Despite 15 years of reforms & liberalization, poor has either remained poor or become poorer.The results of the so-called reforms have not reached the lower strata to improve even their economic well-being.The rich-poor gap has only widened.It is felt that it's time for a new economic model which looks at the well-being of the members of the society
The Hindu on December 24,2007 carried an article titled “India 2007: high growth, low development” by P.Sainath on the editorial page which brings out the realities of development in the country. The author quotes the Human Development Report of the UNDP for the year 2007. According to HDR, rank of India in the Human Development Index(HDI) slipped from 126 to 128 which puts us in the bottom 50 of the 177 nations that HDR looks at. While one may feel very sad about our development ranking we have reasons to be happy & proud: rank of India in the dollar billionaires improved from 8 in 2006 to 4 in 2007 according to Forbes Magazine! Cuba has no representation in the roll call of billionaires but it is ranked 51 in HDI, 77 places ahead of India! Even in Asia, countries like Vietnam and Sri Lanka at 105 and 99 respectively are ahead of us, the so called Asian Tiger.
On Friday, February 1, 2008, Economic Times reported “India grew 9.6% in FY 07;FM hopes for an encore” (Page 17). The report says that the country grew faster in 2006-07 than previously estimated and clocked 9.6%, highest in 18 years. It continues to say that India’s per capita growth rate stood at 8.15 in the last fiscal.On the same page the paper has reported the data released by the National Sample Survey Organization(NSSO).The data pertains to the average spending by urban & rural population.The average individual spending on consumer items per day in rural area is about Rs.21 while that in urban area is aboutRs.39(or Rs.625 and Rs.1171 respectively per month) in 2005-06.And about 19% of the rural population spent less than Rs.12 a day.
On February 7,ET reported about growing inequality in the country(Proof-reading FM’s inclusive mantra: Inequality Rises In Both Rural & Urban India, page 13).The report provides the results of the India Financial Protection Survey conducted by Max New York Life and NCAER which uses the Gini Coefficient(devised by Italian statistician Corrado Gini in 1910s and is a variability measure emplyed to calculate a nation’s consumption or income inequality. The coefficient has value from 0 to 1, with 0 indicating perfect equality and 1 perfect inequality).The GINI coefficient for Rural, Urban and All India in fact increased from 0.38, 0.39 and 0.43 respectively in1995-96 to o.41, 0.43 and 0.45 respectively in 2004-05 indicating that inequality has in fact increased despite all the growth we talk about.
The Business Line on February 8, 2008 had an editorial on the same theme: The India Story: Growth Without Equity where Mr.S.D. Naik laments that it is a matter of grave concern that the recent acceleration in GDP growth has not been accompanied by an equitable distribution of wealth and wellbeing based on the India Development Report 2008 released by the Indira Gandhi Institute of Development Research , Mumbai. He goes on to say that while there has been a reduction in the percentage of people living below poverty line during the last two decades, the incidence of poverty as measured by the head count ratio(HCR) declined at a slower rate of 0.7 % per annum during 1994-2005 , compared with 0.85% per annum during 1983-1994.Also, while India has the second highest growth rate (after China), its rank in terms of Human Development Index(HDI), a composite measure of life expectancy, adult literacy and standard of living) slipped from 126 in 2006 to 128 in 2007 even when the average incomes of middle class people surged and the country’s rank w.r.t dollar billionaires rose from 8 in 2006 to 4 in 2007.
While it has become a fashion to compare our economy with that of China, the proponents of growth based on GDP conveniently ignore facts like that China has been able to bring down the incidence of poverty by 45 percentage points between 1981 and 2001 whereas we have been able to reduce the same by only 17 percentage points.
All these stories narrate hard facts that could be pointing to shortcomings in the development model that we follow. While all the macroeconomic growth indicated by the growth in GDP might result in the improvement of the economic situation of the country on a total scale resulting in better average per capita income, it does not necessarily lead to the development of the underprivileged and the poor. The allegation that the new found liberalized economy has in fact favoured the upper crest of the society while the have-nots have been pushed further down, so far has been proved correct. I feel fifteen years of reforms and liberalization is sufficiently long for economies to have an evaluation of the structural adjustment process we initiated to bring in economic development. The development of a society shall be measured by the well-being of the members of the society. Most of the nations have been overwhelmed by the wealth the nation can generate by actively promoting corporate interests by embracing structural reforms recommended by the Brettonwoods twins and WTO(influenced by a few countries and their big corporates), but one should keep in mind what David C. Korten in his book When Corporations Rule The World , “The task ahead is to transform a world ruled by corporations dedicated to the love of money to a world ruled by people dedicated to the love of life”.
Monday, February 11, 2008
Saturday, February 9, 2008
Nothing Ethical About It! Back To IIPM !
It’s more than a year since I wrote last about IIPM and its ploys. I even thought of ignoring IIPM as certain people and institutions are incorrigible, whatever happens.But I sincerely thought that BT, claiming to be the No.1 business magazine will not stoop to conquer ( to make money).BT dtd February 10, features an ad from IIPM(page 79)which gives the “EDP CALENDAR 2006-07 ASIA” detailing ‘World Class EDPs For India Inc’.The ad starts with “The following professors exclusively visiting IIPM to take classes, will be additionally taking Executive Development Programmes for India Inc.as per the following calendar” (italics added).Then it gives the details of the programmes starting from April ‘06 and ending with Dec ’07. Not even a single programme has been scheduled for 2008! Usually a Calendar of Events are prepared for the next year- like an academic calendar at a business school will give you schedules for the next academic year –it never tells you about the past events. Business Schools invariably teaches business ethics as a subject but how can an institute which resorts to blatant violation of ethical principles inculcate ethics and values in their students? IIPM has been resorting to these apparently unethical methods to further their interests. But what about a respected business magazine like BT which claims to be the No.1 business magazine in India carrying such misleading ads? How could a highly respected company like 3M support the same?(The ad shows Post-it, a brand of 3M as a supporter )
Monday, February 4, 2008
Shall I continue to subsidize companies like TCS, Infosys, Wipro or Satyam and their shareholders and employees?
The profits earned by the export of software from India have been exempted from IT ever since the section 80 HHE of the IT Act(1961) was introduced in 1991. Initially, such an incentive to encourage exports was necessary as we wanted foreign exchange very badly as our reserves had fallen to abysmally low levels. Thanks to the incentives, the software exports took off very rapidly, and has emerged as one of the happening sectors and major earners of foreign exchange during the past sixteen years or so. The foreign exchange reserves have since jumped from those perilous levels to very comfortable levels and economists and social scientists have started probing the various uses to which these bulging reserves can be put.
While the strength of FE reserves gives us lots of confidence, has it been really helpful in reducing the social imbalances like inequality of income, eradication of poverty etc?Who benefits from such incentives? Companies like TCS, Infosys, Wipro etc each report profits in the vicinity of a billion dollar a year.Who are the beneficiaries of this profit? Barring contributions made by these companies towards social responsibility activities, these profits and the extra profits due to the IT exemption get distributed among the company’s promoters, shareholders and employees who happen to be among the super rich, or high net worth individuals or employees who have already been paid handsomely in the form of tax free dividends or very high salary packages. The benefits of the tax exemptions mainly go to a limited number who are already better off than the rest of the members of the society. Shall we continue to encourage this practice? If these three or four companies were to be taxed at the normal rates, something in excess a billion dollar would have been available to the society to improve the bare necessities of lakhs of people. While the GDP would have shown the same level of improvement, a larger number of members of the society would have had the benefit of consuming the same thing which a few members would otherwise would do. The current scenario will only help in widening the gap between the rich and the poor. Even I, a middle class citizen would have benefited from the amounts these companies would have paid by way of tax. As it stands , I have, in effect, been subsidizing these bigger companies who don’t get taxed despite being immensely profitable where as I get taxed at the normal rates for whatever salaries I struggle to earn.
While the strength of FE reserves gives us lots of confidence, has it been really helpful in reducing the social imbalances like inequality of income, eradication of poverty etc?Who benefits from such incentives? Companies like TCS, Infosys, Wipro etc each report profits in the vicinity of a billion dollar a year.Who are the beneficiaries of this profit? Barring contributions made by these companies towards social responsibility activities, these profits and the extra profits due to the IT exemption get distributed among the company’s promoters, shareholders and employees who happen to be among the super rich, or high net worth individuals or employees who have already been paid handsomely in the form of tax free dividends or very high salary packages. The benefits of the tax exemptions mainly go to a limited number who are already better off than the rest of the members of the society. Shall we continue to encourage this practice? If these three or four companies were to be taxed at the normal rates, something in excess a billion dollar would have been available to the society to improve the bare necessities of lakhs of people. While the GDP would have shown the same level of improvement, a larger number of members of the society would have had the benefit of consuming the same thing which a few members would otherwise would do. The current scenario will only help in widening the gap between the rich and the poor. Even I, a middle class citizen would have benefited from the amounts these companies would have paid by way of tax. As it stands , I have, in effect, been subsidizing these bigger companies who don’t get taxed despite being immensely profitable where as I get taxed at the normal rates for whatever salaries I struggle to earn.
Saturday, February 2, 2008
Opening Up The Market = Less Market = Curtailment Of Democratic Process?
Why is it that all new initiatives or moves by Government, regulators and even economists are biased towards big businesses and big businessmen? Are we moving towards a regime where opening up of the economy and markets leading to less markets consequent to lesser competition?
This article has been motivated by the report in ET dated Jan 25, 2008(Minority ransom in M&A deals on way out). The report per se is restricted to the amendment to the company laws aimed at curtailing the rights of minority shareholders which may not have serious implications on the democratic processes in the society. But on a wider horizon, this can be an example of the larger maladies that exist in the economy in the pretext of freer markets. Actions of this sort can raise doubts in the minds of the people regarding the implications they may have on the democratic process if it percolates to other areas too. First let us look at the report and the company law amendments mentioned there. The title of the report itself seems to be in bad taste. It gives an unfortunate impression that minority shareholders always try to put spokes on the scheme of things and try to thwart any attempts or stall any proceedings by promoters and managements. How many moves by incumbent managements and/or promoters with good intentions were thwarted by minority shareholders acting on their own interests? There might have been a few rare cases where minority shareholders have tried stalling the processes by the promoters and managements but a majority of them might have been instigated by competitors or other interested parties. Shall we amend a regulation to appease a few corporates or to punish still few troublesome minority shareholders? But, why is it that all new initiatives or moves by Government, regulators and even economists are biased towards big businesses and big businessmen? Are we moving towards a regime where opening up of the economy and markets leading to less markets consequent to lesser competition? Changes that have been happening in India over a period of last fifteen years somehow create an impression on the above lines. For example, when SEBI initially drafted laws for regulating IPOs, it stipulated that 25% of the offer had to be reserved for general public investors after all the reservations for employees, shareholders of promoting companies, Indian Mutual funds,FIIs and Indian & Multilateral development financial institutions etc The very purpose was to create a better market for securities. But such stipulations have since been diluted even though it has not achieved one of it’s aims viz spreading an equity culture and with stock valuations skyrocketing, the retail small investors will have a really difficult time to get allotment without any mandatory requirement regarding setting aside a portion of the shares to them. By and large regulations for markets have been found to be favouring companies than public.
This type of market scenario is being witnessed in many other areas too. Before liberalization, cement industry had a very large number of players, thanks to the encouragement given to the mini-cement plants .Today, the competition in the industry has been reduced from many to a few. And these few are controlling the stakes in the cement market with the prices of cement going through the roof. Cement prices in 1993-94 hovered around Rs.100-110 per bag and today the prices have increased to Rs.260-270.It has become simply unaffordable to the common man. The real estate companies, who have raised huge amounts funds from the markets due to stratospheric valuation of their companies can easily afford to pay Rs.260 or 270 for a bag. Are the market forces intact and playing? Are we proving right what Peter Drucker wrote back in 1996: “We are learning very fast that the belief that a free market is all it takes to have a functioning society –or even a functioning econmy- is a pure delusion” (The Relentless Contrarian , Wired, August 1996)
Recently Mr.Ratan Tata was interviewed by a business publication where he made a scathing remark about the attitudes of businessmen which explains the attitude of businessmen to the market forces.(He himself being a businessman, how he will exclude himself from the kind of behaviour is anybody’s guess). Mr.Tata is reported to have said, ”In Delhi, you have the President of CII talking about open markets on the one hand and on the other hand trying to ensure that there is no one who comes into the industry” while speaking on the controversy about awarding fresh GSM spectrum to various players in the telecom market.(Businessworld, January 14, 2008).When it comes to market forces vis-à-vis M&As, while M&As can theoretically lead to competitive advantages for firms by way of economies of scale, the resulting bigger players may keep the consumer at ransom.
The process of liberalization and consequent opening up of the market has apparently led to less-democratized processes in the economy. While democratic process dictates one person one vote, irrespective of the position, wealth or power one enjoys, the antithesis seems to be happening in business and economy where one rupee,one vote regime prevails. Holders of larger stakes (like promoters and management team) will be able to manipulate huge swings towards their position after the proposed company law amendment to favour value-based voting than number-based voting. Won’t the existing framework be more effective as a check & control system on the promoters and/or incumbent management? The proposed amendment might essentially entrust the decision making power and authority with a few leading to decision making highly dependent on the wisdom of a small cadre of promoter shareholders or leaders of the management team.
It is observed that people in positions of power usually abstain from the process of decision making whenever there is an issue of conflicts of interests- be it sitting on an interview panel and facing a scenario of interviewing a candidate who happens to be a relative or having other relationships or being on the panel to select the business person of the year. Why such practices don’t get extended to executive decisions involving shareholders? Why not interested promoters and management representatives abstain from voting and leave it the public shareholders(including institutional investors) to decide? One should not expect all shareholders to exercise their votes considering the low shareholder activism in India but the process is a first step to empower the public and minority shareholders. Companies can even suggest that these groups may discuss the issues with the independent directors who are supposed to protect the interests of the outside shareholders. Rather than trying to implement a step to control or curtail the minority shareholders, a process to empower them shall be attempted. Won’t that be a more democratic process to be adopted in a democratic country?
This article has been motivated by the report in ET dated Jan 25, 2008(Minority ransom in M&A deals on way out). The report per se is restricted to the amendment to the company laws aimed at curtailing the rights of minority shareholders which may not have serious implications on the democratic processes in the society. But on a wider horizon, this can be an example of the larger maladies that exist in the economy in the pretext of freer markets. Actions of this sort can raise doubts in the minds of the people regarding the implications they may have on the democratic process if it percolates to other areas too. First let us look at the report and the company law amendments mentioned there. The title of the report itself seems to be in bad taste. It gives an unfortunate impression that minority shareholders always try to put spokes on the scheme of things and try to thwart any attempts or stall any proceedings by promoters and managements. How many moves by incumbent managements and/or promoters with good intentions were thwarted by minority shareholders acting on their own interests? There might have been a few rare cases where minority shareholders have tried stalling the processes by the promoters and managements but a majority of them might have been instigated by competitors or other interested parties. Shall we amend a regulation to appease a few corporates or to punish still few troublesome minority shareholders? But, why is it that all new initiatives or moves by Government, regulators and even economists are biased towards big businesses and big businessmen? Are we moving towards a regime where opening up of the economy and markets leading to less markets consequent to lesser competition? Changes that have been happening in India over a period of last fifteen years somehow create an impression on the above lines. For example, when SEBI initially drafted laws for regulating IPOs, it stipulated that 25% of the offer had to be reserved for general public investors after all the reservations for employees, shareholders of promoting companies, Indian Mutual funds,FIIs and Indian & Multilateral development financial institutions etc The very purpose was to create a better market for securities. But such stipulations have since been diluted even though it has not achieved one of it’s aims viz spreading an equity culture and with stock valuations skyrocketing, the retail small investors will have a really difficult time to get allotment without any mandatory requirement regarding setting aside a portion of the shares to them. By and large regulations for markets have been found to be favouring companies than public.
This type of market scenario is being witnessed in many other areas too. Before liberalization, cement industry had a very large number of players, thanks to the encouragement given to the mini-cement plants .Today, the competition in the industry has been reduced from many to a few. And these few are controlling the stakes in the cement market with the prices of cement going through the roof. Cement prices in 1993-94 hovered around Rs.100-110 per bag and today the prices have increased to Rs.260-270.It has become simply unaffordable to the common man. The real estate companies, who have raised huge amounts funds from the markets due to stratospheric valuation of their companies can easily afford to pay Rs.260 or 270 for a bag. Are the market forces intact and playing? Are we proving right what Peter Drucker wrote back in 1996: “We are learning very fast that the belief that a free market is all it takes to have a functioning society –or even a functioning econmy- is a pure delusion” (The Relentless Contrarian , Wired, August 1996)
Recently Mr.Ratan Tata was interviewed by a business publication where he made a scathing remark about the attitudes of businessmen which explains the attitude of businessmen to the market forces.(He himself being a businessman, how he will exclude himself from the kind of behaviour is anybody’s guess). Mr.Tata is reported to have said, ”In Delhi, you have the President of CII talking about open markets on the one hand and on the other hand trying to ensure that there is no one who comes into the industry” while speaking on the controversy about awarding fresh GSM spectrum to various players in the telecom market.(Businessworld, January 14, 2008).When it comes to market forces vis-à-vis M&As, while M&As can theoretically lead to competitive advantages for firms by way of economies of scale, the resulting bigger players may keep the consumer at ransom.
The process of liberalization and consequent opening up of the market has apparently led to less-democratized processes in the economy. While democratic process dictates one person one vote, irrespective of the position, wealth or power one enjoys, the antithesis seems to be happening in business and economy where one rupee,one vote regime prevails. Holders of larger stakes (like promoters and management team) will be able to manipulate huge swings towards their position after the proposed company law amendment to favour value-based voting than number-based voting. Won’t the existing framework be more effective as a check & control system on the promoters and/or incumbent management? The proposed amendment might essentially entrust the decision making power and authority with a few leading to decision making highly dependent on the wisdom of a small cadre of promoter shareholders or leaders of the management team.
It is observed that people in positions of power usually abstain from the process of decision making whenever there is an issue of conflicts of interests- be it sitting on an interview panel and facing a scenario of interviewing a candidate who happens to be a relative or having other relationships or being on the panel to select the business person of the year. Why such practices don’t get extended to executive decisions involving shareholders? Why not interested promoters and management representatives abstain from voting and leave it the public shareholders(including institutional investors) to decide? One should not expect all shareholders to exercise their votes considering the low shareholder activism in India but the process is a first step to empower the public and minority shareholders. Companies can even suggest that these groups may discuss the issues with the independent directors who are supposed to protect the interests of the outside shareholders. Rather than trying to implement a step to control or curtail the minority shareholders, a process to empower them shall be attempted. Won’t that be a more democratic process to be adopted in a democratic country?
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