The path to being an Export Powerhouse

A lot of soul searching is going on on how to make India and export powerhouse. We do not have oil and yet we consume a lot of it. We need to export equivalent value of our imports to be a healthy economy and we are unable to do so.

In this blog, I shall explore some deeper reasons for our inability to mature to being an export powerhouse.

I am offering this blog as an example of how the following steps will make India an export power house

1. Improving domestic competition, lowering barriers to entry and removing barriers to trade inside the country

This will automatically increase exports. The alcohol industry is used as an example where the limits placed on the industry make it unfit for exports on large scale.

I am neither pro nor anti alcohol.  I take it as a reality that some people need alcohol so it is  better to accept it and make laws which suitably govern the production, distribution and consumption.

The alcohol industry has state-wise legislation of production, pricing, distribution and sales. Regulation varies from state to state with Tamilnadu being the most regulated where the state is now an integral part of the alcohol business and Goa where it is relatively free.

There is massive imports of alcohol due to overseas travel. The conventions on duty free allow each adult passengers to bring in two litres of alcohol. Funnily the internal laws do not allow the same.

As a result, our domestic alcohol industry suffers from poor quality lack of brands as there is no national market. It is not enough to make a good product and be able to market it well, You need to have politicians and government in your pocket and in many cases adopt them as your partner.

We have some of the best quality grains, fruits, flowers in the world and an unique culture of making alcohol without using grain products. Yet we have not international brand in alcohol. The reason is that our domestic market is constrained. Very little innovation is possible - racketeering is the order of the day.

Our nation has a very large population with very diverse tastes. This is a natural advantage if we allow creation of competitive national markets. Any good new product will find a large enough volume of takers which can give it volume and critical mass leading to profitability. This in turn will automatically lead to exports.

Let us  see what happened till two - wheelers and cars industry was licensed and controlled.  There was no innovation, no competition. There were imports and hardly any exports. Now we are exporting a lot of 2 wheelers and cars and are turning into worldwide production hubs for two-wheelers and cars.

2. Dismantle Licence Raj ...

A easy to attach national market creates a lot of innovation. A young Engineer or Designer straight out of college can launch a new product and challenge the status-quo and create a successful organization.
No one will come to work for you if you dont have good toilets. You dont need inspectors to check these things. We need to keep self regulation and punish violators like Union Carbide not waste time and police vibrant people who want to create new products and organizations.

There is a very large hungry base of young people.  Even if they do not find jobs, they will become entrepreneurs due to lack of choice but unless the eco-system is provided for these fledging businesses to thrive, they will all end in failure.


3. Government should tip the scales very subtly in favour of Indian companies

This is a lesson to be learnt from Unites States of America. Many new technologies are partially funded by the government so that the country gets an advantage.  The government also buys their own country's products so that these organizations gain vitality. Their is a lot of strategic intent in their buying behaviour.

Our country's government not only does not support firms which could create exports. It harasses and penalizes such companies so much so that they think that it is is mistake to be in a business where the government is a big buyer or has a big role ! Many examples abound: A company recently created capacity for Technical Ammonium Nitrate, an industrial explosive of high quality learning and absorbing new technologies in the process. Our government companies would rather import fertilizer grade explosive and use them rather than buying from this innovative company.

There is a company  called Encore Software Ltd which made a product which could have aided the armed forces during the terrorist attack in Mumbai in 2008. Unfortunately this product is yet to see the light of day as the decision makers in government  do not support them and to add insult to injury expect to be support them. Any surprise we have no exports of arms from India  and are dependent on imports ?

Sell the Cigarette factory

Indian insurance companies and  Special Undertaking of UTI owns 32% of ITC Ltd.  (see shareholding pattern). In comparison the promoters of ITC Ltd namely Britich American Tobacco (BAT) owns about 30.4%.

It is quite contradiction of sorts that the Government which is making smoking more and more difficult is owning such a large chunk of a cigarette manufacturer. No doubt ITC does a few other things but almost all of its profits come from cigarettes.

Cigarette smoking has been shrinking in the US and most  of the  developed world for the last three decades. See the following graphs

There are no indicators to show that we wont be part of that trend soon. Current sales and volume growth shows slow down in cigarette consumption. If the government decides to be proactive, we could hasten these changes. This company trades at a lofty 32 times earnings.

As the following TABLE shows most of the profits are from Cigarettes.




The nation also needs money for various important needs such as recapitalizing banks, creating infrastructure etc.

It makes eminent business sense to sell ITC shares to BAT. This will gather about Rs 90000 crores in the coffers of LIC, GIC and subsidiaries and the Special undertaking of UTI which could be used more productively. The funds received by LIC could be used to buy shares of PSUs which could be off loaded by the Government to LIC making it a backdoor divestment.

And perhaps a portion of the proceeds could be used to fund campaigns on Television and Social media to reduce cigarette consumption too !

Undoing MNREGA elegantly

There is a lot of worry regarding the employment guarantee scheme among people concerned about the future of India. It is vitiating the work atmosphere and making prefer idleness to work. It is also spoiling the finances of the nation.

If we consider labour as a commodity, its rate goes down when there is dumping. Labour like airline seats is a perishable commodity and its price drops when there is no demand. There is dumping when there is no demand. There is usually no demand for labour only in select pockets of the country. These districts are prone to large migration.

A tightening of the disbursement and monitoring will definitely help reduce the cost of MNREGA but it will not reduce it fully.

If the Central Government can identify the districts with the poorest prospects of jobs and improve these districts on a war footing, then this would reduce migration. This could in turn drive rates of labour in other states much higher and make labour rates far above MNREGA rates. In short, it would have a very amplified impact on the labour markets. For example, improving electricity, law and order and creating of  Industrial estates in poorest districts of West Bengal, Orissa, Bihar and UP will drive up wage rates all over the country especially in Tamilnadu, Karnataka, Delhi, Punjab and Maharashtra.

This could reduce MNREGA substantial in an elegant manner at least in the richer states.

Corruption : Tat vam asi Part 2

This is in continuation of my first post int his topic (see this link).

Every corrupt government which demits office leaves a lot of money on the table due to its corruption. Usually this weakens the finances and forces the new government to tax the same people who are paying tax and not the people who have benefitted from the corruption.

If the in-coming government can think of opportunities for the state arising from the past corruption the same would be very big opportunities, Recently some one was mentioning that there are 2 lakh properties which have not paid taxes for last 8-9 years in a large metro, These assessees bribed the officer and got out of paying taxes.

Even if each of htese properties have to pay just Rs 10000 p. a as tax then 2 lakh properties for say 8 years amounts to Rs 1600 crores, With a 100 % penalty the could come to Rs 3200 crores. So mal-governance also provides opportunities for those coming in to rule. In addition it would also increasing the coffers by Rs 200 crores every year.

Apart from this capturing tax revenues, a clear message goes out that there is no incentive to bend break rules. Those who benefited from this will realize that in the end, evasion and corrupt practices turned to be more costly. This may also provide opportunities to trim the government workforce and/or put the fear of God into them.

Using status goods for betterment of society

Today there is very large demand for status goods :  Top end cars, gleaming houses, expensive holiday homes,  private planes and boats,  IPL teams , EPL teams and even islands . In this blog will not go into the right or wrong of it. In this blog we will see the positive side of this need for status goods and see how it can be used for the betterment of the nation.

Status goods serve a real need for many people. The need to be looked up to by other in society. This has been there since time immemorial. People are going to be doing things that can give them a higher status.  In the current context most of all the above mentioned status goods are private goods

Status goods are demanded by people of action: those driven by Rajas. Such people are capable of doing the work of ten men and sometimes even a hundred. Many of them have an inner desire to be acknowledged for their strength and capacity for action. Many do not even begrudge, if their fruits are taken free by others. This concept of free rider problem which ails public goods is alien to our Indian mindset. If the man of action, the hero is celebrated in society, he goes on to even greater deeds as long as enough is provided for his physical and psychic well being. At least from the Indian point of view,  I believe that Ayn Rand got it wrong. The man of Rajas does not want all the fruits of his action to be his. He wants the credit to be his.

So instead of bemoaning the need for status goods, it is better to find a way of harnessing this. This could be done by creating public goods which are status goods.

Why should we create status goods which are public goods ? We need to create them to reduce the in your face class differences which arise from private goods. Creation of public goods also reduces the experience of life of a rich and poor man without deducting from the experience of each.

Let me give an example: if a large temple in Chennai takes a donation from a wealthy donor and makes him Guest of Honour for a important festival - the gap in the experience of poorest and richest in this status good is much lower than if the patron had bought the costliest German car in the market. Such public status goods  while at the same time giving a boost for joint social participation in society. In some ways, one car argue that the Hero has actually won a more genuine status symbol - something he can enjoy with all his heart.

It is my surmise that a lot wasteful expenditure is going into private goods because the avenues for putting them into public goods is lacking. We need to create status goods tout of public goods. This will take the need for status and make them sublime out of it.

The lack of status goods is leading people to do crazy things like buy Rajya Sabha nominations,  "influence" awards such as Padma Shri etc. In fact one can go little farther to say that since there is shortage of public goods that give status people are going to the extent of trying to corner whatever public goods are there ie we have a supply side problem  with public goods.

Here are a few public  goods that the government could create that will help create public goods that could also be enjoyed by one and all

• Creating more government educational institutions and universities  and auction the rights to be named  after individuals: Imagine getting Rs 100 crores for setting up a Petroleum  and Energy institute named after Dhirubhai Ambani.
• Creating chairs at government universities
• Temple events: They offer tremendous scope for creating public goods. Cultural and religious events dot the calendar through the year and each of these could be opportunities for creating public goods. The Jain temples still have this practice and the Hindu temples need to re-incorporate these practices. This will bolster art, take it to every person in society and also provide tremendous vitality to the temples. But for this temple should be managed by right people and not bureaucrats.

Last but not the least - this is a very old idea. I am just refreshing them as it is not active in the thought process in society.

This blog is meant to be an interactive forum for development of ideas. If you have any ideas, criticism, please write in the comments section.

Shotgun weddings

Our nation is facing an unpleasant mess of bad loans of the public sector banks.  Public sector undertakings (PSUs)  have a lot of cash on their balance sheet and domain expertise in many of these industries. Banks are unable to find a way out of the mess. The private promoter are Abhimanyus who have no solutions to come out of the mess they have landed themselves in. They only knew how to go into this mess !

These promoters cannot raise any money as their share prices have rightly collapsed as the market has learnt about their modus operandi.  There is a market for the product or the service these assets produce but there are severe financial problems ailing these businesses.

The best solution would be a sale of the private company asset at debt value to the relevant PSU.
In case the value of the asset is lower than the debt, then the banks could sell these assets at these prices and could take some options on the PSU as part of compensation so that as these assets perform they could benefit. This way the losses that banks made would be recouped by the government through either the PSU or the bank.

This will also quickly add to the supply and remove shortages. There is a precedent for such as a move in the merger of Oriental Bank of Commerce with Global Trust Bank. It was simply forced on both the parties.  We need to similarly forcibly move the defaulter assets into well managed PSUs.

Coal and power assets would benefit greatly by this measure.

It will be akin to killing all of the following problems in one stroke

1) The problems of funding the losses of the banks will be solved. Instead of the banks taking the hits the promoters and investors will take the hits. Money saved in this regard will run in lakhs of crores and can be used for other nationally relevant projects.

2) Reforming crony capitalism: When promoters lose their companies and their share value goes to zero, all promoters in future will think a thousand times before they want to con a bank. Making example out of a few is the easiest and time tested way to establish fear of law.

3) Supply side problems in some industries would be solved - namely coal and power and this would spur economic development.

4). Investible company universe is shrinking rapidly in this country. Investment culture is dying as a result. Investors are scared that PSUs will mis-use the cash on the diktats of bureaucrats and ministers. If the PSUs were to use their cash to buy good assets at distress prices, this would remove the fears of the investors and actually substantially increase the prospects of these companies (see my earlier blog on PSUs). The listing of FERA companies in late 70s and 80 created an investment culture which was responsible for creation of many of your good companies.

5) If these problems are fixed the government would actually benefit from this crisis  in the form of higher valuation of the shares of the PSUs or banks.

Handicraft and hand-made products : Can they made the new status symbols ?

The negatives of handicrafts are its greatest positives.

The industry is not scaleable. There is not enough production.  The children of artisans do not want to carry on the trade and want to educate themselves and join the job market. By all accounts, handicrafts industry should be on road to extinction - but all of these negatives are its best hidden blessings.

Whenever some things becomes rare and difficult to obtain they also become costlier and the costlier they become, they have the makings of status symbols. and funnily the more costlier status goods get  it the more they sell  i.e, demand increases as prices increase, a category of goods known as Veblen goods.  In fact, one can argue that these goods are the real natural status goods as it is difficult to increase the supply unlike iphones or high end cars where automated production technology can be used.

Can we find use the negatives, nay positives of the handicrafts industry and find ways of improving design and execution and marketing of handicrafts and market them as the new status symbols ?

If this succeeds and the artisans becomes prosperous, more people will take to producing handicrafts and the production will increases substantially. This will puncture the  Veblen bubble of increasing demand by increasing prices as there may not be much status left in a product whose product volumes are rising and everyone is having one at home.  But that too would be an excellent outcome as the handicrafts would attain vitality because it would have a large base of producers and consumers.

So here is a challenge for all those in these areas. If you find any dying handicraft, can you create very high end status symbols products from handicrafts ?  

Would this be true of art forms also ? Can we create events which are status symbols from such art forms ? The cogniscenti would argue it would be an insult to the art form. No doubt it would be, but would it not be a greater insult to let the art form die ?