Transforming our PSUs to create a new engine of growth

The Public sector can be a new engine of growth for India.  A very large amount of capital is invested in India's public sector. These companies have the scale to become  global scale players if managed well but are constrained due to the way they are managed. 

The main constraints are in acquisition of best talent, interference in decision making, poor capital allocation resulting from interference of the government in the running of business and using these companies as milch cows for political ends by using them to provide subsidies for political ends. As a result of these companies earn poor rates of return on capital and are unable to grow fast, create employment and make investments and work to their full potential.  These companies are also easily hamstrung by their private sector competitors by suitably "incentivizing" the political leaders concerned. The current trajectory of management may lead to bankruptcy of many of the PSUs and create great financial stress for banks and the governments. BSNL and Air india are heading down this road rapidly and they need to be rescued quickly.

Many of these constraints are seen as having fatal flaws by the stock market. As Peter Drucker put it succinctly, Profitability is the sovereign test of the enterprise. Many of these enterprises  have failed the   test soundly and are not seen as investment worthy by the stock market. 

We need to create a program to convert these companies from being Public sector companies to becoming more like the HDFC, ICICI or IDFCs. The government could hold either 26% or a golden share and create safeguards to prevent mismanagement but the companies need to have autonomy in running the company.  The divestment of these stakes could happen as the efficiency of operations improve so that the government would receive a fair compensation for the stakes. There should be complete autonomy in acquisition of talent, capital allocation and efficient management of the enterprise to earn the best possible return. These  factors should be cast in stone and  non-negotiable and irreversible. The government needs to create a clear mandate of corporate governance and commit to not changing it. The companies  should be made to sign agreements with the government to provide affirmative action to the extent it will not affect their efficiency but they should be free to implement in the manner they wished. These agreements should have a long tenure of 25-50 years and should not be changeable during the interim period.

Our national policies regarding licences and permissions in these sector should mimic the kind of policies favoured by countries such as USA, Hong Kong, Australia towards their dominant corporations. 

The cost of governmental interference and hampered operations is quite stark. For example: the market cap of HDFC Bank which was started in 1994 has a market cap of Rs 160,000 crore. While SBI which is almost 150 years old has a market cap of Rs 120,000 crores despite being almost four times as large as HDFC in assets.

We could also think of inviting private participation in these companies through limited stakes i.e, any private sector group could participate through stock ownership and board participation. There is a precedent for this in the banks started by different communities where different groups got together to manage banks such as Tamilnadu Mercantile Bank and these groups cannot hold more than certain % of the voting share as per the articles of association.


If we do this, we could think of converting our struggling PSUs into world scale businesses with great vitality. 

If we visualize these transformations, we can understand the possible improvements possible.

• converting a BHEL into a GE
• converting a Coal India or NMDC to Rio Tinto or a BHP
• converting a BSNL into a Vodafone
• converting a BPCL/HPCL or IOC into Shell or Exxon Mobil
• converting SBI into a HSBC or even a HDFC Bank !!
• convert SAIL into a world leader in Steel
• convert National Fertilizers  into a Yara
• convert IndiaPost into a Fedex ?
• convert Air India into a Singapore Airlines
• convert our PSU defence companies into world scale arms manufacturers

The investments have already been made into  these companies/assets. All it takes is to change the rules by which these are managed. These are much more easier to do than attract even a fraction of the investment it would take to create these companies. The profitability improvements can provide steady source of capital for investments for growth for which we are going around with begging bowls to attract FDI. Better management of these companies will add to the tax revenues of the country.

We have massive fiscal deficits.  There is no more money left for creating any more engines of growth. We may need to scale back many of the programs we already have. In such a scenario, this measure is one of the lowest hanging fruit.

There is another problem facing us. Our stock market is severely lacking depth. Once the top 40-50 companies are well priced, there are no good companies available at reasonable valuations for investors to buy into. Any further investment by Foreign Institutional Investors only increases the valuation of these companies pushing  the valuations into stratospheric levels. This also pushes away the retail investor from the stock market as s/he is not able to find steady blue-chips which would pay dividends. A slow divestment of these transformed PSUs would transform the Indian stock market and make it a very attractive place for our retail investors and world wide investors. It will also drastically reduce crony capitalism.

This is a zero cost and  zero investment  change which can provide a good impetus to our economy. 

The Importance of the AMUL Model

What is AMUL ?

AMUL is  the brand name of the Gujarat Co-operative Milk Marketing Federation (GCMMF). It is set up to market the produce of the Dairy Co-operative Unions in the state. GCMMF sits at the apex of the pyramid of the Dairy co-operative movement.

For sake of ease, I am using the term AMUL to represent the structure represented by GCMMF/Co-operatives in this article (please see this for more details GCMMF/Co-operatives).

Why is AMUL different from a corporation ?

AMUL tries to expand the market for the farmer's produce and keep demand for milk and milk products well matched or ahead of supply of milk thereby ensuring that the farmer gets a good price for his/her produce. The objective of AMUL is to maximize the returns to the farmer not the profitability of AMUL.  This objective of AMUL arises on account of its ownership structure. GCMMF the apex marketing agency is owned and controlled by the Co-operatives.

AMUL tries to give the highest price to the milk producer and convert the raw milk into products and sell it at the lowest possible price to the consumer. AMUL, by adopting this strategy has also become a formidable player in the market selling products at very fair prices and never exploiting customers - thereby limiting the behaviour of participants in this industry and the profits that can be made in the industry.


The actions that flow from AMUL's objective are

Sale of products at reasonable prices thereby spurring consumption
Penetration pricing for many products so that at all times new markets are created for the ever increasing output of milk
Creating a steady and growing market rather than exploiting profit making opportunities which may increase profits but reduce volume growth
High return on capital for dairy farmers and assured off-take and reasonable prices putting them on a virtuous cycle of growth

If a normal corporation would be in the business of procuring milk and selling it,  its primary goal would be to minimize the cost of milk procured and maximize the sale value of the products - completely opposite of that of AMUL. This may be appear deluded (especially in light of AMUL's experience) as this tends to slowdown the variable which can help a business keep its dealings healthy - namely volume but this is the usual business logic.

In game theory terms, the dairy farmers are controlling the value chain rather than the merchant controlling the farmers. This is exactly as Sardar Vallabhai Patel had intended when he and few other leaders advised the farmers to get out of the clutches of the merchants/traders who were exploiting them and create their own co-operatives. Under the astute leadership of Tribhuvandas Patel, the dairy movement kept out all political parties from it as the farmers decided to only their identity of the farmer to the dairy meeting.

Why is the AMUL model important ?

We are suffering constantly from the problem of excess production and lack of steady remunerative price for many commodities. Even if the prices fall, its benefits never really reaches the consumer and is taken up by the manufacturer. This causes farmer distress during low prices without really adding to the demand or creating a market.

The AMUL model has changed these dynamics by creating a globally well known brand, a market and a strong sales marketing organization and distribution network. It is a proven model and has worked for over 60 years now and can be replicated. It takes zero investment and self-regulated as the weight of the society bears upon it and hence it is not easy to hijack it or sabotage it.

Traditionally when there is distress, governments announce ad hoc measures which cost a lot but accomplish very little in the long run.

Even today a large part of our population lives of agriculture. By creating organizations like AMUL, we accomplish many things in one stroke: Rural empowerment, women entrepreneurship, providing opportunities at village level to stop migration into cities, creation of income in villages which would allow Providing  Urban Amenities in Rural Areas (one of the main cause of migration to cities)

Way forward ?

AMUL was created as an accident of history but we need to learn from it and create many more AMULs as a deliberate national design. Creation of more AMULs does not require much investments. In fact, it will be most effective if it done with zero investment from the government and 100% moral support from the government. All it requires is political will and leadership to organize the farmers and create a virtuous cycle of economic growth and social empowerment can be created which rewards hard work and enterprise.

The days of governments creating money and throwing them at problems without really solving anything are coming to an end.  In such a scenario the AMUL models are worth their weight in gold.

We, as a nation, need to identify various areas where the farmers produce are not getting adequate value and create many more AMULs. 

Last but not least we need to support and reward political leadership which will adopt  these innovative engines of economic growth and not harp on the same cliched and failed models of economic development.

The Sanjeevani for harmonious economic growth

We have many problems plaguing our economic model of growth. Our current model depends a lot on industrial growth. The economic growth from industrialization is constrained by three factors: namely Capital available especially risk capital/ equity, land available for industrialization and employable population with skills relevant to industry. All of these three factors are in short supply: risk capital is not available easily, land for industrialization displaces people from their land and has become a contentious issue. The fraction of the people who are employable by industry as compared to those who seek a livelihood is very small.

The industry creates employees and very few entrepreneurs. This creates its own  tensions and repercussions in the long run  as employees appreciate the economic constraints much less than entrepreneurs creating a difficult industrial relations environment. Additionally industry invariably creates pollution and changes the ecology of the  area where it comes up.  Given this situation, it is clear that while industry can produce economic growth we need another engine of economic growth for many pockets of the country which are not getting developed or cannot be developed by industrialization.

I recently read this saying in Sanskrit. I have been thinking about this saying and it may have the secret to creating a new engine of growth which will strengthen our economy, our society and our environment.

A pond equals ten wells, a reservoir equals ten ponds.

A son equals ten reservoirs, and a tree equals ten sons!

दशकूपसमा वापी दशवापीसमो ह्रदः ।

दशह्रदसमः पुत्रो दशपुत्रसमो द्रुमः ॥

dasha-kūpa-samā vāpī, dasha-vāpī-samo hradaḥ |

dasha-hrada-samaḥ putro, dasha-putra-samo drumaḥ ||

Matsya-purāṇa 154:512

Why is the tree so revered ? One reason could be that it can grow and propagate itself without any effort and produce so much of value to humans and the environment. Factories don't have the intelligence to multiply on their own by simply creating a seed of the next factory. 

The economics of nature are simply fabulous. Comparing  a tree with a factory, we see that factories require substantial resources to be built and managed. They do not expand of their own accord. The next factory requires as much or even more investment. They could become obsolete quickly.  They upset the ecological equilibrium of the area where they are established. The tree is a factory that can grow pretty much by itself if it finds itself in the right place. Its products have great established use over many millennia as food, medicine, construction materials and importantly raw materials for the industrial economy (tyres, paper, construction, food, nutraceuticals to name a few). It plays a restoring a role in the environment.

This is not to say that we should forsake the economic growth through factories and machines. Let that go on and  and play its role. We should accept the limitations of industrial growth and adopt other models also  and place adequate importance to use the power of nature inherent in trees to power for economic growth.

What can be done ?

This approach seems theoretical. The immediate question is how can this be applied across the country.

We need to identify raw material products that can be created from trees and value added products that could be created from them. We then identify areas which are the best to grow these trees and create business around communities. We should let families grow the trees and collect the products and process them through co-operatives like Amul. This will require very little capital - only for collecting and processing the produce.

The planting and growing of trees should be linked to milestones in the family such as birth of children, marriage so that they are equivalent of opening a fixed deposit account or insurance policy for the family which will pay itself in time for the development of the person or family concerned. We need to rebuild the rituals for planting and maintaining these trees so that the tradition is maintained. 

There are few immediate areas where this can applied

1. Growing sandalwood in Karnataka: We have the crazy policy of effectively banning private growing of sandal wood trees. We need to instead encourage growing of trees in each household in areas where it is conducive. This can increase the production of sandalwood manifold and help increase market share of sandal wood in the perfumery business. The price of good sandal wood is at least Rs 2500 /kg. If we increase production, it may lower the price and at a much lower price there would be a very big market and income would also be spread among many more people.

2. Neem: Neem based products are growing in a big manner for humans and as insecticides. The cost of neem seeds has gone up from almost (cost of picking and transport)  to about Rs 23/kg. 

3. Amla: Amla produces many products which help in curing  many of the modern day diseases.

4. Alternatives for Forest produce: Massive deforestation has reduced the forest cover and reduced the source of raw materials for nutraceutical industry. While the world population has increase manifold since 1947, the forest cover has reduced substantially. This  tragedy is paradoxically a very good opportunity to create forestry product markets around trees such as Arjun, Ashwagandha etc. ( This is also an opportunity to reduce cost of medicare using traditional medicine such as Ayurveda but we shall reserve that discussion for another blog).

Conclusion:

This experiment has been conducted in Maharashtra and many other states by BAIF Foundation for many decades now. It is called the Wadi program. Deforested areas have been afforested with diverse trees such as mango, cashew nut among others. These produce are collected and processed by co-operatives owned by the growers and sold as value- added produce.  These have seen more as poverty alleviation schemes to bring tribals out of property and rehabilitate them.  At some level the Amul experience is one such using cattle instead of trees.

These solutions are much more than and need to be seen in a newer light of a new Engine of national economic growth with minimal sops and minimal outlays, which produces many entrepreneurs and livelihoods and work around the constraints posed by industrial economic growth. This should be a part of a new national policy for economic growth than a mere poverty alleviation exercise.

Nature is very kind. It has great power inherent in it if we only bothered to listen. This solution proposed uses the power of Biological networks, Economic networks and Social networks.  If properly thought through and implemented, it can create sustainable harmonious development of society using very low investment.