempted on a massive scale. How on earth can we afford to bear the burden of Rs. 18,000 crores due from the Center to government employees as enjoined by the pay commission. The finances of many state governments are already in a parlous state, thanks to political profligacy and managerial incompetence. It is clear that a gargantuan government pre-empts resources from urgent development needs and diverts them into mostly unproductive uses. The harsh fact is that if the size of government is not reduced significantly, it will simply eat us all out of hearth and home. Secondly, if the size of government is to be cut, correspondingly, the size of the private sector has to be increased. Which means that an aggressive time bound program of privatization is an absolute necessity. Privatization does not mean disinvestment alone; many other mechanisms for providing a greater role for the private participation have been tried and tested the world over (sub contracting municipal services being one example). The temptation to use privatization (or disinvestment) proceeds to cover the fiscal deficit must be curbed at all costs. It is tantamount to dipping into capital to fund revenue expenses. Privatization proceeds must only be deployed in development or capacity building programs.Thirdly, the crucial area of infrastructure development gets the highest priority. In particular, I would categorize communication infrastructure as the area that will make or break India in the 21st century. By communication infrastructure I mean telecom, information technology and transport. The first two are now so intertwined that it is difficult to deal with them separately. Therefore a synergistic approach has to be taken in these two areas. This is a vital area for us since it is one field in which we are globally competitive. If we are to expand our competitive edge, we must rapidly rebuild telecom and information technology networks so that they can provide the backbone for extensive and sophisticated multimedia usage. Specifically, we must make the Internet the new gateway of India.
And finally, it is about time we put quality where it belongs; at the top of our national agenda. I would therefore suggest that the new government formulate a national quality policy. The thrust of this policy mush not only be quality certification but also to improve quality by adopting the relevant processes in all areas of our national life. This National Quality Policy (NQP) could, for example, include attractive tax benefits for those attaining measurable and certified quality improvements. At the same time, a very important component of the NQP must be the inclusion of a quality curriculum at the school level since the early adoption and mastery of quality attitudes tools and processes hold the key to our national resurgence.
As 1997 comes to a close, we must ask what the so-called leaders presented to the nation in its 50th year of Independence. No matter how charitable a view we may take, the truth is that the politicians have systematically sold this country short. Pretty political squabbles have foisted a huge cost on the economy. But the inherent strength of the economy and its resilient participant's have ensured that rays of hope still shine through the disappointment of opportunities missed. As the cliché goes, hope springs eternal and so it is with us as we begin the familiar trudge back to the polling booths! The market place is no respecter of persons and reputations. Even as the antics of our politicians are raising questions on how serious we really are about putting our economy in order, competition in the marketplace is separating the performers from the also-rans and forcing decisions on the government that is slowly widening the gap between politics and the economy.This is perhaps best illustrated by the fact that for all the worries about recession, the economy fundamentals are still fairly well placed. True, our growth this year may be half what we have become used to in the last 5 years. True, there are unmistakable signs of a slowdown in many sectors of the economy. And true, also, that many businesses find themselves up to their eyeballs in a sea of red ink. But on the positive side, growth is still expected to be around 4 per cent, inflation is al it’s lowest in living memory (below 4 per cent) and forex reserves are around $26 billion. Exports (April-October 1997) are running 5 per cent above last year while imports are up 6.5 per cent in the same period. However, what really worries me is that indirect tax revenue is some 16 per cent below expectations - which means the fiscal deficit this year may exceed the target of 4.5 per cent of GDP. Any increase in the fiscal deficit will put strong upward pressure on inflation. Reasons for slowdown: If the fundamentals are strong, what then is the reason for an economy-wide bearish sentiment? Part of the reason is the political uncertainty that has dogged the county for over a year now. But perhaps a more important reason is that economic reform and globalization have finally begun to bite. Specifically, the reform program has resulted in vastly increased competition from within and without, in the economy. Indian consumers are now fully exposed to international quality and are demanding no less from businesses they deal with. At the same time, even long established companies are suddenly finding new upstarts who are upstaging them with better quality at lower prices. For the first time, the Indian customer has choice and he has not been shy to exercise it. No longer does he have to put up with tired brand extensions that are high on hype and low on additional benefits; nor does he have to be satisfied with price extortion and poor quality. The writing is clearly on the wall - only he who satisfies rapidly changing needs of customers best, will survive. It is therefore, no wonder that many corporate are stuck with unsold inventories and erode profit margins. Soon, we may well witness the demise of many established 'large' companies who lost to much smaller competitors. Impact of forex turmoil: The downslide of the Indian rupee in recent weeks has provided an opportunity for the new Governor of the Reserve Bank of India Bimal Jalan to test his market intervention skills, direct and indirect. So far the policy approach rather than the direct intervention (selling dollars) approach has worked rather well and the rupee has confined itself to the sub 40 level. Perhaps the rupee might even stabilize around Rs. 40 to the dollar. Given that the rupee is still not fully convertible and there is no outflow of domestic capital, the depreciation in the rupee is qualitatively different from the currency crises in South East Asia. Fortunately, the strong economic fundamentals have contributed to a more positive prognosis for the rupee than for many of its counterparts in south and south-east Asia. Be that as it may, the substantial decrease in the rupee's external value has important implications. Firstly, the higher value of the dollar means lower prices of Indian products in world markets. To the extent that these products are price-elastic, this will translate into increased exports and much higher export earnings. Indian exports will become more price competitive with exports from the South East Asian region which enjoyed till recently a substantial price advantage because their respective currencies had fallen sharply.
But this new-found competitiveness is only based on price; competitiveness based on quality is quite another issue and on this area we have still some distance to go. For a lasting and long-term increase in our share of world markets, there is no alternative to continuously improving our quality competitiveness. Secondly, the cost of imports will shoot up. To the extent that out industrial growth depends on imported raw materials equipment and technology, the lower rupee value means higher prices and lower margins of profit as it is no longer possible to palm of increase in costs to customers.Thirdly, the bright, arbitrageur-managers who wanted to make a killing for their companies by arbitraging on interest rates have landed their companies with higher debt costs. This is quite the opposite of what they were trying to do.In the last six months, many companies have opted to convert their working capital loans from rupees to dollars as the dollar loans carried lower interest rates. They have aggressively demanded fine rates (in the 150 to 200 basis points above LIBOR range) in their negotiations with banks and on many occasions, played one bank against the other in the race for dollar conversions. But with the rupee depreciating, all hopes that the companies had of reducing their high cost borrowings with lower cost foreign currency debts are likely to dashed. On the contrary, many companies could end up incurring heavy forex losses. For example, a Rs 1 crore working capital demand loan which was converted into a foreign currency loan at a competitive rate of say 175 basis points above LIBOR some six months ago could saddle the borrower with an exchange loss of between Rs 10 and 12 lakh! So, what was gained by lower dollar interest rates is more than wiped out by the exchange losses. Indeed, this may put additional pressures on the bottom lines of many corporates. Companies are therefore learning costly lessons in coming to terms with the global markets. The FCNR loan misadventure for many companies exposes the danger of arbitrage. It also drives home the lesson that focusing on core competencies is the only way to increase profits in the long run. As RBI governor Bimal Jalan indicated recently, trying to make a quick buck is an invitation to disaster; however, striking a moralistic tone when we are dealing with markets has little relevance. In any case, patriotism is not the monopoly of governments and bureaucracies. My own view is that the rupee may now be near its current real value and the Rs. 40 to the dollar mark reflects not only the linkage between interest rates, current account balances and inflation but more importantly, the real competitiveness of the Indian economy based on productivity. And it is productivity that is the real concern.
Interest rates & productivity: Take for instance the behavior of interest rates. Over the last year or so there has been a steep fall in interest rates. This is mostly because of the decline in inflation, which has prompted a series of easy money monetary policy initiatives. What economists call the nominal component of interest rates is actually the inflation rate, which is already in the low three to five per cent per annum band. Therefore there is very little scope left for an inflation driven decline in interest rates. Any further reduction in interest rates can only happen if the real rate decreases. And since the real rate depends on productivity, it can decline only if productivity increases. So any additional interest rate cutbacks can only result from productivity improvements. Productivity is a medium and long-term phenomenon even though information technology is threatening even this bit of conventional wisdom. Increased competition in the economy provides a fillip to productivity. The structural reform program began in 1991 does just that. It is only now that the real impact of the reform program has begun to take effect. Unfortunately, this is also the time that the politicos have decided to play their power games. The danger that India will miss the boat again because of political instability is once again very real. Some approximations based on rather loose assumptions give an idea of the cost the country has to pay for the ambitions of our politicians.Opportunity Cost of Political Uncertainty: With the GDP of India being around some 270 billion dollars, if we had had a stable government at the center though 1997-98 which had pressed ahead with the structural reform program resulting in infrastructure projects taking off, financial sector (including insurance and banking) reforms being stepped up, external trade becoming more unfettered and milestones on the road map to capital account convertibility being passed without delays, it would have been reasonable to expect that the economy would have grown at eight per cent. This would have meant a 21.6 billion dollar addition to the GDP, in the current fiscal year. But a combination of factors has led to the economy achieving a growth rate of just 4 per cent; this means an addition of just $10.8 billion to the GDP. In effect this means that the other 10.8 billion dollars is the 'loss' in growth that has been missed out. This is the opportunity cost of an expected growth of eight per cent falling to 4 per cent.
It is difficult to quantify exactly how much political stability contributes to growth, but even if it accounts for just half of one per cent of GDP growth, the amount lost is still 1.35 billion dollars. At a dollar rate of Rs.40, this would translate into a staggering Rs. 5400 crores loss. This of course does not include the cost of conducting a fresh general election. Overall, I would estimate that the cost to the nation of the recent political machinations (via opportunity cost and cash for the election) at anywhere between Rs. 5,000 and Rs. 7,000 crores. Priorities for 1998: Considering the weight of past baggage of the past, any new government will have its work cut out for it in 1998.
Firstly, next year, serious attention will have to be paid to the size of government itself. India can no longer afford to incur over Rs. 50,000 crores per year in interest to service debt that is mostly incurred to meet non-plan government expenditure. This means that downsizing of government will have to be attempted on a massive scale. How on earth can we afford to bear the burden of Rs. 18,000 crores due from the Center to government employees as enjoined by the pay commission. The finances of many state governments are already in a parlous state, thanks to political profligacy and managerial incompetence. It is clear that a gargantuan government pre-empts resources from urgent development needs and diverts them into mostly unproductive uses. The harsh fact is that if the size of government is not reduced significantly, it will simply eat us all out of hearth and home. Secondly, if the size of government is to be cut, correspondingly, the size of the private sector has to be increased. Which means that an aggressive time bound program of privatization is an absolute necessity. Privatization does not mean disinvestment alone; many other mechanisms for providing a greater role for the private participation have been tried and tested the world over (sub contracting municipal services being one example). The temptation to use privatization (or disinvestment) proceeds to cover the fiscal deficit must be curbed at all costs. It is tantamount to dipping into capital to fund revenue expenses. Privatization proceeds must only be deployed in development or capacity building programs.Thirdly, the crucial area of infrastructure development gets the highest priority. In particular, I would categorize communication infrastructure as the area that will make or break India in the 21st century. By communication infrastructure I mean telecom, information technology and transport. The first two are now so intertwined that it is difficult to deal with them separately. Therefore a synergistic approach has to be taken in these two areas. This is a vital area for us since it is one field in which we are globally competitive. If we are to expand our competitive edge, we must rapidly rebuild telecom and information technology networks so that they can provide the backbone for extensive and sophisticated multimedia usage. Specifically, we must make the Internet the new gateway of India.
And finally, it is about time we put quality where it belongs; at the top of our national agenda. I would therefore suggest that the new government formulate a national quality policy. The thrust of this policy mush not only be quality certification but also to improve quality by adopting the relevant processes in all areas of our national life. This National Quality Policy (NQP) could, for example, include attractive tax benefits for those attaining measurable and certified quality improvements. At the same time, a very important component of the NQP must be the inclusion of a quality curriculum at the school level since the early adoption and mastery of quality attitudes tools and processes hold the key to our national resurgence.
As 1997 comes to a close, we must ask what the so-called leaders presented to the nation in its 50th year of Independence. No matter how charitable a view we may take, the truth is that the politicians have systematically sold this country short. Pretty political squabbles have foisted a huge cost on the economy. But the inherent strength of the economy and its resilient participant's have ensured that rays of hope still shine through the disappointment of opportunities missed. As the cliché goes, hope springs eternal and so it is with us as we begin the familiar trudge back to the polling booths!
*****
|
||||
|
 |
| Designed, hosted and maintained by e2Mars (P) Ltd. India. 2007- All rights reserved. | ||||
|