Vivek Kaul
Rahul Gandhi is a fan of the famed Toyota Way. The Toyota Way is a series of best practices that underlie the managerial approach and the production system of the automobile company Toyota. This management philosophy grew out of the Toyota Production System.
As Aarthi Ramachandran writes in Decoding Rahul Gandhi “According to Dr Jeffrey K Liker, the author of theThe Toyota Way, one of the most authoritative books on the subject, its core principle was that ‘the right process will produce the right results. It aimed to do this by eliminating ‘waste’ in the production process to almost nil. It held that ‘standardized tasks are the foundation for continuous improvement and employee empowerment.”
Rahul and his team are trying to build a similar sort of system within the Congress which would make standardisation possible. The idea is to build systems and process which would keep working irrespective of whoever is incharge.
Or as Rahul Gandhi put it at a convention of All India Congress Committee(AICC) in November 2007 “If we are to truly develop leaders of whom this nation is proud, we need to do two things. The first is to build an organisation that is open and relevant to the broad range of Indians who believe in our values and seek to serve the nation. The second is to build a meritocratic organisation. Young people bring tremendous passion and energy into our organisation.”
The idea it seems was to move Congress beyond the appointment system, where only sons, daughters, relatives and loyalists of senior leaders could hope to make it through to the upper echelons of the party.
In order to do this Rahul and his team have gradually taken over the administration and the running of the Congress party, over the last five to six years. In the process, they have managed to alienate the old timers of the party. Also, the idea has been to bring some sort of measurement into political leadership.
As Rasheed Kidwai writes in 24 Akbar Road “Team Rahul is also believed to be working on a plan that aims to reward performance and quick response. Ticket aspirants who can produce excel sheets on Aadhar cardholders and cash-transfer beneficiaries in their constituencies are likely to have the edge over those armed merely with recommendations from regional bosses.”
This has led to the old timers in the party getting very uncomfortable with Rahul’s laptopwallahs. As The Economic Times reports “A growing worry is Rahul’s penchant for picking teams which party veterans term strange. In some circles, Rahul’s personal team members such as Kanishka Singh, Sachin Rao, Kaushal Vidyarthi and K Raju are jokingly referred to as “aliens who want to do mass politics through data on laptops, just as those wiz kids who led Rajivji up the garden path.”
But whatever it is that Rahul is trying to do, doesn’t seem to be working. The party has lost elections in Uttar Pradesh, Rajasthan, Madhya Pradesh, Delhi and Chhattisgarh under his leadership. This means that the party has been been wiped out in the big states of North and Central India. In Uttarakhand the party just about managed to form the government, with the help of independents.
There are several reasons why Rahul’s Toyota Way isn’t really working for the Congress. It is worth remembering that the Congress is a party which thrives on dynasts and their chamchas. As Ramachandra Guha explains this in an essay titled A Short History of Congress Chamchagiri which is a part of his book Patriots and Partisans.“Most Indians are too young to know this, but the truth is that until about 1969 the Congress was more or less a democratic party,“ writes Guha.
But after that Rahul’s grandmother Indira Gandhi took over the party and made it a family run concern. As Guha writes in the essay Verdicts on Nehru which is a part of the same book “Mrs Gandhi converted the Indian National Congress into a family business. She first bought in her son Sanjay, and after his death, his brother Rajiv. In each case, it was made clear that the son would succeed Mrs Gandhi as head of Congress and head of government.”
While Gandhis were the dynasty at the top of the hierarchy, there were several other dynasties that kept the party running in different parts of the country. And this over the decades has led to the Congress party becoming a ‘property for dealers’.
Bharat Bhushan writing in the Business Standard uses this term quoting an anonymous Congress leader. As he writes “The same Congressman who saw hostile public sentiment reaching cyclonic proportions, lamented, “We are not a party but a property. A party has leaders; a property has only dealers. All the dealers are looking to their own benefit in the Congress. There is no public purpose left.” Now that is the way the party has evolved and suddenly expecting to start attracting public spirited individuals who care about the people of this country is rather naïve.
Over and above this Rahul has made it very clear that he is looking to induct youth into the party. As he has said in the past “our political organisations are designed in such a way that youth cannot enter them…The most important job in Indian politics is to get youth into Indian politics.”
During the last few years, Rahul and his team were working on this by trying to get internal elections held for the Youth Congress all over the country. In the first election which was held in Punjab, with the help of retired election commission officials, Ravneet Singh Bittu, the grandson of the late Beant Singh, a former Chief Minister of Punjab, was elected.
This was a trend that has since been repeated all over the country. Ramachandran gives a series of such examples in her book on Rahul. As she writes “In Haryana, Chiranjeev Rao, son of senior minister Ajay Singh Yadav won the polls. In West Bengal, Mausam Benazir Noor, niece of veteran Congress leader and former Union minister, the late A B A Ghani Khan Chowdhary was the victor. In Uttarkhand, Anand Singh Rawat, son of union minister Harish Rawat won the post. In Himachal Pradesh…Virbhadra Singh’s son, Vikramaditya, polled the most votes in a controversial election.” And this story goes on in other states like Maharashtra, Chhattisgarh, Goa, Jharkhand and Tamil Nadu.
So while Rahul might want to create a structure of internal democracy within the Congress, the senior leaders who are most hurt by this, wont let him do so easily. As Ramachandran writes “The results indicate that senior leaders have used the Youth Congress to extend or defend their turfs. By getting family members into Youth Congress, they attempted to get a foot into the new Congress under Rahul.”
The other big problem with this approach is how does Rahul expect members of the Congress to be serious about internal democracy, when there has been no democracy at the top levels of the party for many decades now. He and his mother, who are the top two functionaries of the party, are a symbol of that. So in that sense its really a chicken and egg problem.
At the same time, there has been a lot of talk Rahul’s team using measurement systems to select candidates that will represent them in elections. Whatever they are doing doesn’t seem to be working. An excellent comparison here is with the Aam Aadmi Party which used a lot of data analysis in the recently held, Delhi elections. And it did so over a period of around one year since its formation. As Aloknanda Chakraborty writes in the Business Standard “The AAP…is light years ahead of its opponents in the way it has collected, analysed and used massive amounts of data to identify, connect with and mobilise potential voters for the just-concluded Delhi elections.”
Also, it is worth remembering here that the Toyota Way talks about standardised tasks. Rahul Gandhi himself doesn’t seem to be following that. He likes to take a hit and run stand on issues that he espouses now and then. (You can read the detailed argument here). In fact this is something that comes out even in Rahul’s personal behaviour. As The Times of India reports “he (i.e. Rahul) alternately comes off as aloof and warm to his colleagues.”
Given this, Rahul Gandhi does not come across as a serious politician. To me a appropriate comparison seems to be a corporate scion who wants to be a painter, but is stuck with his or her family business. Ramachandra Guha put it best when he told Firstpost in an interview “He(i.e Rahul) has no original ideas, no heart for sustained and hard work. He should find another profession.”
There are other issues also about the Toyota Way being implemented in the Congress party. As Ramachandran writes “A political party is not a corporate organisation…Election nominations are specifically distributed on a number of factors ranging from right parentage, to money and resources, and clout with influential voter blocks. How would a corporate-style performance management system be able to capture it all?”
Rahul has always maintained that what he is trying to engineer is a long term process. But it is worth remembering that running a business is not always about strategy. It is also a lot about short term tactics, especially in times of trouble. A business which stays glued only to strategy in times of trouble has a huge chance of running itself into the ground. The same stands true for a political party.
Hence, it is time for the Congress party and Rahul Gandhi to cut their losses. As The Times of India reports “Party leaders don’t dispute the need for refashioning the party. Their concern is about the timing, with many holding that the fast approaching elections leave too small a window for the ambitious experiment that Rahul seems to fancy.”
Since Rahul is a fan of the Toyota Way, he should be trying nemawashi, which is a part of the Toyota Way. As Dr Jeffrey Liker points out in The Toyota Way, one of the most authoritative books on the subject “Nemawashi is the process of discussing problems and potential solutions with all those affected, to collect ideas and get agreement on a path forward.”
If Rahul wants the Congress to survive, he should now be talking to the party old-timers, before its too late.
The article originally appeared on www.firstpost.com on December 10, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Month: December 2013
Story of a home-grown David: How AAP trumped the mighty
Vivek Kaul
One of the fundamental rules of forecasting is to make as many forecasts as possible and then publicise the ones you get right. On August 4, 2012, I wrote a piece on Firstpost, in which I compared what would become Aam Aadmi Party(AAP) to a disruptive innovation.
The term disruptive innovation was coined by Clayton Christensen, who happens to be a professor of strategy at Harvard Business School. He defines it as “innovations that transform an existing market or create a new one by introducing simplicity, convenience, accessibility and affordability. It is initially formed in a narrow foothold market that appears unattractive or inconsequential to industry incumbents.”
A great example of a disruptive innovation is Micromax. Micromax and a host of other Indian phone makers built up significance presence in the smartphone market, while the biggest player Nokia was busy elsewhere.
Bharti Beetel, which produced India’s first landline phones which had buttons on them, did not wake to the opportunity of the mobile phone market. This despite the fact that its sister company Airtel was India’s biggest mobile phone service provider.
RCA, America’s leading radio company, did not see the rise of battery powered pocket transistors which were first made by Sony in 1955. Sony changed the way the world heard music by launching the Walkman and the CDman. But it handed over the digital music player market on a platter to Apple and other companies. Sony did not capture the mp3 player market because it feared that it would play havoc with all the music rights that it owned.
When it comes to low cost airlines Southwest Airlines first woke up to the opportunity. None of the bigger players in the market like Pan American, British Airways, Lufthansa, Delta etc, saw the opportunity at that point of time. Even in an Indian case, a rank outsider Indigo has captured the low cost market, instead of incumbents like Air India and Jet Airways, which continue to make huge losses.
There are scores of such examples in business, where the biggest player(or players) in the market has been rattled by a new player. AAP is a similar disruptive innovator. In the August 2012 piece, I had said that what “works to the advantage of disruptive innovators is the fact that the major players in the market ignore them initially and do not take them as a big enough force that deserves attention.”
And this works to the advantage of the disruptive innovator, which can quietly keep doing its thing. The bigger player is not interested because the market that the disruptive innovator is catering to is too small for them to take seriously. Take the case of smartphones. Smartphones have been around since the late 1990s, but they only took off in the last few years. Hence, Nokia never got around to take them very seriously.
When Sony first launched pocket transistors they catered primarily to teenagers. This led to RCA ignoring the market, because the bigger market was elsewhere. Apple’s first personal computers were targeted towards the youth, leading to the existing players who manufactured minicomputers ignoring the market completely.
Along similar lines, the Bhartiya Janata Party and the Congress, looked at AAP as a party which catered to the frustrations of the middle class. And given that the middle class in this country does not care to vote, the existing political parties felt that there was no point in paying attention to what the AAP was upto.
In fact, Sheila Dikshit, the chief minister of Delhi for the last fifteen years said so in several interviews. In an interview to the Open magazine published in early November, Dikshit said that “he(i.e. Arvind Kejriwal, the National Convener of the AAP) is not even on our radar.” In a rally without referring to Kejriwal, she even called him ‘barsaat ka keeda’.In another interview to Tehelka, Dikshit said “My reaction to the Aam Aadmi Party is nothing..absolutely nothing.” By the time Congress woke up to the threat from the AAP, it reacted the only way it could, by ordering a probe into the foreign funding sources of the party.
The Bhartiya Janata Party also woke up around mid October, six weeks before the election, and decided to project Dr Harshvardhan as its chief ministerial candidate. As the India Today reported on the issue “Highly-placed sources in the BJP have told indiatoday.in that the party wanted to go into the elections with a leader who had a clean image and that made it go with the doctor.”
The only possible explanation for this change is the fact that the BJP came to realise slightly late in the day, that the AAP was no pushover. Hence, it had to project a chief ministerial candidate with a clean image. And this got Dr Harshvardhan into the picture.
The fact that it wasn’t taken seriously by its opponents allowed the AAP to go about building itself right from scratch in Delhi. The results suggest that what the AAP has managed to do in a small span of a little over a year is unprecedented. No other political party established right from scratch has ever won the number of seats that it has, since independence, in its very first election.
On various discussions that happened across television channels yesterday political analysts brought up the example of NT Rama Rao. NT Rama Rao stormed to power by winning the January 1983 assembly elections in Andhra Pradesh. His Telgu Desam Party won 199 out of the 294 assembly seats. In comparison, AAP’s performance looks pale.
But its worth remembering here that NT Rama Rao was the biggest Telgu film-star at that point of time. He may have been contesting elections for the first time, but everyone in Andhra Pradesh knew who he was. And given how crazy Andhra Pradesh was and continues to be about cinema, NTR did not have to start right from scratch like AAP did in Delhi.
Some others also compared AAP’s success to the defeat that Mamata Banerjee handed out to the Left Front in West Bengal in 2011. While what Mamata did was huge, it is worth remembering that it took her almost three decades to do that. And when she moved out of the Congress Party to form the Trinamool Congress, a large section of the Congress Party moved with her. This meant that there was some sort of organisation that was present at the ground level when Mamata seriously thought of taking on the Left parties on her own.
When the success of AAP is looked at with these factors in mind, it really is unprecedented.
Another point that comes out here is what marketing gurus Al and Laura Ries make in their book The Fall of Advertising and the Rise of PR. In the last few decades the biggest brands have been made through public relations and not through advertising. As Al Ries told me in a October 2008 interview that I did for the Daily News and Analysis (DNA) “Almost all of the recent brand successes have been public relations (PR) successes, not advertising successes…In its first 10 years, Starbucks spent less than $10 million (total) on advertising which is a small amount in a country of 300 million people. The Body Shop has never advertised. Yet recently, L’Oreal paid $1.1 billion to buy the company…Red Bull today is a worldwide brand with $3.3 billion in annual sales, yet the company does little advertising. Same is true about Google, Facebook, Twitter, which are now some of the biggest brands in the world.”
In fact, the success of AAP is a very good example of the same. The party did not have enough money to go through the conventional advertising route of advertising on television and in newspapers. They came up with innovative ways of advertising which did not need a lot of money, like getting their volunteers to stand with banners of the party at strategic traffic points. They also advertised on autorickshaws, which was a cheap and effective way of reaching a large number of people.
In fact, they got spectacular coverage in the media by exposing corruption in business and crony capitalism. Arvind Kejriwal and the AAP were on the front pages of newspapers all over the country, for fairly long periods of time, over the last one year due to this. In the end, this strategy was overused, businessmen cracked the whip and finally a large section of the media stopped covering there exposures. The door to door campaign in Delhi that it carried out was also a spectacular public relations exercise.
As I said earlier, the big boys never really took the AAP seriously. They asked all the practical questions. Where would the AAP raise all the money to fight an election? How would they be able to put an effective organisation in place, in such a short period of time? How would they manage to achieve all that we have achieved in the last sixty to hundred years, in a period of one year?
The party did this and a lot more.
It raised money directly from people, something that has been unheard of in Indian politics. The party also innovated when it came to reaching out to people, something expected from a disruptive innovator. It organised small mohalla sabhas attended by a few hundred people at a time, all across Delhi. Of course, existing political parties used to large rallies, did not see much worth in organising events where at best a few hundred people turned up.
The AAP also used social media very effectively when it came to drumming up support, something no one other than Narendra Modi, has tried to do.
The question is will the AAP be able to replicate its success in Delhi through other parts of the country? The answer is not simple. The incumbent politicians would like to believe that it will be very difficult for the AAP to play the game of caste so important in large parts of the country.
But what should give them hope is the fact that the larger political parties are still not taking them seriously. A senior BJP leader said on NDTV India yesterda that comparing BJP with AAP was like comparing “Raja Bhoj with Gangu Teli”. Another BJP leader challenged them to win even a single seat out of the 48 Lok Sabha seats in Maharasthra.
This tells us that the incumbent politicians are still not taking AAP seriously and feel that they will find it difficult to replicate their success outside Delhi. How successful AAP is outside Delhi, only time will tell us.
To conclude, AAP’s spectacular debt in Indian democracy was best summarised by anchor Punya Prasun Bapai on Aaj Tak yesterday, when he said “Jhadu, Tiranga Ke Saath Lehra Raha Hai”.
The article originally appeared on www.firstpost.com on December 9, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
How money printing has made the rich richer
Vivek Kaul
Raghuram Rajan before he became the governor of the Reserve Bank of India, wrote a book called Fault Lines. This was one of the first books that offered reasons for the financial crisis and that went beyond the greed of Wall Street.
One of the reasons that Rajan discussed in great detail was income inequality. He argued that this was one of the major reasons behind the financial crisis.
The top 1% of the households accounted for only 7.9% of total American wealth in 1976. This would grow to 23.5% of the income by 2007. This was because the incomes of those in the top echelons was growing at a much faster rate.
The rate of growth of income for the period for those in the top 1% was at 4.4% per year. The remaining 99% grew at 0.6% per year. What is even more interesting is the fact that the difference is even more pronounced in the 1990s and the first decade of the twenty first century.
The incomes of those in the top echelons grew at a much faster rate since the 1990s. Between 1993 and 2000, when the dotcom bull run happened and when Bill Clinton was the President of the United States, the income of the top 1% grew at the rate of 10.3% per year, and for the remaining 99%, it grew at 2.7% per year.
Between 2002 and 2007, when George Bush Jr was the President, the income for the top 1% grew at the rate of 10.1% per year. For the remaining it grew at a minuscule 1.3% per year. In fact, the wealthiest 0.1% of the population accounted for 2.6% of American wealth in 1976. This had gone up to 12.3% in 2007.
But it was not only the CEOs and the super rich who were getting richer. Even those below them were doing quite well for themselves. In 1976, the top 10% of households earned around 33% of the national income, by 2007 this had reached 50% of the national income.
In fact in 1992, before the dotcom bull run started, the top 10% earned around 41% of the national income, by the time it ended, the number was at 47% of the national income. When George Bush took over as President the number was at 45% and by the end of his term in early 2008, it had galloped to 50%.
The rich were getting richer in America. One reason for this was the fact that those at the upper echelons of organisations were making more money than ever before. At a more basic level there was also a huge increase in “college premium”. This meant that people who had a college degree earned much more than those who had stopped studying at the high school level.
The advent of technology had made a lot of low level jobs redundant. Earlier secretaries used to be required to type letters and responses, or to communicate within the various offices and branches of the firm. With the advent of computers and internet, people did their own typing. And that in turn meant lower pays at lower levels.
The solution to this increasing inequality of income to some extent was more and better education. But that is something that would take serious implementation and at the same time results wouldn’t have come overnight. They would take time.
Hence, the American politicians looked elsewhere to deal with this increasing inequality. There solution was to ensure that loans were easily available to people. Rajan explains this in Fault Lines. As he writes “Politicians have therefore looked for other ways to improve the lives of their voters. Since the early 1980s, the most seductive answer has been easier credit. In some ways, it is the path of least resistance…Politicians love to have banks expand housing credit, for all credit achieves many goals at the same time. It pushes up house prices, making households feel wealthier, and allows them to finance more consumption. It creates more profits and jobs in the financial sector as well as in real estate brokerage and housing construction. And everything is safe – as safe as houses – at least for a while.”
This availability of easy money led to a big real estate bubble, which finally morphed itself into the global financial crisis which has been on since late 2008. In the aftermath of the crisis economic growth slowed down. Central banks around the world, led by the Federal Reserve of United States, the American central bank, started to print money.
The idea was to flood the system with money, keep interest rates low and encourage people to borrow, to get the economy up and running again. But that did not happen or at least did not happen at the pace that central banks expected it to.
Low interest rates led to financial firms borrowing and investing money all over the world driving up various financial markets to all time high levels, including the American stock markets. As Gary Dorsch, an investment newsletter, writes in his latest newsletter dated December 4, 2013, “The US-stock market rally is now 57-months old, and over this time period, the S&P-500 index has climbed a “wall of worry,” rising +170% from its March 9th, 2009 low, and hitting an all-time high, above the 1,800-level.”
The idea was that once the stock market started to go up, the wealth effect would come into play i.e. people would feel rich and they would go shop. But as it turned out, the retail investors have stayed away from the market for a large part of the last four and half years and have only now started to come back to the market. As Dorsch puts it “But only this year, did it begin to earn the grudging respect of smaller retail investors. They’ve plowed $175-billion into equity funds so far this year, after withdrawing $750-billion in the previous six years.”
Meanwhile the rich got richer. As Dorsch wrote in a newsletter dated October 3, 2013, “Over the past 1-½ years, the Fed has increased the…money supply by +10% to an all-time high of $12-trillion. In turn, traders have bid-up the combined value of NYSE and Nasdaq listed stocks to a record $22-trillion. That’s great news for the Richest-10% of Americans that own 80% of the shares on the stock exchanges.”
He also adds in his latest newsletter that “US-equity values have increased $14-trillion over the past 57-months. Across the Fortune-500 companies, the average chief executives pockets 204-times as much as that of their rank-and-file workers, that’s disparity is up +20% since 2009. Perversely, the compensation of the S&P-500 chieftains is often linked to the ruthless slashing of jobs and wages in order to increase the companies’ profitability. In theory, that boosts stock prices, and CEO’s collect about 90% of their compensation through the exercise of stock options.”
And this has meant that the rich have got richer, while the average income of the middle class and the poor has been falling, as jobs are being slashed. “For Middle America, real disposable income has declined. The Median household income fell to $51,404 in Feb ‘13, or -5.6% lower than in June ‘09, the month the recovery technically began. The average income of the poorest 20% of households fell -8% to levels last seen in the Reagan era,” writes Dorsch.
Due to this nearly more than 100 million Americans are receiving one or another form of welfare from the government. “According to the latest data from the Census Bureau, the US has already passed the tipping point and is officially a welfare society. Today, more Americans are receiving some form of means tested welfare than those that have full-time jobs. No, that’s not a misprint. At the end of 2011, the last year for which data are available, some 108.6-million Americans received one or more form of welfare. Meanwhile, there were just 101.7-million people with full-time jobs, including both the private and government sectors.The danger is the US has already developed a culture of dependency. No one votes to cut his own welfare benefits,” writes Dorsch.
And this is clearly not a healthy sign. The irony is that the American politicians helped by the Federal Reserve created a real estate bubble to address income inequality. Once that bubble blew up, they started printing money. And that in turn has led to more inequality. The solution has aggravated the problem.
The article originally appeared on www.firstpost.com on December 6, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Why corporates are not gung ho about investing in India
Vivek Kaul
Several senior functionaries of the UPA government have been confidently talking about the Indian economy returning to high rates of economic growth over the next few years. One of the major factors that needs to be set right for this is to happen is the falling level of corporate investment.
In 2004-05(i.e the period between April 1, 2004 and March 31, 2005) this was at 10.3% of the gross domestic product (GDP). It rose to 17.3% in 2007-2008(i.e. The period between April 1, 2007 and March 31, 2008).
Since then the number has been falling and should be currently around 10% of GDP or even lower, for that matter. This is reflected in the sanctions for fresh projects which have been fallen dramatically over the years. As an editorial in The Financial Express points out “a recent study by Kotak Institutional Equities shows how sanctions for fresh projects have been tapering off from Rs 1,13,900 crore in Q1FY11 to Rs 74,900 crore in Q1FY12, Rs 41,300 crore in Q1FY13 and to just Rs 22,000 crore in Q1FY14.”
When the level of corporate investments fall, it has an immediate impact on the creation of urban jobs. As Chetan Ahya and Upasana Chachra of Morgan Stanley point out in a December 2, 2013 note titled India Economics: 2014 Outlook: A Year of Macro Adjustment “The steady decline in the ratio of investment to GDP has had a severe impact on urban job creation.” When enough jobs are not being created this has an impact on consumption and that in turn impacts economic growth.
Given this, if the Indian economy has to go back to growing at high economic growth rates of 8% and higher, the level of corporate investments as a proportion of GDP need to go up. But that is easier said than done.
aSwanand Kelkar and Amay Hattangadi have a very interesting piece in the Mint today where they offer a major reason behind the slowdown in corporate investments. As they write “The Incremental Capital Output Ratio (ICOR)…measures the incremental amount of capital required to generate output or GDP. From FY2004 till FY2011, India’s ICOR hovered around the 4 mark, i.e. it required four units of investment to generate one unit of output. Over the last two years, this number has increased with the latest reading at 6.6 for FY2013.”
What this means in simple English is that the projects that corporates invest in are taking a longer period of time to be completed and start throwing up money. And this in turn is pushing down the return on the money that coprorates invest in fresh projects. In this scenario, any corporate will think twice before committing to a fresh investment.
This scenario is likely to continue in the time to come. As Neelkanth Mishra and Ravi Shankar of Credit Suisse write in a research note titled India: 2014 Outlook dated December 2, 2013, “We expect the investment cycle to stay broken for the next two-three years: most types of large-scale investments with the exception of oil & gas have a depressed medium-term outlook. The order book for BHEL, the bellwether capital goods company, continues to decline, and the fact that new project announcements aren’t seeing any pick-up either would only worsen the situation going forward, in our view…The construction of national highways is unlikely to accelerate with most construction companies having weak balance sheets, and the last one-two years of contracts being so aggressively bid that they are having trouble raising loans.”
For this cycle to be broken both inflation and interest rates need to come down. Inflation has had a huge impact on private consumption. “Moreover, persistent high consumer price inflation has only eroded the purchasing power of urban consumers, thus adding to the weakness in urban consumption. In addition, rural consumption growth is also moderating as real rural wage growth is decelerating. Slower growth in government spending will also in turn affect rural consumption growth adversely. Hence, we believe even private consumption growth remain slow in the next 6-12 months,” write Ahya and Chachra of Morgan Stanley.
Given this, consumer demand will continue to remain low. And in face of that fact, corporates in a large number of sectors aren’t likely to expand or announce fresh projects.
High interest rates also discourage corporate investment. Interest rates have risen due to lower savings. “From FY2008 (i.e. the period between April 1, 2007 to March 21, 2008) to FY2013(i.e. the period between April 1, 2012 and March 31, 2013), the savings rate has fallen from 36.8% to 29.6%,” point out Kelkar and Hattangadi. Savings have fallen on account of people paying more for things, due to high inflation.
What has also not helped is the fact that of the money saved a lot of money has been diverted into physical assets like gold and real estate, in the hope of earning a rate of return that manages to beat the prevailing inflation. “Persistently high consumer price inflation has kept real interest rates negative…encouraging households to reduce financial savings and increase allocation to gold and real estate. This is reflected in deposit growth, which has stayed weak relative to credit growth now for the last three and a half years, elevating the loan-deposit ratio near full capacity levels (76.5%currently),” write Ahya and Chachra.
And due to this the level of financial savings (or the money that people put into fixed deposits, small savings scheme, mutual funds, insurance etc) has come down dramatically. In 2007-2008 the number was at 11.63% of GDP. By 2011-2012 this had fallen to 8.02% of GDP. Currently, the number must be even lower.
If interest rates need to come down the amount of money going into physical savings needs to come down. As Ahya and Chachra point out “the central bank (i.e. the RBI) will also need to manage real rates in a way that incentivises households (savers) to increase their allocation towards financial saving (deposits) and away from gold.”
The import duty on gold has been raised from 2% to 10% during the course of this year
. Over and above this a gold importer needs to re-export 20% of all the gold that he imports. This has led to gold imports falling dramatically to $3.9 billion during July to September 2013, down nearly 65% from the same period in 2012, when it had stood at $11.1 billion.
While gold imports are falling, does that mean the demand for gold has been falling as well? News reports suggest that gold smuggling has gone up dramatically. A report in the Daily News and Analysis suggests that nearly 500 kgs of gold is being smuggled into India everyday., which means around 15 tonnes a month, and that is clearly a lot of gold. (To read a detailed analysis on this point, click here)
If this is correct, what this means is that Indians are still buying gold. And given that the level of financial savings is unlikely to go up in the near future. This means that interest rates will continue to remain high, making it unattractive for corporates to borrow fresh money to invest.
What does not help is the fact the Indian corporates are already highly leveraged. In fact, debt to equity ratio of industrial companies was around 0.8 as of March, 2006, point out Mishra and Shankar. This mean that corporates had 80 paisa of debt for every rupee of equity. Since then it has gone up to around 2 i.e. corporates now have 2 rupees of debt for every rupee of equity.
All these reasons make it difficult for India Inc to be gung ho about making fresh investments in the time to come.
The article originally appeared on www.firstpost.com on December 6, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Of Chidambaram, Salman Khan and the great Indian hope trick
Vivek Kaul
So India is out of trouble. The current account deficit for the period July to September 2013 is down to 1.2% of the GDP in comparison to 5% of GDP a year earlier. The current account deficit is the difference between total value of imports and the sum of the total value of exports and net foreign remittances. Or to put it in simpler terms, it is the difference between outflow (through imports) and inflow (through imports and foreign remittances) of foreign exchange .
The gross domestic product (GDP) grew by 4.8% during July to September 2013 as compared to the same period last year. This was much better than the growth of 4.4% seen during April to June 2013.
And given this improvement, the Indian economy is starting to recover. Or so we are being told by politicians, bureaucrats, financial firms and stock brokers. The great Indian hope trick is at work. Leading the pack is finance minister P Chidambaram. “ We are going through a period of stress but there is a ground for optimism…we hope things will become better in the second half of the current fiscal,” he said on December 2.
Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, seems to be more optimistic than Chidambaram and he expects the GDP growth rate “in the second half of the current year to be better than the first half.”
That might very well turn out to be the case. But whether India grows at 4.8% or 5.1% that is purely of academic interest. It doesn’t matter. If the country needs to get people out of poverty it needs to grow at 8-9%. And the way things currently are it looks very difficult to achieve that kind of growth.
In a speech which was published as an editorial in The Times of India, Chidambaram said “In 2014-15 our growth rate will be close to 6 per cent, in 2015-16 it will be close to 7 per cent and, in the year after, we will be back to the high growth of 8 per cent.”
This is the great Indian hope trick at work. Yes things are looking a lot better on the current account deficit front and GDP growth also seems to have picked up, but there are a host of other economic factors which indicate that getting back to an era of high economic growth will be difficult.
1) The consumer price inflation was at 10.09% in October 2013. Food inflation was even higher at 18.2%. Half of the expenditure of an average household in India is on food. In case of the poor it is 60%. In such an environment people are likely to postpone other forms of consumption which are not immediately necessary, given that more and more of their money goes towards buying food. And this has an impact on economic growth. (In order to understand how inflation is inversely proportion to growth, click here).
2) The slowdown in consumption is clearly visible in the private final consumption expenditure(PFCE) which forms around 60% of the overall GDP, when measured from the point of view of expenditure. The PFCE for the period between July and September 2013 grew by just 2.2%(at 2004-2005 prices) from last year. Between July and September 2012 it had grown by 3.5%. What this tells you is that people are postponing consumption because of high inflation.
3) A slowdown in consumption is visible in a slowdown in car sales. In the month of November car sales of the major players Maruti Suzuki, Hyundai and Tata Motors were down. It is worth remembering that car sales unlike a lot of economic statistics is a real number and not a theoretical construct. Car sales of Maruti Suzuki fell by 5.9% to 85,510 units. The sales of Hyundai were down to 33,501 units by 3.6%. Tata Motors was the worst of the lot, with sales down by 39.8% to 26,816 units. What this tells you again is that people are postponing consumption because of high inflation.
This lack of demand is also reflected in the slowing down of consumer durables output. As Sonal Varma of Nomura wrote in a research note dated October 11, 2013 “consumer durables output growth remained in the negative, possibly due to a sharper slowdown in white goods production.” This is a clear reflection of the fact that people are not interested in buying things.
4) Economic growth in large parts of the world slowed down after investment bank Lehman Brothers went bust in September 2008. India beat the trend and continued to grow. This was primarily on account of the fact that the government decided to spend a lot of money in comparison to what it was doing in the past.
Given this, the actual fiscal deficit for the year came in at Rs 3,36,992 crore, though the target was Rs 1,33,287 crore. So the fiscal deficit basically more than doubled from a target of around 2.5% of GDP to an actual of 6% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends.
This year the government of India does not have the same sort of flexibility. Data released by the Controller General of Accounts (CGA) shows that between April and October, 2013, the fiscal deficit touched 84.4% of the annual target. The fiscal deficit target for the year is Rs 5,42,999 crore or 4.8% of GDP. During the first seven months it was at Rs 4,57,886 crore or 84.4% of the target, suggesting that Chidambaram has very little room left to manage the fiscal deficit.
In this scenario there is very little chance for the government to increase expenditure to drive economic growth. In fact, if one looks at the GDP numbers for the period July to September 2013, the government final consumption expenditure fell by 11.7% in comparison to the period between April and June 2013.
5) Also, it is more or less certain now that the finance minister P Chidambaram will meet this year’s fiscal deficit target by delaying payments. .Reuters columnist Andy Mukherjee explained this best in a column he wrote on October 25, 2013. “India’s government recognizes revenue and costs not when it actually incurs them, but when it writes or receives cheques. By simply delaying payments, New Delhi can therefore give the impression it is sticking to its promise of keeping this year’s budget deficit within 4.8 percent of GDP,” wrote Mukherjee.
So oil marketing companies will not be paid for their under-recoveries in this financial year. Similarly, the Food Corporation of India(FCI) will not be compensated for the grains that it sells at a subsidised price, this year.
What this means is that by postponing payments, the current government will leave a bigger headache for the next government. As economist Abheek Barua writes in a column in the Business Standard “Let’s face the fact that even if Finance Minister P Chidamabaram were to produce a 4.8 per cent fiscal deficit-to-GDP ratio in 2013-14, it would not mark the end of India’s fiscal woes. The only way to compress the fisc this year is on the back of a hefty deferment of big-ticket expenditures such as subsidy payments for oil and fertilisers…How will a new government handle this? Will it have the courage to prune or jettison some of these revenue-guzzling welfare programmes, and risk eternal damnation by voters? Can it afford to finally do away with oil and other subsidies at one shot?”
Such a scenario will not be good for economic growth. Also, if the government continues in its current way, there is always the risk of a downgrade from one of the international rating agencies. And that will mean a run on the rupee.
6) Chidambaram in a recent speech said that “India is not an island. We are part of the global economy, and what happens in the globe will affect India.The global economy…is expected to achieve a growth rate of only 2.9 per cent in CY 2013. Advanced economies are expected to grow at only 1.2 per cent this calendar year. The eurozone area, which is one of our major trading partners, is expected to shrink 0.4 per cent this year. Therefore, what happens in and what we are able to do, must be seen in the context of the global economy.”
This is classic politician speak. When India was growing then it was because of all the things that the government was doing right. And now that we are not growing it is because of external factors. But let me not get into that. The point here is that if the global economy does start to recover, how well is the Indian economy placed to benefit from it through increased exports? Economist Rajeev Mallik of CLSA has an answer. “Recovery in global demand and trade flows will be positive for India, but it’ll be more positive for other Asian economies. This is because even though India’s ratio of exports in GDP has increased in recent decades, it remains the lowest among the Asian economies. Consequently, the incremental increase in growth in some other Asian economies will outstrip that for India,” explains Mallik in a column in the Business Standard.
7) The current account deficit has been brought under control by clamping down on gold imports. Another major reason for its fall is the slowdown in growth leading to lower imports. Imports declined 4.8% to $114.5 billion during the July to September 2013 period. As an editorial in The Financial Express points out “But, more than anything else, it is the continued collapse in GDP that has ensured CAD remains under control, implying that the situation can once again get out of control as GDP picks up—with no policy on opening up of the coal sector, for instance, coal imports will pick up once again as GDP rises.”
8) So in this environment few are investing. As The Financial Express editorial points out “a recent study by Kotak Institutional Equities shows how sanctions for fresh projects have been tapering off from R1,13,900 crore in Q1FY11 to R74,900 crore in Q1FY12, R41,300 crore in Q1FY13 and to just R22,000 crore in Q1FY14.”
What all this tells us is that there are serious economic issues that need to sorted out if India has to get back anywhere near 8% GDP growth rate. In this scenario anyone trying to tell us that India will soon go back to a high economic growth rate is like Salman Khan telling the world that he is a virgin who is saving himself for his wife. We all know that is not something to be taken seriously.
The article originally appeared on www.firstpost.com on December 4, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)