This Govt Company Lost Rs 11.65 Crore Per Employee, and It’s Not Air India

Hindustan photo

The finance and defence minister Arun Jaitley, recently said: “India has a historic second chance, after nearly one-and-a-half decades, to disinvest in state-owned Air India Ltd and help propel the growth of aviation sector.”

Whether this happens remains to be seen given that the issue of disinvestment of Air India is a political hot potato, and any movement on this front is likely to lead to a lot of hungama, for the lack of a better word, from India’s professional trade union leaders, as well as the opposition parties, which have been in a rather moribund state of late.

Over and above this, the Modi government hasn’t really come up with any economic reform till date, which is likely to make it unpopular with a section of the population. The unpopular steps have typically been reserved to drive the so called cultural agenda of the Rashtriya Swayemsevak Sangh (RSS) and the Bhartiya Janata Party (BJP).

Having said that, before the government goes about disinvesting Air India there are several low hanging fruits that it can pluck, and save a lot of money in the process. One such company is the Hindustan Photo Films Manufacturing Co. Ltd. Take a look at Table 1.

Table 1: 10 Major Loss Making CPSEs during 2015-16 

As per Table 1, Hindustan Photo Films was the fourth largest loss maker among all public sector enterprises in 2015-2016. It made a loss of around Rs 2,528 crore. The three companies that made greater losses than Hindustan Photo, had some semblance of a business, though not a business model. The Steel Authority of India Ltd has steel plants all over the country and employs thousands of people, though it lost a lot of money in doing so, given that it can’t compete with the Chinese steel on the price front.

The Bharat Sanchar Nigam Ltd, offers telecom services across the country. And Air India, for whatever it is worth, is India’s national airline and flies people globally as well as locally. It also flies the prime minister whenever he takes an international trip.

But what about Hindustan Photo Films? What does the company do? Photo films went out of business a while back. The question is: Why is the government still running a photo film company? The photo film was killed first by the digital camera and then by the mobile phone. Actually, the company doesn’t make photo films any more.

During 2012-2013 (the latest annual report that I could find), the total production of the company had stood at Rs. 3.6 crore. The sales had stood at Rs. 3.7 crore. Now imagine who in their right minds would run a company with sales of under Rs. 4 crore and which ends up with losses of more than Rs. 1,500 crore, as it did during the course of 2012-2013. As mentioned earlier in 2015-2016, the company lost Rs 2,528 crore. It employed 217 individuals. This meant a loss of Rs 11.65 crore per employee. This number shows the ridiculousness of the entire exercise of keeping the company alive.

In fact, 2015-2016 wasn’t the first time that Hindustan Photo Films lost money. It has been losing money for over a decade. Between 2004-2005 and 2015-2016, the company has lost close to Rs 15,000 crore in total.

Table 2: Losses of Hindustan Photo Films 

As is clear from Table 2, the company hasn’t made any money in years. Given this, in order to continue to operate the company has borrowed money. As of March 31, 2016, the total long-term loans of the company stood at Rs 23,752 crore. Servicing these loans by paying interest on them, I guess is the major expense of the company now. I say guess because I don’t have access to the latest annual report of the company.

Banks keep giving loans to a dud company like Hindustan Photo Films because they know that they are ultimately lending to the central government, and what can be a more safer form of lending.

It is worth pointing out here that the government does not have an unlimited amount of money. Every rupee that goes towards funding the losses of companies like Hindustan Photo Films, is money that does not go towards more important things like education, health, or affordable housing, for that matter.

Also, a normal excuse offered on keeping a loss-making public sector enterprise going is that so many people are employed. Over and above the direct employment, there is a certain ecosystem that the public sector enterprise feeds into and helps that ecosystem as well. But in this case, this logic fails given that there are only 217 employees. They can be given a good voluntary retirement package and the company can be shutdown. Also, the physical assets of the company can be sold to repay the debt that has been accumulated. For starters, the company has 472 constructed homes in its township.

This is low hanging fruit that the Modi government can easily cash in on, if it wants to. Why this hasn’t happened up until now, on that your guess is as good as mine.

The column originally appeared on Equitymaster on May 30, 2017.

Which is the Biggest Hit of Them All?

Baahubali_the_Conclusion

The race is on. Is it Bahubali 2? Or is it Dangal? Which is the biggest Indian hit film of all time?

For a brief period, it looked that Bahubali 2 with a worldwide business of more than Rs 1,500 crore, would take the top slot. Until Dangal opened in China. The movie has done a worldwide business of close to Rs 1,700 crore, with around Rs 900 crore coming from China alone.

This means that Dangal is the biggest Indian hit film of all time. Ironically, Bahubali 2 with collections of close to Rs 500 crore in Hindi, is the biggest hit in Hindi cinema (originally made in Telugu it has been dubbed into Hindi) of all time. Dangal made a little over Rs 387 crore in Hindi. On an all India basis Bahubali 2 did greater business than Dangal. Hence, within India Bahubali 2 is the biggest hit of all time.

There are many things that this analysis does not take into account. The first and foremost is the fact that no one is looking at the return on investment.

If a film made on a budget of Rs 15 crore does a business of Rs 60 crore, it earns a return of 300 per cent. In comparison, if a film made on a budget of Rs 100 crore does a business of Rs 200 crore, it makes a return of only 100 per cent, even though the overall business that it does is certainly more.

Hence, just measuring the revenue of a film gives a misleading picture. But this is the way analysis happens.  This convolutes the overall picture in favour of films doing big business, even though their return on investment may not be necessarily high.

The second point is inflation. The value of the rupee today is not the same as it was 50 years back or 20 years back or even a year back. Ticket prices have gone up over the years. In fact, in large parts of the country, film ticket prices have gone up much faster than the overall rate of inflation. When I was in college in the mid to late 1990s, the most expensive ticket was around Rs 11. Even if we assume a rate of inflation of 8 per cent per year over the last two decades, Rs 11 then is now worth around Rs 51.

In the big cities, where much of the film business happens, Rs 51 is simply not enough to buy a film ticket. Hence, films now make much more money than they did in the past because tickets even after adjusting for inflation are more expensive than they used to be.

As Diptakirti Chaudhuri writes in Written by Salim-Javed—The Story of Hindi Cinema’s Greatest Screenwriters: “In the first run, Ramesh Sippy [the director of Sholay] estimates Sholay made a staggering Rs 25 crore. To put this in perspective, it made more than eight times the production cost—which was the highest ever at that time.”

How does this number look if we were to take inflation into account? Chaudhuri estimates the prices have gone up eighteen times since 1975. This “would put just the domestic gross collection of Sholay at Rs 450 crores.” A price increase of 18 times over four decades means a rate of inflation of around 5.3 per cent.

This is just adjusting for inflation. If we take into account the excessive increase in ticket prices in comparison to overall inflation, Sholay would have made much more than Rs 450 crore, if we were to adjust for today’s reality.

It would have definitely made more than Bahubali 2 has in its first run in Hindi. Also, this does not take into account the fact that Sholay continued to earn money over the years, as it kept getting re-released. Now that is something that doesn’t happen anymore with most money being made in the first few weeks of the film’s release.

If we see the situation from this lens, things suddenly don’t seem like they are being projected.

The column originally appeared in the Bangalore Mirror on May 31, 2017.

When It Comes to Creation of Jobs, We Agree and Disagree with Amit Shah

amit shah

The BJP president Amit Shah late last week said: “We have tried to give new perspective to employment as it is not possible to provide employment to everyone in a country of 125 crore people. We are promoting self-employment and the government has made eight crore people self-employed.”

Well it’s obvious that no government can create the huge number of jobs that India needs. But then politicians are not known to say the most obvious things. Hence, Shah deserves credit for saying what he did.

The number of jobs in central public sector enterprises has fallen over the years. Let’s take a look at Table 1.

Table 1: Employment and Average Annual Emoluments in CPSEs 

As can be seen from Table 1, the number of people employed by the central public sector enterprises has fallen over the last decade.

Now how do things look for the central government employees? On January 1, 2006, the central government had a sanctioned strength of 38.3 lakh. Against this, it had 32.7 lakh employees on its rolls. By January 1, 2010, the sanctioned strength had gone up to 38.9 lakh, while the number of employees had fallen to 32.3 lakh.

By January 1, 2014, the sanctioned strength had risen to 40.5 lakh, whereas the number of employees had risen marginally to 33 lakh. So, between 2006 and 2014, the central government basically added around 28,000 jobs.

Over and above this, the various state governments employ around 72 lakh individuals. Hence, the ability of the government to create jobs is limited. This does not help given that around one million Indians are entering the workforce every month. Hence, the economy needs to be creating 1.2 crore jobs every year, and that is clearly not happening.

In fact, the sad state of the Indian jobseeker can be made out from something I write in my new book India’s Big Government-The Intrusive State and How It is Hurting Us: “Only 60.6 per cent of the individuals who were available for work all through the year were able to get work for the entire year. In rural areas, this figure was at 52.7 per cent. This basically means that close to half of rural India cannot find work for all 12 months of the year.” These numbers were true for 2015-2016.

Further, the situation on this front is more or less the same since the last survey was carried out, in 2013-2014. As per the last survey, 60.5 per cent of individuals who were available for work all through the year had been able to find work for that entire year. In rural areas, this figure was at 53.2 per cent. The figures are more or less similar to those of the latest survey.

Last week Shah talked about self-employment and the government having made 8 crore people self-employed. In the next breath he also said: “There is no system to find out the exact availability of jobs in the country.” So that makes us wonder, where did the 8 crore number come from?

Also, Shah in his statement tried to pass-off self-employment as something unique to the current government. Self-employment is what almost every Indian who does not find a job, ends up with.

As Abhijit Banerjee and Esther Duflo write in Poor Economics: “The sheer number of business owners among the poor is impressive. After all, everything seems to militate against the poor being entrepreneurs. They have less capital of their own (almost by definition) and… little access to formal insurance, banks and other sources of inexpensive finance…. Another characteristic of the businesses of the poor and the near-poor is that, on average, they are not making much money.”

The point here is that a large part of the workforce is not self-employed by choice but are self-employed because they have no other option. Banerjee and Duflo call them ‘reluctant entrepreneurs’. This can be made out from the fact around 46-47 per cent of the Indian workforce is self- employed.

The fact that Indians are reluctant entrepreneurs also becomes clear from some data highlighted in the National Manufacturing Policy of 2011. It estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people.

This means that any SME, on an average, employed 2.27 individuals. The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals. These firms are responsible for 45 per cent of the manufacturing output of the country.

What this clearly tells us is that the size of the average Indian manufacturing firm is very small. This is a good proof of the fact that most Indians getting into entrepreneurship do so because they don’t get jobs. They start small and continue to remain small. One reason lies in the fact that their business does not generate enough capital to expand.

The second reason lies in the lack of ease of doing of business. Any firm looking to grow soon runs into a maze of rules and regulations and corrupt bureaucrats appointed by both state and central government. Jobs are created when small firms start to grow big and recruit more people.

As an OECD (Organisation for Economic Co-operation and Development) research paper points out: “SMEs (small- and medium-sized enterprises) account for 60 to 70 per cent of jobs in most OECD countries, with a particularly large share in Italy and Japan, and a relatively smaller share in the United States. Throughout, they also account for a disproportionately large share of new jobs, especially in those countries which have displayed a strong employment record, including the United States and the Netherlands. Some evidence points also to the importance of age, rather than size, in job creation: young firms generate more than their share of employment.”

Hence, jobs are created when small firms grow. And that clearly isn’t happening in India. The labour laws continue to remain as screwed up as ever. And so does the ease of doing business. On that front Shah’s government has barely managed to move.

When it comes to creating jobs, the government can at best act as a facilitator and help the private sector and individuals create jobs. But that facilitation is easier said than done.

Postscript: I recently did a podcast with the writer Amit Varma who is currently the editor of the Pragati magazine, on The Coming Jobs Crisis. Most of what I spoke was based on my new book India’s Big Government-The Intrusive State and How It is Hurting Us. You can listen to the podcast here.

The column originally appeared in Equitymaster on May 29, 2017.

When It Comes to Creation of Jobs, We Agree and Disagree with Amit Shah

amit shah

The BJP president Amit Shah late last week said: “We have tried to give new perspective to employment as it is not possible to provide employment to everyone in a country of 125 crore people. We are promoting self-employment and the government has made eight crore people self-employed.”

Well it’s obvious that no government can create the huge number of jobs that India needs. But then politicians are not known to say the most obvious things. Hence, Shah deserves credit for saying what he did.

The number of jobs in central public sector enterprises has fallen over the years. Let’s take a look at Table 1.

Table 1: Employment and Average Annual Emoluments in CPSEs 

As can be seen from Table 1, the number of people employed by the central public sector enterprises has fallen over the last decade.

Now how do things look for the central government employees? On January 1, 2006, the central government had a sanctioned strength of 38.3 lakh. Against this, it had 32.7 lakh employees on its rolls. By January 1, 2010, the sanctioned strength had gone up to 38.9 lakh, while the number of employees had fallen to 32.3 lakh.

By January 1, 2014, the sanctioned strength had risen to 40.5 lakh, whereas the number of employees had risen marginally to 33 lakh. So, between 2006 and 2014, the central government basically added around 28,000 jobs.

Over and above this, the various state governments employ around 72 lakh individuals. Hence, the ability of the government to create jobs is limited. This does not help given that around one million Indians are entering the workforce every month. Hence, the economy needs to be creating 1.2 crore jobs every year, and that is clearly not happening.

In fact, the sad state of the Indian jobseeker can be made out from something I write in my new book India’s Big Government-The Intrusive State and How It is Hurting Us: “Only 60.6 per cent of the individuals who were available for work all through the year were able to get work for the entire year. In rural areas, this figure was at 52.7 per cent. This basically means that close to half of rural India cannot find work for all 12 months of the year.” These numbers were true for 2015-2016.

Further, the situation on this front is more or less the same since the last survey was carried out, in 2013-2014. As per the last survey, 60.5 per cent of individuals who were available for work all through the year had been able to find work for that entire year. In rural areas, this figure was at 53.2 per cent. The figures are more or less similar to those of the latest survey.

Last week Shah talked about self-employment and the government having made 8 crore people self-employed. In the next breath he also said: “There is no system to find out the exact availability of jobs in the country.” So that makes us wonder, where did the 8 crore number come from?

Also, Shah in his statement tried to pass-off self-employment as something unique to the current government. Self-employment is what almost every Indian who does not find a job, ends up with.

As Abhijit Banerjee and Esther Duflo write in Poor Economics: “The sheer number of business owners among the poor is impressive. After all, everything seems to militate against the poor being entrepreneurs. They have less capital of their own (almost by definition) and… little access to formal insurance, banks and other sources of inexpensive finance…. Another characteristic of the businesses of the poor and the near-poor is that, on average, they are not making much money.”

The point here is that a large part of the workforce is not self-employed by choice but are self-employed because they have no other option. Banerjee and Duflo call them ‘reluctant entrepreneurs’. This can be made out from the fact around 46-47 per cent of the Indian workforce is self- employed.

The fact that Indians are reluctant entrepreneurs also becomes clear from some data highlighted in the National Manufacturing Policy of 2011. It estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people.

This means that any SME, on an average, employed 2.27 individuals. The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals. These firms are responsible for 45 per cent of the manufacturing output of the country.

What this clearly tells us is that the size of the average Indian manufacturing firm is very small. This is a good proof of the fact that most Indians getting into entrepreneurship do so because they don’t get jobs. They start small and continue to remain small. One reason lies in the fact that their business does not generate enough capital to expand.

The second reason lies in the lack of ease of doing of business. Any firm looking to grow soon runs into a maze of rules and regulations and corrupt bureaucrats appointed by both state and central government. Jobs are created when small firms start to grow big and recruit more people.

As an OECD (Organisation for Economic Co-operation and Development) research paper points out: “SMEs (small- and medium-sized enterprises) account for 60 to 70 per cent of jobs in most OECD countries, with a particularly large share in Italy and Japan, and a relatively smaller share in the United States. Throughout, they also account for a disproportionately large share of new jobs, especially in those countries which have displayed a strong employment record, including the United States and the Netherlands. Some evidence points also to the importance of age, rather than size, in job creation: young firms generate more than their share of employment.”

Hence, jobs are created when small firms grow. And that clearly isn’t happening in India. The labour laws continue to remain as screwed up as ever. And so does the ease of doing business. On that front Shah’s government has barely managed to move.

When it comes to creating jobs, the government can at best act as a facilitator and help the private sector and individuals create jobs. But that facilitation is easier said than done.

Postscript: I recently did a podcast with the writer Amit Varma who is currently the editor of the Pragati magazine, on The Coming Jobs Crisis. Most of what I spoke was based on my new book India’s Big Government-The Intrusive State and How It is Hurting Us. You can listen to the podcast here.

The column originally appeared in Equitymaster on May 29, 2017.

Why Demonetisation Did Not Hurt Modi

narendra_modi

Later this week, the prime minister Narendra Modi will complete three years in office. In the recent past, there have been a spate of articles analysing the performance of the Modi government.

The general conclusion seems to be that the prime minister continues to remain politically popular. The recent wins of the Bhartiya Janata Party in the Uttar Pradesh state assembly elections and the Delhi municipal elections, is evidence of the same.

Over and above this, there has been a lot of analysis around the impact of demonetisation, as more data becomes available. Most data show that the economic impact of demonetisation has been negative. For all the trouble that people were put through, the income tax department hasn’t been able to identify much of black money.

Further, barely any fake currency was identified during the process of demonetisation. Digital transactions peaked in December 2016 and have fallen since then. Hordes of informal businesses were shut down and many people lost their jobs, in the process. And if all this wasn’t enough, on some days ATMs still run out of cash.

Nevertheless, despite all this Modi continues to be a popular prime minister. What is happening here? The negative economic environment created in the aftermath of demonetisation hasn’t impacted the prime minister.

Narendra Modi is what political scientists call a populist leader. What is the definition of a populist leader? Jan-Werner Müller, a professor of politics at Princeton University, defines this in his book What is Populism?

First and foremost “it is a necessary but not sufficient condition to be critical of elites in order to count as a populist”. Over and above this, there are other factors that go into the making of a populist leader like Modi is.

As Müller writes: “Populists claim that they, and they alone, represent people… The claim of exclusive representation is not an empirical one; it is always distinctly moral. When running for office, populists portray their political competitors as part of the immoral, corrupt elite; when ruling, they refuse to recognise any opposition as legitimate. The populist logic also implies that whoever does not support populist parties might not be a proper part of the people—always defined as righteous and morally pure.”

A populist leader also likes cutting out the middleman. This means relying as little as possible on party organisations and the media, which acts as intermediaries between party organisations and the people.

This explains why Modi chose to directly address the nation on Doordarshan while announcing demonetisation on November 8, 2016. He spoke to the nation through the mann ki baat programme on radio on November 27, 2016. He addressed the nation again on December 31, 2016.

The focus of the message delivered was on how black money of the morally corrupt elite was hurting India big time and how important it was to tackle this problem on a war footing on an immediate basis. By doing this a situation of a crisis was created.

As Müller writes: “A “crisis” is not an objective state of affairs but a matter of interpretation. Populist will often eagerly frame a situation as a crisis, calling it an existential threat, because such a crisis then serves to legitimate populist governance. Put differently, a “crisis” can be a performance, and politics can be served as a continuous stage of siege.”

And this direct talking by populists attacking the so called morally corrupt elite goes down well with the true people, something which all the data and the numbers offered against decisions made by them can’t do anything about.

As Müller writes: “Populists ultimately appeal to a certain symbolic rendering of the “true people,” the appeal of that image will not vanish automatically when voters are presented with a some set of correct statistics about a particular policy area”.

And that best explains why demonetisation was a politically popular decision though numbers clearly show that it hurt the Indian economy.

The column originally appeared in the Bangalore Mirror on May 24, 2017