Sonianomics will put India on the path to disaster

 
Vivek Kaul
Sonia Gandhi must be having the last laugh, at least when it comes to economic reforms and their salability among Indian politicians. “Maine kaha tha, Mamata nahi manegi(I had told you Mamata will not agree),” she must be telling the Prime Minister Manmohan Singh these days. “Par aap zidd par add gaye(But you became rather obstinate about the entire thing),” she must have added.
Whether this government survives or not remains to be seen but economic reforms will now be put on the backburner, that’s for sure. Also, the Congress party led United Progressive Alliance(UPA) will start preparing for elections (early or not that doesn’t really matter). And given that Sonia Gandhi’s form of “giveaway everything for free” economics will come to the forefront again now.
The various Congress led governments, since India attained independence from the British in 1947, have always followed this form of economics. As Sunil Khilnani writes in The Idea of India “The state was enlarged, its ambitions inflated, and it was transformed from a distant, alien object into one that aspired to infiltrate the everyday lives of Indians, proclaiming itself responsible for everything they could desire: jobs, ration cards, educational places, security, cultural recognition.”
When someone is responsible for everything, the way it usually turns out is that he is not responsible for anything.  A major reason for the economic and social mess that India is in today is because of the various Congress led government trying to be responsible for everything.
This is going to increase in the days to come with Sonia Gandhi’s pet projects of the right to food and universal health insurance being initiated. It need not be said that the projects will help spruce up the chances of the Congress party in the next Lok Sabha election.
These are populist giveaways which have existed all through history. As Gurucharan Das writes in his new book India Grows at Night Populist giveaways have always been a great temptation. Roman politicians devised a plan in 140BCE to win votes of the poor by offering cheap food and entertainment – they called it ‘bread and circuses.’”
But even with that, the idea of right to food and health for all, are very noble measures and difficult to oppose for anybody who has his heart in the right place. Nevertheless, the larger question is where will the government get the money to finance these schemes from?  As P J O’Rourke, an American political satirist, writes in Don’t Vote! It Just Encourages the Bastards “We’re giving until it hurts. That is, we’re giving until it hurts other people, since we’re giving more than we’ve got.” 
The fiscal deficit target of Rs 5,13,590 crore or 5.1% of the gross domestic product(GDP), for 2012-2013 will be breached by a huge amount. Fiscal deficit is the difference between what the government earns and what it spends. This will happen primarily because of the subsidy bill going through the roof (as the following table shows).

SubsidesApr-July 2012Apr-July 2011Increase over last yearbudget estimate% of budget estimate
Oil

28,630

20760

37.91%

43580

65.70%

Fertilizer

32220

19250

67.38%

60974

52.84%

Food

46400

37540

23.60%

75000

61.87%

Source: Controller General of Accounts, Deutsche Bank. In rupees crore

As is clear from the table the subsidies on oil, fertilizer and food for the first four months of this have been much higher than the previous year. Also four months into the year the subsidies are already more than 50% of the amount targeted for the year. Like the food subsidy for the year has been targeted at Rs 75,000 crore. During the first four months subsidies worth Rs 46,400 crore have already been offered. Unless the government controls this, the spending over the remaining eight months of the year will definitely cross the targeted Rs 75,000 crore. This will increase the overall spending of the government and thus the overall fiscal deficit, which is in the process of reaching dangerous proportions.
As I have stated in the past at the current rate the fiscal deficit of the Indian government could easily surpass Rs 700,000 crore or 7% of the GDP. (you can read the complete argument here). Now add the right to food and universal health insurance to it and just imagine where the fiscal deficit will go. And that means the scenario of high interest rates and high inflation will continue in the days to come.
But that’s just one part of the argument. Those in favour of subsidies and a welfare state have often given the example of the greatest western democracies (particularly in Europe) which have run huge welfare states with the government taking care of its citizens from cradle to grave. An extreme example of such a welfare state is Greece.
Greece categorises certain jobs as arduous. For such jobs the retirement age is 55 for men and 50 for women. “As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, musicians…” write John Mauldin and Jonathan Tepper write in Endgame – The End of the Debt Supercycle and How it Changes Everything.
But the Western democracies became welfare states only after almost 100 years of economic growth. “Western democracies had taken more than a hundred years of economic growth and capacity building to achieve the welfare state,” writes Das. And given this India is indulging in “premature welfarism”. “A nation with a per capita income of $1500 cannot protect its people from life’s risks as a nation with a per capita income of $15,000 could. It came at a cost of investment in infrastructure, governance and longer-term prosperity,” adds Das.
That’s one part of the argument. In order to finance these programmes the government will have to run huge fiscal deficits. This means that the government will have to borrow. Once it does that it will crowd out borrowing by the private sector and thus bring down the investment in infrastructure and hence longer term prosperity.
There is no example of a premature welfare state in the history of mankind rising its way to economic prosperity. An excellent example of a country that tried and failed is Brazil.  India is making the same mistakes now that Brazil did in the late 1970s.
As Ruchir Sharma writes in Breakout Nations Inspired by the popularity of employment guarantees, the government now plans to spend the same amount extending food subsidies to the poor. If the government continues down this path, India might meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crossed out private investment, ending the country’s economic boom…the hyperinflation that started in the early 1980s and peaked in 1994, at the vertiginous annual rate of 2,100 percent. Prices rose so fast that cheques would lose 30 percent of their value by the time businesses could deposit them, and so inconsistently that at one point a small bottle of sunscreen lotion cost as much as a luxury hotel.”
Inflation in such a scenario happens on two accounts. First it happens because people have more money in their hands. And with this they chase the same number of goods, thus driving up prices. The second level of inflation sets in once the government starts printing money to finance all their fancy welfare schemes.
As far inflation is concerned things have already started heating up in India. As Das writes “The Reserve Bank warned that wages, which were indexed against inflation in the employment scheme (the national rural employment guarantee scheme), had already pushed rural wage inflation by 15 per cent in 2011. As a result, India might not gain manufacturing jobs when China moves up the income ladder.”
Other than inflation, giving away things for free has other kinds of problems as well. With states giving away power for free or rock bottom rates, the state electricity boards are virtually bankrupt. As Abheek Barman wrote in a recent column in the Economic Times Most of the power is bought by state governments, through state electricity boards (SEBs). These boards are bankrupt. In 2007, all SEBs put together made losses of Rs 26,000 crore; by March last year, this jumped to a staggering Rs 93,000 crore. Just two SEBs, Uttar Pradesh and Jammu & Kashmir, account for nearly half this amount. To cover power purchase costs, the SEBs borrow money. Today, the total short-term debt of all the SEBs has soared to a mind-boggling 2,00,000 crore. Many states would buy as little electricity as possible, to avoid going deeper into the red.” (You can read the compete piece here). So the farmer has free electricity but then there is no electricity available most of the time.
Das writes something similar in India Grows at Night. Punjab’s politicians gave away free electricity and water to farmers, and destroyed state’s finances as well as the soil (as farmers overpumped water); hence, Haryana supplanted Punjab as the national’s leader in per capita income.”
Other than this a lot of things given away for free by the government are siphoned off and do not reach those they are intended to. It would be foolish on my part to assume the politicians in this country (including Sonia Gandhi and of course Manmohan Singh) do not understand these things. But as Das writes “But neither the ‘do-gooders’ nor the Congress party was deterred by the massive corruption in the supply of diesel, kerosene, electricity and cooking gas as well as in ‘make work’ schemes and food distribution. Politicians felt there were still plenty of votes there.
But these votes will come at the cost of economic progress. No country in history has got its citizens out of poverty by giving away things for free. Countries have progressed when they have created enough jobs for its citizens. And that has only happened when the right investments have been made over the years to build infrastructure, industry and human skill.
So the votes for the Congress will come at the cost of economic prosperity for the country. In the end let me quote a couplet written by Allama Iqbal: “Na samjhoge to mit jaoge ae hindustan waalo, tumhari daastan bhi na hogi daastano main” ( “If you don’t wake up, O Indians, you will be ruined and razed, Your very name shall vanish from the chroniclers’ page” – Translation by K C Kanda in Masterpieces of Patriotic Urdu Poetry: Text, Translation, and Transliteration).
The Prime Minister Manmohan Singh’s love for urdu poetry is well known. It is time he went back to this couplet of Allama Iqbal and tried to understand it in the terms of all the problems that will come along with the premature welfare state that his party has created and is now trying to spread it further.
The article originally appeared on September 20, 2012 on www.firstpost.com. http://www.firstpost.com/politics/sonianomics-will-put-india-on-the-path-to-disaster-462163.html
(Vivek Kaul is a writer. He can be reached at [email protected])
 
 

How Mamata is denting the rupee and bloating the oil bill


Vivek Kaul
A major reason for announcing the so called economic reforms that the Manmohan Singh UPA government did over the last weekend was to get India’s burgeoning oil subsidy bill which was expected to cross Rs 1,90,000 crore during the course of the year, under some control.
One move was the increase in diesel price by Rs 5 per litre and limiting the number of cooking gas cylinders that one could get at the subsidisedprice to six per year. This was a direct step to reduce the loss that the oil marketing companies (OMCs) face every time they sell diesel and cooking gas to the end consumer.
The other part of the reform game was about expectations management.  The announcement of reforms like allowing foreign direct investment in multi-brand foreign retailing or the airline sector was not expected to have any direct impact anytime soon. But what it was expected to do was shore up the image of the government and tell the world at large that this government is committed to economic reform.
Now how does that help in controlling the burgeoning oil bill?
Oil is sold internationally in dollars. The price of the Indian basket of crude oil is currently quoting at around $115.3 per barrel of oil (one barrel equals around 159litres).
Before the reforms were announced one dollar was worth around Rs 55.4(on September 13, 2012 i.e.). So if an Indian OMC wanted to buy one barrel of oil it had to convert Rs 6387.2 into $115.3 dollars, and pay for the oil.
After the reforms were announced the rupee started increasing in value against the dollar. By September 17, one dollar was worth around Rs 53.7. Now if an Indian OMC wanted to buy one barrel of oil it had to convert Rs 6191.6 into $115.3 to pay for the oil.
Hence, as the rupee increases in value against the dollar, the Indian OMCs pay less for the oil the buy internationally.  A major reason for the increase in value of the rupee was that on September 14 and September 17, the foreign institutional investors poured money into the stock market. They bought stocks worth Rs 5086 crore over the two day period. This meant dollars had to be sold and rupee had to be bought, thus increasing the demand for rupee and helping it gain in value against the dollar.
But this rupee rally was short lived and the dollar has gained some value against the rupee and is currently worth around Rs 54.
The question is why did this happen? Initially the market and the foreign investors bought the idea that the government was committed at ending the policy logjam and initiating various economic reforms. Hence the foreign investors invested money into the stock market, the stock market rallied and so did the rupee against the dollar.
But now the realisation is setting in that the reform process might be derailed even before it has been earnestly started. This was reflected in the amount of money the foreign investors brought into the stock market on September 18. The number was down to around Rs 1049.2 crore. In comparison they had invested more than Rs 5080 crore over the last two trading sessions.
Mamata Banerjee’s Trinamool Congress, a key constituent of the UPA government, has decided to withdraw support to the government. At the same time it has asked the government to withdraw a major part of the reforms it has already initiated by Friday. If the government does that the Trinamool Congress will reconsider its decision.
How the political scenario plays out remains to be seen. But if the government does bow to Mamata’s diktats then the economic repercussions of that decision will be huge. The government had hoped that the losses on account of selling, diesel, kerosene and cooking gas, could have been brought down to Rs 1,67,000 crore, from the earlier Rs 1,92,000 crore by increasing the price of diesel and limiting the consumption of subsidised cooking gas.
If the government goes back on these moves, the oil subsidy bill will go back to attaining a monstrous size. Also, what the calculation of Rs 1,67,000 crore did not take into account was the fact that rupee would gain in value against the dollar. And that would have further brought down the oil subsidy bill. In fact HSBC which had earlier forecast Rs 57 to a dollar by December 2012, revised its forecast to Rs 52 to a dollar on Monday. But by then the Mamata factor hadn’t come into play.
If the government bows to Mamata, the rupee will definitely start losing value against the dollar again. This will happen because the foreign investors will stay away from both the stock market as well as direct investment. In fact, the foreign direct investment during the period of April to June 2012 has been disastrous. It has fallen by 67% to $4.41billion in comparison to $13.44billion, during the same period in 2011. If the government goes back on the few reforms that it unleashed over the last weekend, foreign direct investment is likely to remain low.
One factor that can change things for India is the if the price of crude oil were to fall. But that looks unlikely. The immediate reason is the tension in the Middle East and the threat of war between Iran and Israel. Hillary Clinton, the US Secretary of State, recently said that the United States would not set any deadline for the ongoing negotiations with Iran. This hasn’t gone down terribly well with Israel. Reacting to this Benjamin Netanyahu, the Prime Minister of Israel said “the world tells Israel, wait, there’s still time, and I say, ‘Wait for what, wait until when? Those in the international community who refuse to put a red line before Iran don’t have the moral right to place a red light before Israel.” (Source: www.oilprice.com)
Iran does not recognise Israel as a nation. This has led to countries buying up more oil than they need and building stocks to take care of this geopolitical risk.In the recent period, since the start of 2012, the increase in stocks has been substantial, i.e. 2 to 3 million barrels per day. These are probably precautionary stocks linked to geopolitical risks,” writes Patrick Artus of Flash Economics in a recent report titled Why is the oil price not falling?
At the same time the United States is pushing nations across the world to not source their oil from Iran, which is the second largest producer of oil within the Organisation of Petroleum Exporting Countries (Opec). This includes India as well.
With the rupee losing value against the dollar and the oil price remaining high the oil subsidy bill is likely to continue to remain high. And this means the trade deficit (the difference between exports and imports) is likely to remain high. The exports for the period between April and July 2012, stood at $97.64billion. The imports on the other hand were at $153.2billion. Of this, $53.81billion was spent on oil imports. If we take oil imports out of the equation the difference between India’s exports and imports is very low.
Now what does this impact the value of the rupee against the dollar? An exporter gets paid in dollars. When he brings those dollars back into the country he has to convert them into rupees. This means he has to buy rupees and sell dollars. This helps shore up the value of the rupee as the demand for rupee goes up.
In case of an importer the things work exactly the opposite way. An importer has to pay for the imports in terms of dollars. To do this, he has to buy dollars by paying in rupees. This increases the demand for the dollar and pushes up its value against the rupee.
As we see the difference between imports and exports for the first four months of the year has been around $55billion. This means that the demand for the dollar has been greater than the demand for the rupee.
One way to fill this gap would be if foreign investors would bring in money into the stock market as well as for direct investment. They would have had to convert the dollars they want to invest into rupees and that would have increased the demand for the rupee.
The foreign institutional investors have brought in around $3.86billion (at the current rate of $1 equals Rs 54) since the beginning of the year.  The foreign direct investment for the first three months of the year has been at $4.41 billion.
So what this tells us that there is a huge gap between the demand for dollars and the supply of dollars. And precisely because of this the dollar has gained in value against the rupee. On April 2, 2012, at the beginning of the financial year, one dollar was worth around Rs 50.8. Now it’s worth Rs 54.
This situation is likely to continue. And I wouldn’t be surprised if rupee goes back to its earlier levels of Rs 56 to a dollar in the days to come. It might even cross those levels, if the government does bow to the diktats of Mamata.
This would mean that India would have to pay more for the oil that it buys in dollars. This in turn will push up the demand for dollars leading to a further fall in the value of the rupee against the dollar.
Since the government forces the OMCs to sell diesel, kerosene and cooking gas much below their cost to consumers, the losses will continue to mount. The current losses have been projected to be at Rs 1,67,000 crore. I won’t be surprised if they cross Rs 2,00,000 crore. The government has to compensate the OMCs for these losses in order to ensure that they don’t go bankrupt.
This also means that the government will cross its fiscal deficit target of Rs 5,13,590 crore. The fiscal deficit, which is the difference between what the government earns and what it spends, might well be on its way to touch Rs 7,00,000 crore or 7% of GDP. (For a detailed exposition of this argument click here). And that will be a disastrous situation to be in. Interest rates will continue to remain high. And so will inflation. To conclude, the traffic in Mumbai before the Ganesh Chaturthi festival gets really bad. Any five people can get together while taking the Ganesh statue to their homes, put on a loudspeaker, start dancing on the road and thus delay the entire traffic on the road for hours.  Indian politics is getting more and more like that.
Reforms, like the traffic, may have to wait. Mamata’s revolt is single-handedly worsening the oil bill, thanks, in part, to the rupee’s worsening fortunes. By not raising prices now, the subsidy bill bloat further, and in due course we will be truly in the soup.
The article originally appeared on www.firstpost.com on September 20, 2012. http://www.firstpost.com/economy/how-mamata-is-denting-the-rupee-and-bloating-the-oil-bill-461919.html
Vivek Kaul is a writer and can be reached at [email protected]
 

Kirana vs Wal-Mart: Busting the big myths of big retail

 
Vivek Kaul
In a rather poignant scene in Zoya Akhtar’s Zindagi Na Milegi Dobara, the character played by Farhan Akhtar, is sitting face to face with his biological father, played by Naseeruddin Shah (in a brilliant cameo). As the story goes, Shah had abandoned Akhtar’s mother (played by Deepti Naval) after getting her pregnant and moved onto becoming a famous painter in Europe.
Akhtar finally calls up Shah, when on a holiday in Spain he and his two friends get involved in a drunken brawl and land up in jail. Shah comes and bails them out. After this, Akhtar asks Shah for the true reason behind abandoning his mother. To which Shah replies “Sach hota kya hai. . . sach ka har ek ka apna apna version hota hai!” (What is truth? Everybody has their own version of it)
This line written by Farhan Akhtar is at the heart of the current debate happening, after the decision made by the Congress led UPA government to allow foreign direct investment in multi-brand foreign retailing.
Those in favour of the decision have their own version of truth. And those against it have another version. Those in favour of the decision believe that allowing foreign investment will create jobs, build supply chains and overall help economic growth. Those against it firmly believe that it will destroy the neighbourhood kirana shop, as you, I and everybody else, hop onto Wal-Mart to buy stuff. I have my own version of truth which is somewhere between the two extremes.
The kirana store will survive: A lot of hue and cry has been made on this. Nitish Kumar the Chief Minister of Bihar believes that the aam aadmi will suffer because of FDI in retail and hence he won’t allow it in Bihar. The fact of the matter is that it is not easy to compete with the neigbourhood kirana store. My kirana guy even goes to the extent of delivering things that he does not sell, like eggs and medicines, to ensure that I keep giving him business. As Rajiv Lal a professor at the Harvard Business School told me in an interview I did for Daily News and Analysis (DNA) “Kirana stores have a lot of benefits that established retailers don’t have. First of all location. What rents do they pay versus what established companies have to pay? Employees, same story. On the consumer side they can deliver services, in terms of somebody calls them and asks can you deliver six eggs? The guy runs and delivers six eggs. That’s not something that the big established firms can provide.” (You can read the complete interview here)
No homogeneity across India: An important factor for big retail to be successful is the homogeneity of the population in consumption behaviour. This gives them economies of scale. As marketing guru V Kumar told me in a recent interview I did for DNA “Does the country as a whole consume common things or there are regional biases?  In a country like Brazil people eat similar foods that every retailer can sell.” In India clearly things are different. “In India between South, East, West and the North, there is so much heterogeneity that you need localized catering and marketing .So consumption behaviour varies therefore unless you are willing to carry heterogeneous products in each of the locations it is tough,” said Kumar (You can read the complete interview here). This is a challenge that foreign retailers will have to deal with.
The real estate conundrum: A typical Wal-Mart in the United States is situated outside the city, where rents are low. But such a strategy may not work in India. “It’s not easy to open a 150,000 square feet store in India. That kind of space is not available. They can’t open these stores 50 miles away from where the population lives. People in India don’t have the conveyance to go and buy bulk goods, bring it and store it. They don’t have the conveyance and they don’t have the big houses. So it doesn’t work,” explained Lal. This is something that Kumar agreed with. “Even if Wal-Mart is there in every place, the way they are located is typically outside the city limits. So only people with time, motivation and a vehicle, will be able to go and buy things. And the combination of these three things is very rare.” The kirana stores also provide goods on interest free credit to their customers something that no big retailer can afford to do.
The fear of Wal-Mart and others of its ilk is overdone:  It is widely believed that wherever Wal-Mart goes it destroys the local business. As Anthony Bianco writes in The Bully of Bentonville – How the High Cost of Wal-Mart’s Everyday Low Prices is Hurting America “It (Wal-Mart) grows by wrestling businesses away from other retailers large and small. In hundreds of towns and cities, Wal-Mart’s entry put ailing …shopping districts into intensive care and then ripped out the life-support-system.”
But that is truer for markets like Canada, Mexico and United Kingdom, which are culturally and geographically closer to the United States. The Wal-Mart formula doesn’t always work everywhere. Pankaj Ghemawat, who has the distinction of being appointed the youngest full professor at the Harvard Business School, writes about this in his book Redefining Global Strategy,  “When CEO Lee Scott (who was the CEO of Wal-Mart from 2000 to 2009) was asked a few years ago about why he thought Wal-Mart could expand successfully overseas, his response was that naysayers had also questioned the company’s ability to move successfully from its home state of Arkansas to Alabama…such trivialisation of international differences greases the rails for competing exactly the same way overseas at home. This has turned out to be a recipe for losing money in markets very different from the United States: as the former head of the company’s German operations, now shut down, plaintively observed, “We didn’t realise that pillowcases are a different size in Germany.””
What is the experience from other emerging markets? Big retail has got some traction in countries like China and Brazil. As Kumar put it “If you look at evidence from China organized retailing has got more traction. That’s because they did not have many mom and pop stores to begin with. They were cultivating their own things which was locally community based. But with more cities coming up and migration of people from rural areas to cities, gives more scope for organised retailing in China. Also space is not an issue in China. In India space is a constraint. Look at China and India. China is much bigger than India but the population is pretty much similar. Look at Brazil, it is as much bigger than India but the population is maybe one sixth that of India.  So they also have space.” Whereas space remains a key constraint for big retail stores like Wal-Mart, Tesco and Carrefour in India.
Also in almost all emerging markets a local company is number one. As Lal told me “There is not  a single emerging market that I know where a foreign entrant is the number one retailer. In Brazil it is Pão de Açúcar, in China you have the local Beijing Bailian. In most markets even when there are foreign entrants the dominant retailer in the organised sector is still the local retailer.”
And there are several reasons for the same. The local retailers are very price competitive. “If Wal-Mart is operating in Brazil there is nothing that Wal-Mart can do in Brazil that the local Brazilian guy cannot do. If you want to procure supplies from China, you can procure supplies from China as much as Wal-Mart can procure supplies. On top of that they have local merchants that they know they can source from and Wal-Mart may not,” said Lal.
Will foreign players be able to crack the market, when most of the Indian retailers are bleeding? The biggest Indian business groups have tried to crack organized retailing over the last decade. The Tatas, the Birlas, the Ambanis, all have a significant presence in the sector. But despite that organized retailing remains a small part of the overall retail business. As Sreenivasan Jain writes in the DNA: “For starters, India has had big or organised retail for about 15 years now, not a small stretch of time. Some of the biggest Indian corporates are in this space, like Reliance, the Birlas, Godrej, RPG (Sanjeev Goenka Group) and Kishore Biyani’s Future Group. Despite this, organised retail is only 5% of the Indian retail market. The remaining 95% is still unorganised.” (You can read the complete article here).
And all these big players are losing money hand over fist. “Last year, Reliance Fresh posted a loss of Rs 247 crore, Bharti posted a loss of Rs 266 crore, and Aditya Birla group, which runs the chain of More supermarkets, posted a loss of Rs 423 crore. Some retail chains have actually shut down, like Subhiksha which at one time had almost 1,500 outlets,” writes Jain.
It is in the interest of these firms that foreign investment is allowed in the sector, so that they can sell a part of the equity to foreign firms. Those in favour are of the opinion that these firms do not have the necessary expertise which the foreigners will bring in. This argument does not really work. Bharti Enterprises which runs the Easy Day stores has a back-end and cash-and-carry partnership with Wal-Mart. Star Bazaar, run by the Tata group is offered back end support by Tesco. So the big retail giants are in a way already operating in India.
Another point put forward by those in favour of foreign investment in retail is that it will help build reliable supply chains across the country. Theoretically yes, but the trouble is supply chains cannot be built if it’s left to the states to decide whether they allow foreign retail or not. Supply chains need to be seamless, they cannot be built if one state allows foreign retail and the neighbouring state does not. Also, we must remember that despite the presence of these heavy weights in the retail sector the kirana shops still continue to function as they had before.
So what is the future going to be like?  It is difficult to predict what the future of the likes of Wal-Mart, Tesco and Carrefour in India is going to be. But one thing is for sure. They won’t find it easy. As far as Wal-Mart goes Kumar had this to say “There will be a market if they are content at not being the largest retailer. If they say in India I am one among many, they will have a presence. Maybe at some point in the future, things might change, like Wal-Mart buying other retailers and that’s the way they can expand. Their specialty is supply chain and turning the inventory over multiple times than other retailers. They cannot turn it over multiples times here. Each time if they make a 1% margin they get a higher margin due to turning the inventory over multiple times. Here I don’t see them turning it over as many times as in other markets. It’s very difficult to do that.”
Kumar also predicts that over a period of time the likes of Wal-Mart will be forced to buy the smaller kiranas in order to expand. “My prediction is this that mom and pop stores or kiranas as we call them will become more and more sophisticated. Today the store owners know people by their names, as the number will grow they will have to start building a database, but they don’t have the capabilities. So organised retailing will start buying mom and pop stores individually. And then they will put all of them under one banner. It will be like how Tesco is operating in the U.K with different store formats. You have Tesco supermarket, convenience store, street corner store, express etc. So that is the way in India you will see this evolving because otherwise there is no growth for them,” said Kumar.
So my version of truth is somewhere in between those who support foreign investment in mutli brand retailing as it’s called, and those who don’t. Big retail will not be the panacea it’s being made out to be. Neither will it destroy the smaller shops as is being claimed. It will have to create its own space. And that will only happen over a period of time.
This article originally appeared on www.firstpost.com on September 18, 2012. http://www.firstpost.com/business/kirana-vs-wal-mart-busting-the-big-myths-of-big-retail-459490.html#disqus_thread
(Vivek Kaul is a writer and he can be reached at [email protected])
 
 

How Manmohan’s omelette came out as scrambled egg


Vivek Kaul
Around half way through Manu Joseph’s new book The Illicit Happiness of Other People, Ousep Chacko, one of the main characters in the book, says “Don’t hate me, son. There are people in this world who set out to make an omelette but end up with scrambled eggs. I am one of them.”
I just couldn’t help comparing this statement to Manmohan Singh, the current Prime Minister of the country. When he started out in 2004 he had all the economic ingredients that could be used to make a good omelette but what he has given us instead is burnt bhurji (the closest Indian representation of scrambled eggs and with due apologies to all the vegetarians out there).
When Manmohan Singh took over as the Prime Minister on May 22, 2004, things were looking good on the economic front. Consumer price index (CPI) inflation was at a rather benign 2.83%(Source: http://www.tradingeconomics.com/india/inflation-cpi) in May 2004. Interest rates were low.
The fiscal deficit projected by the government for 2004-2005(or the period between April 1, 2004 and March 31, 2005) was at 4.4% of the gross domestic product (GDP). Fiscal deficit is the difference between what the government earns and what it spends.
The interest payments that the government had to make on previous debt formed around 94% of the fiscal deficit. Interest payments stood at Rs 1,29,500 crore whereas the fiscal deficit was at Rs 1,37,407 crore.  Thus the primary deficit or the difference between expenditure and income, after leaving out the interest payments, came to just 0.3% of the GDP.
What this meant was that the government was more or less meeting its expenditure from the income that it was earning during the course of the year. Thus the deficit was on account of the past debt. It also meant that the government did not have to borrow much, which in turn kept the interest rates low, encouraging both businesses and consumers to borrow and spend, and thus helping the Indian economy grow at a fast rate.
The subsidy bill for the year stood at Rs 43,516 crore or a little over 9% of the total government expenditure.
Cut to now. The CPI inflation for July 2012 was at 9.86%. The interest rate on most retail loans is greater than 10%. And the fiscal deficit has gone through the roof. The projected fiscal deficit for the year is Rs 5,13,590 crore or around 5.1% of the GDP. The primary deficit is at 1.9% of the GDP.
Even these numbers, as I showed in a recent piece will turn out to be way off the mark. (You can read the piece here). As economist Shankar Acharya wrote in the Business Standard “A few days back the Controller General of Accounts (CGA, not CAG!) informed us that the central government’s fiscal deficit for the first four months of 2012-13 had already exceeded half of the Budget’s target for the full year.”
The way things are going currently, the fiscal deficit might touch 7% of the GDP or its roundabout by the end of this year. This is a situation which hasn’t been experienced since 1990-91, just before India liberalised and opened up the economy.
In his speech as the Finance Minister of India in July 1991 Manmohan Singh had said “The crisis of the fiscal system is a cause for serious concern. The fiscal deficit of the Central Government…is estimated at more than 8 per cent of GDP in 1990-91, as compared with 6 per cent at the beginning of the 1980s and 4 per cent in the mid-1970s.”
So the question that arises is what went wrong between 2004 and 2012? The answer is that the subsidy budget of the government went through the roof. Things started changing in 2007-2008. The projected subsidy bill for the year was Rs 54,330 crore. By the end of the year the government had spent Rs 69,742 crore or 28% more. This was in preparation for the 2009 Lok Sabha elections.
The same thing happened the next year i.e. 2008-2009. The government budgeted Rs 71,431 crore as subsidies and ended up spending Rs 1,29,243 crore, a whopping 81% more. The subsidies were primarily on account of fertiliser, oil and food.
The budgeted subsidies for the current financial year (i.e. the period between April 1, 2012 and March 31, 2013) are at Rs 1,90,015 crore or around 12.7% of the total government expenditure. But as has been the case earlier the government will end up spending much more than this. Even after the Rs 5 increase in diesel price, the oil marketing companies (OMCs) will lose more than Rs 1 lakh crore on selling diesel this year. The total loss on account of selling diesel, kerosene and cooking gas at a loss is estimated to come to Rs 1,67,000 crore.
Just this will push up the subsidy bill close to Rs 3,00,000 crore.  The government is expected to cross the budgeted amount for food and fertiliser subsidy as well. All in all it’s safe to say that subsidies will account for more than 20% of the government expenditure during the course of the year, leading to greater borrowing by the government and thus higher interest rates for everybody else.
The idea behind the subsidies (or inclusive growth as the government likes to call it) is to help the poor and ensure that they are not left out of the growth process. The question is where is the money to fund these subsidies going to come from? As Ila Patnaik writes in The Indian Express “Anyone looking at the rising subsidy bill, at the size of the welfare programmes, and contrasting it with the limited tax base, can only wonder why India will not have a fiscal crisis. A continuation of the present policies cannot but land the country into a huge problem. Either before a crisis or after it, there is little doubt that the current expenditure path has to change.”
The programme at the heart of the so called inclusive growth is the National Rural Employment Guarantee Act (NREGA), under which there is a legal guarantee of 100 days of employment during the course of the financial year to adults of any rural household. The daily wage is set at Rs 120 in 2009 prices, which means it is indexed for inflation. Now only if economic and social development was as easy as getting people to dig holes and fill them up.
Also as is usual with most such schemes in India there are huge leakages in this scheme as well. Estimates suggest that leakages are as high as 70%, which means only around Rs 30 of the Rs 100, reaches those it should, while the rest is being siphoned off. This is done by fudging muster rolls, which are essentially supposed to contain the number of days a labourer has worked and the wages he or she has been paid for it.
Also these subsidy and welfare programmes were initiated when the Indian economy was growing faster than 9%. Now the economic growth has slowed down to 5% levels. As Patnaik puts it “Implicit was also the argument that NREGA will be paid for by the high tax collection that the fast growing sectors of the economy would yield. Growth was to be made inclusive through a redistribution of incomes. This was the scenario when India was growing at 10 per cent and leaving some people behind. It was a scenario that might stand the test of time if India continued to grow at a long-run steady state of 10 per cent growth. This plan did not appear to evaluate the fiscal path of such a programme when growth halved.”
Slow growth also implies a slowdown in tax collections for the government, which might lead to the government needing to borrow more to finance the subsidies and welfare programmes.
A lot of the expenditure on account of subsidies could have been met if the government had been less corrupt and not sold off the assets of the nation at rock bottom prices. The loss on account of the telecom scandal was estimated to be at Rs 1.76 lakh crore. The loss on account of the coal blocks scandal was estimated to be at Rs 1.86lakh crore.
While these scams were happening all around him, Manmohan Singh chose to look the other way. As TN Ninan wrote in the Business Standard “Corruption silenced telecom, it froze orders for defence equipment, it flared up over gas, and now it might black out the mining and power sectors. Manmohan Singh’s fatal flaw — his willingness to tolerate corruption all around him while keeping his own hands clean — has led us into a cul de sac , with the country able to neither tolerate rampant corruption nor root it out.”
Singh has tried to re-establish his reformist credentials recently by announcing a spate of economic reforms over Friday and Saturday. But none of these reforms look to control the expenditure of the government and thus bring down the fiscal deficit. If the government continues down this path the future is doomed. As Ruchir Sharma writes in Breakout Nations “If the government continues down this path, India might meet the same path as Brazil in the late 1970s, when excessive government spending set off hyperinflation, ending the country’s economic boom.”
Higher expenditure also means inflation will continue to remain high. “NREGA pushed rural wage inflation up to 15% in 2011,” writes Sharma. The fear of high inflation continues, despite the reforms announced by the government. “The government undertook long anticipated measures towards fiscal consolidation by reducing fuel subsidies and selling stakes in public enterprises. Further, steps taken to increase foreign direct investment (FDI) should contribute to both greater capital inflows and, over the long run, higher productivity, particularly in the food supply chain. Importantly, however, for the moment, inflationary pressures, both at wholesale and retail levels, are still strong,” the Reserve Bank of India said in a statement today, keeping the repo rate (or the rate at which it lends to banks) constant at 8%. This despite the fact that there was great pressure on the central bank to cut the repo rate. It is unfair to expect the RBI to make up for the mistakes of the government.
The bottomline is that if the government has to get its act right it needs to reign in its expenditure. I started this piece with eggs let me end it with chickens. As economist Bibek Debroy wrote in the Economic Times “Since 2009, UPA-II has behaved like a headless chicken. It is still headless, but the chicken at least wants to cross the road. We still don’t know whether it will be run over or cross the road and lay an egg.”
And even if eggs are laid, we might still not end up with burnt bhurji rather than omelettes.
(The article originally appeared on www.firstpost.com. http://www.firstpost.com/politics/how-manmohans-omelette-came-out-as-scrambled-egg-458242.html)

(Vivek Kaul is a writer. He can be reached at 
[email protected])
 
 

To be a revolutionary manager – FIRST BREAK ALL THE RULES


Curt Coffman is the New York Times bestselling author of First, Break All the Rules: What the World’s Greatest Managers Do Differently(along with Marcus Buckingham). He is also a researcher, business scientist and a consultant to Fortune 500 organisations. “Approximately 15% of organisations today are embracing the power of people within the organisation.  At the same time, 95% of companies believe that they are doing so. Businesses are currently operating at only 35% of their capacity, because of obsolete people practices.  There is a maxim from quantum physics that says…“When you change the way you look at things, the things you look at change,”” says Coffman. He will be touring India for ‘First, People 2012’, India’s First HR ‘Un-Conference’ in Goa on September 21 – 22 organised by SHRM India (Strategic Human Resource Management), a subsidiary of the world’s largest HR association, SHRM – The Society for Human Resource Management. In this interview he speaks to Vivek Kaul.
In your groundbreaking work First Break All the Rules you got responses from 80,000 interviews to determine that the best managers are revolutionaries.  Could you discuss that in some detail?
Just in the past 5 years we have interviewed approximately 90,000 managers/leaders across the globe.  Great managers have one objective and that is to facilitate unprecedented performance in every individual.  They form very strong relationships with their people based on trust and friendship.  This allows for high expectations that are motivational and challenging.  They don’t treat everyone the same but as individuals with unique talents, gifts for contribution and specific needs.  There is an opposition to the notion of changing people, as they feel one’s work should draw out the individual’s talent versus attempting to put in what was left out.  Commitment to innovation is seen through embracing the differences in individuals rather than create a blanket of conformity.  Yes, they are the rebels who really drive an organisation’s success – one person at a time.
If the best managers are revolutionaries who are the revolutionaries according to you in the current business scenario?
The great leaders of tomorrow will commit to one thing – making sure every individual in the enterprise has a great manager.  Great managers who are close to the action will trump traditional leadership in driving world-class results.  Leaders atop the organisational chart cannot effectively impact the local workplace and thus need great local managers to create ownership and commitment. The senior leaders of today’s most relevant brands know this intuitively.  Brands like Google, Zappos, Apple, Tata, and Starbucks, know the power of aligning brand (how others see us) with culture (how we see ourselves). Enlightened executives know the power of each individual employee on creating success.
One of the things that comes out from First Break All the Rules is that treat employees like individuals, set specific outcomes, but not the process, and focus on employee strengths instead of calling out weaknesses. Could you discuss that in some detail with examples?
Progressive leaders who are charged with creating a better tomorrow and managers who are charged with creating a outstanding today intimately know what creates a passion for excellence within people.

Destroy PassionCreate Passion
Judge me on how I conform to the “steps” of doing the job regardless of results.Help me know the real outcomes of my job – the real reason you hired me.
Point out precisely who I am not and then help me get better in those deficiencies.Help me discover who I am and then allow me to use my gifts for outstanding contribution.
Work should be serious and hard.Work should be fun and full of energy.
Use fear to drive us.Use hope to drive us.
Always highlight what you don’t want.Create a vision around what you do want.

Do you see many companies following this kind of process while dealing with their managers?
Ninety five percent of all organisations proclaim that people are the key to their success.  Sadly, I must say that only about 15% of global organisations have adopted a 21st century vision about people and the vital role manager’s play in building value. That said, there might be a higher percentage in India.  You have some great brands and enlightened leaders who are savvy enough to recognise who really owns the means of production – every employee every day. Very progressive organisations like Taj Hotels, Voltas, Piramal, Lupin and Manipal to name a few, pay sharp attention to how managers are identified, developed and rewarded.
What do they do differently?
These organisations are keenly aware that a manager’s real job is to increase the productivity and success of every individual. In the past being a manager meant organising “things” and only caring about how they are viewed by the leaders above them.  This is position-ship not leadership. If there was any focus on people, it was seen as a hobby not a primary function of the role. Very talented and productive people have options and we know that ultimately they leave managers, not organisations.  If you have ever had a bad manager, you know exactly what we are talking about.
What is that makes a great place to work?
When people can’t wait to come to work!
But isn’t that very idealistic?
Yes, but why should it be?  Knowing what about work gives your people energy and what drains their energy is the most primary step in developing a progressive, people-centered focus. Our most current research reveals that a great place to work is based on the characteristics of relationship, growth, and purpose. Relationships are the foundation of strong culture.  Without them we wither away.  The connections we have with co-workers, managers and leaders are the renewable energy that drives success.  Great organisations promote strong friendships and a spirit of connectedness.  People contribute at exceptional levels when there is another person they trust and feel loyal to.  People are most loyal to the organisations that have helped them grow and develop –  that is why you will see more philantrophic money being given to colleges and universities than any other institution. Great managers help every person know themselves well and thus set people up for success.  When we know our talents and then acquire the right skills and knowledge incredible things happen.
So what is the takeaway here?
We just do our work and relationships differently when we have a sense of pride in the organisation’s mission.  It is the broader purpose of one’s work that makes a difference.  On those days that we feel overworked and frustrated, the higher purpose of our work will pull us through.
Another thing that your research threw up was that an organisation doesn’t have one culture overriding it. It has these many little cultures what you call the “little C cultures”. Could you discuss this finding in some detail with an example preferably?
Everyone uses the word “culture” with little consistent understanding of what it really means.  If culture is the new competitive advantage, we need to become really clear on what it is.  The key discoveries that we have made are that there is no culture without people. Culture exists at three levels – micro (local employee), bridge (manager) and macro (leadership). Each of these cultural charges have distinct roles; Micro to ignite positive/purposeful energy in one-another, bridge is to connect people to purpose and macro is having leaders who are more “interested” than “interesting.” Once key businesses imperatives are defined, the next question should be “what kind of culture are we going to need to drive results?”
Can you explain this through an example?
Steve Jobs at Apple cast a vision for innovation that carved out markets that didn’t even exist.  He was always listening and more interested than interesting (actually he was more interesting because he was interested).  This macro culture is about creating a better tomorrow.  Steve Jobs vision is only achievable when the right people and culture bring it to fruition.  Great managers are attracted to an environment where they can connect individuals to vision. Take the Apple employee as an example – who wouldn’t want to be a “genius” versus a “help desk employee?”
Earlier in the interview you said that most people don’t leave organisations, they leave their bosses. How do you control for something like that?
The steps are rather basic.  It starts with promoting people who are already the spiritual leaders of people.  Great managers didn’t become that way when the official title was given.  Know who these employees are. Don’t make becoming a manager a reward.  Reward great managers who genuinely care about the success and potential of others and know the strengths of each person they work with.  Another step is to not try and change people, but instead draw out the best within them. Don’t make becoming a manager another rung on the career leader.
Why do you say that the worst mission a manager can undertake is attempting to erase a person’s weaknesses?
Great managers will say that people don’t change that much and instead of trying to put in what was left out, let’s draw out what was left in. Neuroscience now confirms that the brain is done developing between the ages of 15 – 22 years of age.  By that time all of us have a pretty well structured network.  There are things that come naturally and others that don’t.  Talent is about hard wiring and explains our predisposition for excellence in certain roles.  Many times we feel as though we can rewire people brains.  It is not possible.  We have never seen a person take a weakness and transform it into a throbbing strength.  There are ways to manage around our weaknesses, like having a complimentary partner who does have the talent and energy for those things in which you do not. Or, you can find a system that makes the weakness immaterial (i.e. grammar and spell check).
You also suggest that it is okay for managers to treat some people as their favourites. Again something that goes against conventional wisdom. Shouldn’t a manager try and treat everyone in his team equally?
Treating everyone the same is true discrimination.  We are individuals with unique strengths, needs and styles.  By legislating one way for everyone, we disconnect people’s distinctive ability to display exceptional performance.
Your latest book is called Culture Eats Strategy. So how does culture eat strategy?
Vision is what could be.  Strategy is our rational plan to get there.  Execution is our continual day-to-day progress toward the desired outcome.  Our rational plans always require human spirit and energy to bring to fruition.   The daily progress we make (or fail to make) is dependent upon our people – our culture.
So how do you define culture then?
Culture is the collision of rational with emotional.   When individual motives, drives and feelings come up against strategy, plans and structure, the end result depends more on the emotion than logic. While evolving a new strategy can be difficult, executing it in the face of existing conventions, routines and ways of working together can be nearly impossible.
Could you explain through an example?
Consider a hospital we know that changed out CEOs five times in four years.  The culture, comprised of long-tenured staff, resisted the new CEO and strategy de jour.   As each CEO was replaced, the culture became more and more convinced they could “wait the next leader out.” Our vision is essential, our strategy critical; but however sound, they are dependent upon the culture  – the people  – to deliver the desired results.
(Interviewer Kaul is a writer and he can be reached at [email protected])
(The interview originally appeared in the Daily News and Analysis on September 17,2012. <http://www.dnaindia.com/money/interview_to-be-a-revolutionary-manager-first-break-all-the-rules_1741770>)
Box:
The discoveries of great organisations:
-People practices focus on building excellence (what we want), not preventing weakness (what we don’t want)
-A senior leader’s greatest impact comes from insuring that every employee has a great local manager
-No people, no culture.  Finding talent is a basic to performance, managing talent is the differentiator
-Obsessing over the “right” decision is not as important as insuring that the decision is being made by the people closest to the issue
-Employee purpose is driven by a “line-of-sight” between their work and the ultimate impact it has on the customer