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1) Are co-operatives relevant in today's globalised environment?

India occupies a microscopic share of global trade. From about 2 per cent at the time of
Independence it has come below 0.5 per cent on Friday.

With the process of globalisation and the increasing competition in global trade, thanks to
developments like the World Trade Organisation and the agreements thereunder, we have to
think of India's core competence in competing in global trade if we want our share to go up.

Traditionally, India has been an exporter of raw materials. When it comes to manufactured items,
we had some advantage in products like textiles.But increasingly other emerging economies are
able to beat India in traditional low value added items. One silver lining in this cloud of India's
export scene is software, where India seems to have a genuine competitive advantage.

Thanks to a series of protective measures and pampering with subsidies, Indian small scale
industry was able to make some contribution to the economy. With the policy of dereservation
and reduction in subsidies, this sector is facing severe competition. In fact, we should have aimed
for a policy package to achieve a situation like in the United States and elsewhere where an
industry may start in a garage but within four years can become a large global company.

Many of the successful American companies which are dominant in global trade today started as
small ventures. Unfortunately, thanks to our policy of reservation and protection of small scale
industries, we created bonsai factories which could never compete in a global environment.One
area where it will be politically correct to focus attention and which will also spread the benefits of
development throughout the country is agro industries.

We have so far had one outstanding example of success. This is in the area of milk
production.Thanks to the vision and drive of Tribhuvandas Patel and Verghese Kurien, what
started as a single district cooperative, Amul (Anand Milk Union Limited) became a phenomenon
and today India has emerged as the largest producer of milk in the world.The reasons behind this
success should be studied. In fact, Dr Kurien has gone two steps further and tried to replicate the
same success in the area of edible oil as well as vegetables.The basic strategy of Amul depends
on cooperatives which are widespread. The agriculturist or the villager, as the producer, gets full
support in terms of technical guidance.The highest standards of production are maintained and
the cooperative network provides the supporting system from both the logistics and finance point
of view.

Recently I found that there was another model available under which what was done by Dr Kurien
through the cooperative set up can also be done by the successful private sector.S K
Maeilanandhan is an industrialist whose roots are in the rural areas of Erode district in Tamil
Nadu. He started his business by providing poultry feed. Once he was sarcastically asked when
he was on a visit to the United States whether India could produce under strict hygienic
conditions world-class egg products.Maeilanandhan took this as a challenge. He set up a Rs 40
crore project SKM Egg Products Export Ltd in 1997. In the last four years and more, the project is
being run very smoothly and what is more, the highest quality standards are maintained. And
Japanese companies are discovering that they could competitively source egg powder from India
rather than from other places.

What is the secret of Maeilanandhan's success? The secret is absolute quality control, which
builds consumer competence, and ethical business practices, which promote trust with his
suppliers.Quality control is exercised right from the stage of production of the egg. In a 100
kilometre radius from the factory in Erode district, Maeilanandhan's company provides poultry
feed to the farmers for which the payment is made through eggs.As his Japanese importer tells
him what will be the quality and colour of the powder he needs, say, three months hence, the
feed is also adjusted accordingly so that right from the production stage of eggs, quality is
ensured. Equally important is the element of trust which he has been able to build among the
various suppliers of eggs. Earlier, before the new factory was set up, when he was only in the
business of poultry feed, there was an occasion where a lot of chicken died.The blame was put
on the water used in the villages. But Maeilanandhan would not stop. He traced the origin of the
trouble ultimately to the element of pesticides left over in the poultry feed.He fully compensated
his customers financially. This act of going beyond what was legally required probably built a
brand equity for SKM in terms of reliability and trust with his customers.

While the success of SKM Egg Products can be taken as an example of good management
practices, even more important and significant is the fact that just as in Amul, if we want agro
industries to be successful, there has to be a strategic alliance between the suppliers in the
villages and the large scale producer of the branded high-tech product.There has to be a total
control of quality right from the village level and this responsibility will have to be that of the agro

Two questions arise.Is it possible to reproduce what has been done in Erode in all the districts of
India? If we are able to do it, we would have created enormous employment opportunities to
people in this sector.Can this success of agro industry be reproduced in other agricultural
products? We waste nearly 22 per cent of our vegetables and 10 per cent of our foodgrains
because of poor storage. We must have modern agro industries without sacrificing the profit
motive and the incentive for the private sector on the model of SKM. The private sector modern
agro industry can act as an engine for improving ultimately the quality of life in the villages by fully
exploiting the natural resources available in the country and also creating employment
opportunities in the villages.

obedience, non-cooperation, hartal and bandhs are all forms of protests evolved during our
freedom movement.

These were used then and are used now as non-violent protests against governments; against
misrule and repression. These are chosen by political parties as extreme steps when
representations, pleadings, demonstrations, dharnas and strikes fail.

The Constitution of India guarantees the fundamental rights of speech and expression, freedom
to assemble peacefully and without arms and to form associations. Our democracy is a pluralist
one. The parliamentary system that has been functioning successfully so far has provided
enough scope for expressing dissent.

This impels political parties to adopt suitable forms of protest. Today, discontent is growing in a
big way. The neo-liberal economic philosophy has been shattering the life of the toiling people.
The advance of communal-fascist forces is tearing the social fabric.

Against this backdrop, the Kerala High Court order on hartal raised several issues of serious
consequences for the functioning of democracy and political parties in India. Political parties such
as the Congress, CPI (M) and CPI challenged this in the Supreme Court. The apex court, while
upholding a part of the order on hartal by force, reversed a conclusion of the High Court which
held that the Election Commission (EC) had the power to deregister parties.

The very conceptualisation of hartal is non-violent. The message of hartal has to be conveyed to
the people. There can be a counter move to defeat the hartal by adversaries. This can lead to
confrontation. The law enforcing authorities will have to tackle the situation impartially.

A hartal can develop into a bandh by the voluntary participation of masses. But now the challenge
is to deal with parties that have registered themselves as owing allegiance to the Constitution, but
are acting differently. Therefore there must be a proper understanding. A bandh or hartal can be
on a genuine call in the national interest. The question is not that whether bandhs should be
banned. The reality is that bandhs cannot be banned.

Business ethics are no longer a luxury for corporates but a
Large corporations are disappearing under the weight of excessive debt or collapsing
under suspicion of accounting fraud.The supposed gatekeepers of the system - the
auditors, stockmarket regulators, company analysts, professional fund managers and
investment banks, as well as the business media - have failed, with a few honourable
exceptions (The Economic Times, included), in their policing duty.
So is the continued decline in the stockmarket reflects a new distrust of the American
way of doing business?Companies all over the globe now have ethics codes. Over 95 per
cent of the Fortune 1000 companies in the United States report having a corporate code
of ethics.For some corporations, the move to adopt codes is a recognition that they need
to be ethical because this is the right thing to do.
Long gone are the days when corporate boards and executives could follow the Milton
Friedman line that the social responsibility of business is to make a profit. Today, they
have to be touchy-feely about everything - or face the wrath of shareholders and the
media.Take the example of Anita Roddick's Body Shop, which encountered criticism for
the manner of its dealings with the Kayopo Indians, an indigenous group in Brazil.
There is a changing community expectations.These now also play a part in encouraging
corporations to be more ethical. Many consumers now expect the corporations they deal
with to be above reproach.Sportswear manufacturer Nike is continuing to face the
opprobrium of consumers which flows from the employment practices of its
subcontractors in Asia.Consumer boycotts and threats of boycotts in the past have been
effective in making corporations more socially responsible. The cases of Nestlé and
infant feeding formulas and Shell in South Africa come to mind.In both cases, the
churches played a significant part in promoting the boycotts.
There is also some empirical research which ties reported misconduct with a down turn in
share price. Matching share prices on the New York Stock Exchange with reports of
misconduct in the Wall Street Journal between 1989 and 1993 Rao and Hamilton found
that companies like Delata Airlines, McDonalds, Coca Cola, Exxon, Rockwell and
Boeing all lost ground as a result of stories in the Journal reporting their misconduct
across one of five categories. These were bribery and fraud, employee
discrimination.Yet, among ethics professionals there is a growing degree of scepticism
about the benefits of codes alone. Some have argued that codes are 'regressive'
instruments of social control and an imposition of morality.The bottomline is that
experience suggests that for some organisations promulgation of the code is seen as
sufficient. It is not. The key issue, however, is how to internalise within each employee
the values stated in the code.

Can the economy achieve an 8 percent growth rate?

In an economy where the GDP has been growing at 5-6 per cent, it's difficult to believe
that growth can be pushed up to eight per cent during the next five years. Prospects of
drought have made people more sceptical.
Achieving the ambitious target of eight per cent depends both on an increase in
investment and on more efficiency. While these may be technically feasible, they are
unrealistic for the Indian economy.
A government that is quick to roll back even the smallest unpopular measure at the
slightest opposition, can hardly be expected to take on the long list of tough decisions that
are needed.
Looking at the scenario built by the Planning Commission, we see that the share of GDP
invested should rise to 33 per cent. This has to be financed to some extent by foreign
capital but largely by domestic savings.
For the last three years, household savings have been increasingly financing government
consumption rather than going into productive investment. This can be easily corrected
by raising taxes and cutting expenditure.
But these affect voters and interest groups. As a result, steps such as reducing public
sector employment, cutting subsidies and raising user charges, will face political
Equally difficult will be the policy changes needed to increase productivity. For
achieving a growth of eight per cent, industry has to grow by 10 per cent. In the last 10
years, this sector has grown at about seven per cent.
As the role of the public sector gets reduced, the onus of growth falls on the private
sector. Creation of an industrial policy environment that will push up private sector
investment and lead to improvements in growth is not simple. There are deeply-
entrenched vested interests that would oppose such moves.
For instance, a recent ordinance aims to improve the system by which banks and other
financial institutions can recover their money from defaulters. But there is huge pressure
by industrial lobbies on the government to change it.
Loans to the order of a mind-boggling Rs 1.5 lakh crore are owed to lenders. Some of
them, such as the IDBI, have been pushed to the verge of bankruptcy because of these
When the government saves them by doling out tax-payers money, it effectively channels
public money to corrupt industrialists. But since those who gain from the current system
are those who fund elections and contribute to parties, the pressure on the government to
weaken the ordinance might well work.
Another policy that has restricted growth has been the reservation for small-scale
industry. There is little rationale for this after allowing foreign companies to compete
with the SSI units. Other than pandering to some petty industrialists, there is no reason
why this policy should be continued.
Thus, the question is not whether the target of eight per cent growth is feasible, but
whether it's realistic to think that the BJP has the strength to resist pressure from the
support base of its voters and financiers.
And this, unfortunately, is why it may not be achieved.
(This article was taken from Times of India, July 21, 2001)

Capitalism is a very flawed system but the others are so much

worse ?
Many people reading about the recent spate of business scandals in the USA may
conclude that capitalism is a pretty dreadful system. We have long moaned and groaned
about crooked Indian businessmen who inflate profits, hide liabilities, manipulate
markets, and break a hundred laws. But the US scandals show that crooked businessmen
exist everywhere.
This week, some of the biggest energy companies in the US such as CMS, Dynegy and
Reliant admitted that up to 80 per cent of their electricity trades in California were bogus.
They indulged in fictitious sales to one another to create the illusion of a boom in
revenue. They also indulged in various dirty tricks (some of which could be criminal and
lead to prosecution) to exploit loopholes in power regulations (like artificially creating
power congestion and then getting paid to relieve it).This showed there was nothing
unique about the peccadilloes of Enron, the seventh biggest company in the world some
months ago, that hid huge debts off its balance sheets and overstated profits to create an
illusion of prosperity when in fact it was heading for bankruptcy. Enron was abetted by
one of the celebrated Big Five of accounting, Arthur Andersen, which is now in the dock
for criminal obstruction of justice. The most celebrated giants like General Electric and
Boeing stand accused of fudging their accounts to show ever-rising quarterly profits.
Microsoft, the biggest of all, is on trial for monopolistic behaviour. Pfizer, the biggest
drug company, stands accused of manipulating drug prices, and last year, a cartel of drug
companies were fined for trying to rig vitamin prices. Big oil companies are being
investigated for rigging petrol prices.
Crooked behaviour is not uniquely Indian or American. It is inherent in human
behaviour, and can reach great heights in a capitalist system. Now, market systems have
enabled many countries to achieve stunning improvements in living standards that would
have been considered impossible a century ago. Businessmen seek to enrich themselves,
not society. But competitive, transparent markets force businessmen to compete on a
level playing field, because of which the main gains of all their innovation and enterprise
go to consumers. For the 500 biggest companies listed in Fortune magazine, net profit
averages only 3.3 per cent of sales. For that very reason, however, businessmen are
constantly tempted to find ways to reduce competition and transparency to increase their
profits at the expense of customers. This can take legal forms (lobbying, innovative book-
keeping, exploiting loopholes) or illegal forms (bribes, fraud, rule-breaking).
No wonder, then, that so many people are utterly disgusted with capitalism and seek
alternatives. No wonder they find the profit motive a morally unacceptable basis for
ordering an economic system. When the main actors of such a system are self-serving,
manipulative and greedy; when they fudge facts, make false claims and promises, bend
the law in various ways and indulge in outright crimes, how the outcome be at all
satisfactory? Answer: for the same reason that self-serving, manipulative and greedy
politicians produce a satisfactory outcome called democracy.
The argument for a market system is exactly the same as for democracy. Winston
Churchill once said that democracy is a very flawed system, but all the others are so
much worse. The same is true of capitalism: it is a very flawed system but the others are
so much worse. Enron hid its liabilities and exaggerated its assets. But do not all political
parties hide their political liabilities and exaggerate their political assets? Many crooked
business promoters promise investors the moon in order to raise money. But do not
politicians also promise the moon to get votes? Companies fudge their books and make
inflated claims to mislead gullible investors. But do not politicians make inflated claims
to mislead gullible voters? Businessmen claim to represent the national interest while
feathering their nest (by, for instance, demanding high import barriers in the holy name of
swadeshi). But politicians in a democracy also claim to represent the national interest
while feathering their own nests. Businessmen indulge in bribery. So do politicians.
Businessmen revel in black money. So do politicians. Businessmen hire hoodlums to beat
up workers or ruin a rival's business. Politicians too hire hoodlums to capture polling
booths and sabotage rivals' rallies. Businessmen intimidate and buy up rivals to reduce
competition. Politicians too use intimidation and money to buy defectors.There are many
criminals in business. There are many criminals in politics too. The use of money, muscle
and influence to sabotage rivals and competition is a feature of democracy no less than of
Why, despite all this, do we regard democracy as the best political system? Because it is
grounded in choice for the ordinary man, and freedom to choose is a paramount virtue
that makes other freedoms possible. In democracies, the ruler is chosen by ordinary
citizens and voted out by them too. Politicians do their best to subvert free choice through
the use of money, manipulation and muscle. Yet the freedom to choose empowers
ordinary citizens so much that, despite a thousand flaws, democracy turns out to be more
desirable and beneficial than the most well-meaning autocracy. Democracy creates a
market for political goods. Capitalism creates a market for material goods. In both cases,
the freedom to choose gives the ordinary man in the street greater power than the biggest
political or economic giant. By shifting his vote, the ordinary citizen can oust the most
entrenched politician, and by shifting his custom he can bankrupt the most entrenched
company. Lenin was logically consistent in refusing to allow freedom of choice in either
political or material goods. What I find amusing is the notion of many democratic
socialists that the people must be free to choose their own rulers, but cannot be allowed to
choose what goods to buy; that political licensing is abominable but industrial licensing is
moral. There lies the road to serfdom.
AM ]

Commercialisation of health care : Good or Bad ?

Apollo Health and Lifestyle, a fully-owned subsidiary of Apollo Hospitals, launched its
first Apollo Clinic in Janakpuri in New Delhi in end-April.Ratan Jalan, CEO, AHLL is
spearheading the ambitious task of setting up 35 such 'Family Health Centres' by
December 2002 to address primary healthcare. An engineer from IIT, Kharagpur, Mr
Jalan has 25 years of experience across diverse industries including IT, advertising and
marketing and healthcare. He talks to Sudha Nagaraj about the franchisee clinic concept.
What is the idea behind these franchisee clinics? Are you converting the humble
neighbourhood doctor's shop into an expensive and posh business centre?
On an average, families are spending Rs 540 a month on day-to-day healthcare. What do
they get in return? Ill-furnished, overcrowded, unhygenic clinics. There is very little
quality control. The Apollo Clinic will provide an alternative - neither a tacky little place
that you dread nor an opulent one that daunts you.We are not trying to replace the family
physician, we are only bringing a retailing concept into the healthcare system, so that
primary healthcare which accounts for two-thirds of a household expenditure gives
satisfaction to the consumer.What would you offer that a family physician or a hospital
would not?We would offer a range of world class services, coupled with reliability and
competitive pricing. In addition to consultation services with leading specialists,
customers can avail themselves of comprehensive diagnostic facilities, a range of
specially designed preventive health checks, a well-stocked 24-hour pharmacy and even
counselling and telemedicine.If the need arises, we would even give them some kind of
''preferred status'' at the Apollo Hospitals.
Surely this kind of quality and services comes for a price?
Today, consumers are sensitive to both care and cure and are hungry for information.
They are also willing to dig deeper into their pockets to get that extra reliability,
reassurance and convenience. A study by KSA Technopak last year indicates that in India
on an average 11 per cent of the annual household income is spent on healthcare. 25 per
cent of the respondents said they were likely to spend even more for better services.
That's what we give, complete healthcare for your family...with a difference.
What difference?
There is no compromise on equipment, doctors, front office staff -we are putting them
through a rigorous selection process with the help of Ma Foi Consultants. Though the
franchisee manages it, we would be visiting frequently to make quality checks. Pre-
launch, the franchisee and the staff have been put through a customised training module
developed by IIM Bangalore and NIS. GE Medical Services has provided the entire clinic
management software - it allows all Apollo Clinics to be linked. Renowned architect
Alfaz Miller has done the interiors while designer Ravi Bajaj has designed the staff
uniforms. We would continue marketing and advertising support in a big way.
That's quite a businesslike approach...
We are here to tap the potential. The size of the healthcare industry in India is just 5 per
cent of the GDP, as compared to the US where it is as high as 13.7 per cent. But the total
size of the healthcare market here is Rs 100,000 crore of which the share of domiciliary
healthcare is 68 per cent while hospitalisation accounts for just 32 per cent.A 30 per cent
growth rate is expected over the next ten years. Each clinic involves an investment of
about Rs 2 crore and is funded on 1:1 debt:equity. Cash profits will start to accrue in the
first year and the project has a projected post-tax IRR of about 30 per cent.What can we
expect in the future?Ten such clinics in NCR of Delhi and 250 across all major cities in
the country. We will convert healthcare into a brand conscious commodity through
community re-orientation programmes, promos and make preventive healthcare the new

Conditional access system for cable TV watchers: boon or

The Indian Readership Survey 2001 reveals urban cable penetration of 84.7 per cent in towns
and 32.7 per cent in villages. Cable/satellite broadcasters have current revenues of Rs 3600
crore mainly from advertisement revenues with the expected growth by 2006 to Rs 8100 crore
largely on the strength of subscriber revenue.Herein lies the rub.

The average growth in the TV segment sector has been 38 per cent. Naturally the broadcasters
want a greater share of the cable pie and local cable operators are unwilling to give in easily to
demands of full declaration when no broadcaster is willing to reveal his cost of acquisition of
content or operating costs and when the whole trp audience rating issue has become tainted with
controversy. In the past two years broadcasters and multi-system cable operators have resorted
to bitter litigation on various issues and inevitably settled out of court.Broadcasters have had to
face flak from advertisers for not providing assured connectivity. Cable operators have had to
face wrath of consumers for blank screens.

The cable industry is 'governed' by the Cable Network Regulation Act 1995 which only provides
for post office registration and is otherwise a toothless and technologically redundant law.
Ultimately the Convergence Bill will become law but in the meanwhile government has been
resorting to piecemeal legislation to take care of burning issues affecting the electronic media.
These include major amendments to the Cable Act in 2000, a local (satellite) up-linking policy in
2001, and DTH guidelines in 2002. Now the government has accepted the Rakesh Mohan task
force report on introduction of a conditional access system for pay channels. This mandates that
all pay channels would be available only through a set top box to provide the consumer the
choice of viewing and an option to pay for what he chooses to watch. Free-to-air channels would
continue to be available through present receivers at an' affordable price' to be determined by the

After the initial round of euphoria in the cable industry, various queries are being raised mainly by
broadcasters and consumer organisations: Is the set top box a feasible solution for ensuring that
broadcasters are paid? Broadcasters have been able to double their subscription revenue in the
last one year forcing cable operators to raise rates to Rs 300 per month in Mumbai. Any further
raise will not be tolerated. Will consumer choice be reduced by government mandated solutions?
All that the government is doing is restoring the right of choice of watching channels to the
consumer who will only now pay for channels he chooses to watch. Who will bear the costs of
regulation? Obviously, the consumer will bear the cost of the set top box. The cable operator will
bear the cost of the subscriber management system. The broadcaster will have to fix a maximum
retail price to compensate the cable operator for use of the infrastructure and system upgrade
including the subscriber management system.

The government has to chart the road ahead once conditional access becomes mandatory.
Government has to continue to take a proactive consumer stance by taking the following
additional measures immediately: 1) Ensuring a three-phase roll out to cover metros in the next
six months, mini metros in the next 12 months and the entire country in 18 months. 2) To ensure
easy acceptability of set top boxes and subscriber management systems for cable operators all
duties including central/state and local levies be waived for a period of three years. 3) As
government has decided to fix a maximum retail price for free-to-air channels, it should also
freeze all current pay channel rates till deployment of set top boxes is actually in place. Thereafter
the broadcasters would have to persuade customers to subscribe to their channels both in terms
of attractive content and pricing. 4) As the Convergence Bill is still being scrutinised by a standing
committee of Parliament, an interim arrangement to settle all disputes in the TV segment between
broadcasters, cable operators and consumers may be considered by enlarging the function of the
Telecom Regulatory Authority or appointment of an ombudsman.

Ashok Mansukhani [ TUESDAY, MAY 14, 2002 12:52:34 AM ]


Economic freedom not old fashioned theories of development will lead to

growth and prosperity
As my colleague and I walked down towards immigration at the airport in Bali, we saw a
large banner which read, 'Welcome Delegates.' Before we could absorb the pleasant
surprise of being welcomed by the government of Indonesia, we spotted the rest of the
message, which clarified that the welcome was for delegates to a meeting for the World
Summit on Sustainable Development.Wrong number. We were in Bali for a meeting of
the Asian Economic Freedom Network (AEFN) organised by Friedrich Naumann
The purpose of the meeting was to discuss the World Economic Freedom Index created
and computed by the Fraser Institute in Canada and to assess its findings for Asia. The
contrast between the two meetings is instructive. There is a vast difference in the
fundamental concepts, principles and policies that were discussed at the two meetings.
Economic freedom refers to the freedom to engage in economic activity without
interference from the government as long as the freedom of others is respected. The
delegates at the AEFN meeting discussed what empirical variables capture this idea and
what policy changes are required to increase economic freedom.'Sustainable
development', discussed at the other meeting, begs some fundamental questions:
sustainable for how long? For whom? And what is it that we're trying to sustain? Are we
to sustain the amount and distribution of natural resources that exist today for future
generations? Or the current standards of living, the amount and distribution of material
goods and services? Should we sustain whatever it is that we agree to sustain only for
future generations of Homo sapiens or also for other species of flora and fauna? And how
long are we planning to sustain these-ten generations, a hundred, or longer?
The absurdity of the concept becomes clearer with a hypothetical example. Suppose we
live in a period when charcoal is the main source of energy in the world. Charcoal is
made by burning wood and destroy forests and ecosystems and generate greenhouse
gases. This world does not seem sustainable.So, the Charcoal World Summit for
Sustainable Development is called by concerned international agencies, NGOs, and
businesses. The heads of state and governments present at the summit agree on time-
bound targets to reduce charcoal use and production of greenhouse gases, to offer official
assistance to less developed countries, and to subsidise the discovery of alternative
fuels.A Charcoal Summit could have occurred about 150 years ago when Malthus'
worries about population growth overtaking production were prevalent. The dire
predictions of Malthus did not come true. A world powered by charcoal can't sustain 6
billion people. Would subsidies for the discovery of alternative fuels have reached the
right individuals and would they have found coal, petroleum, solar and wind power or
fuel cells? Given the history of government subsidy programs, it seems quite unlikely.
I am thankful that no Charcoal Summit took place 150 years ago, that we didn't have too
many concerned agencies and NGOs then, that we were allowed to grope our way and
discover new fuels. The forces of supply and demand are more powerful than any bribes
by governments in focussing human ingenuity to solve problems. Market forces took us
from whale oil, to charcoal, to coal, to petroleum. The forest cover in the industrialised
world today is higher than it was 150 years ago, and large quantities of coal are lying
underground. No one can predict what will be the next source of energy, but the historical
achievements of the human mind give us great confidence that we will have it well before
any emergency. Then large quantities of petroleum will be left underground and future
generations will grin about how primitive our energy sources were in the 21st
century.What kinds of policies are pushed by the confused proponents of sustainable
development? The Draft Plan of Implementation issued on June 12 by the UN
Commission on Sustainable Development is 77 pages of dense text. It covers all that the
humanity would have ever wanted: gender equality, racial harmony, fair income,
equitable access to education, healthcare, water, sanitation, including the mandate to
reduce by half, by the year 2015, the proportion of the world's people whose income is
less than $1 a day and the proportion of people who suffer from hunger and, by the same
date, to halve the proportion of people without access to safe drinking water.
The market keeps producing prosperity and the commissions keep setting target
dates.The consequences of the edicts of the final Johannesburg meeting in late August
would resemble those of our hypothetical Charcoal Summit. The difference would be of
magnitude, but the pattern would remain the same. Fundamentally, ecology and economy
are similar-none can stay stagnant for long, it must either grow or decline. The choice is
between a growing and a declining economy.The most critical ingredient for economic
growth is economic freedom. The Fraser study concludes that no country with a
persistently high economic freedom rating during the last 20 years failed to achieved a
high level of income. All 17 countries in the most-improved category experienced
average per capita GDP growth of 2.7%. In contrast, all 16 countries which declined the
most on the index of economic freedom declined at an annual rate of 0.6%. As incomes
increase, people demand higher quality, of housing, education, healthcare, and
At higher incomes - studies suggest above per capita income of $2,000 - people begin to
invest in the quality air and water, sanitation, visits to parks and wildlife. The vision
underlying the two meetings in Bali was antithetical. We don't need sustainable
development, but sustained development. For the sake of humanity the next official
welcome should be for delegates of the World Summit on Economic Freedom.

Every cloud has a silver lining

Every cloud has a silver lining. In 1991, but for the balance of payments crisis we might
never have changed course, turned our back on decades of planning and socialist thinking
and moved to a more open, market-driven economy.In 1992, the securities scam saw
thousands burn their fingers.
Yet in retrospect, it was the trigger for the path-breaking reforms in the capital market
over the next few years.Beginning with the setting up of a fully electronic exchange - the
NSE - to dematting of shares, to the abolition of badla and finally to the introduction of
derivatives, almost all the changes in the stock market can be traced to the need to
overhaul archaic systems in the light of the 1992 scam.
And now it's the turn of the frauds in co-operative banks and provident funds to focus
attention on two crucial areas that have long been neglected. One, the health of co-
operative banks and two, the management of provident funds.It's not that the authorities
were unaware of problems. They were. But nothing serves to focus the mind as much as a
crisis. As long as things were going along, albeit in a far-from-satisfactory fashion, the
attitude was, 'if it ain't broke, don't fix it.' But that logic doesn't always work. Not in the
financial sector.
The reason is that when the crisis comes, it is often too late to try and fix it. Also the price
paid may also be too high.This is why the latest spate of frauds is a blessing in disguise. It
may be hard to sell that to the seamen who have lost their hard-earned savings or to the
thousands of depositors faced with the prospect of losing their money.But look at what's
followed. Suddenly there's a new realisation of the need to improve systems and
procedures in co-operative banks. Also of the need to bring greater professionalisation in
the management of PFs.The Central Provident Fund Commissioner has ordered an
immediate audit of all the 2,500 exempted provident funds, we are likely to see faster
movement on the long-promised single access number for each employee covered under
the PF Act, have a regulatory body overseeing PFs... None of this would have happened
but for the recent frauds. There's the silver lining
For globalisation to succeed in India people must be able to see what is in
it for them
Do we need another crisis to get India together to take some tough decisions to improve
our economy? mused one of India's leading economists last month. He was a key member
of the team that had heralded in economic reforms in the early 1990s when India came to
the brink of default. "We are drifting again", said he, "Not too bad and not too good.
Meanwhile, the problem of unemployment is growing.
But it is very difficult to get people to agree to the decisions that must be taken".I also
hear business managers say that it is more difficult to mobilise people when there is no
evident crisis. True, crisis and fear are very effective spurs to collective action, and good
leaders know how to take advantage of them. However, the problem with using crisis or
fear as a motivator is that the need to keep moving is diminished when the crisis passes.
Which then confronts the leaders with the question of whether one must wait for another
crisis to happen, or evoke a crisis to bring people together again!A better way than fear to
get people moving is to create an attraction - an aspirational vision that draws people
towards the same goal.
The economist agreed, "We clearly have a problem of communication in India: people
must see what is in it for them". There is a world of meaning in the simple statement,
"See what is in it for them". To see means to visualise. And "what is in it for them"
means people who are expected to take a journey together should be able to visualise in
their minds what the outcome of the journey will feel like to them. However, most
communications by economists express the outcomes of development as numbers about
the performance of the economy. People cannot visualise what the numbers would mean
in images of real things around them. What they want to know is, "What will my life be
like if this change is brought about?"The past half-century has seen a massive release of
human aspiration in the world as colonialism receded and over a hundred sovereign
nations joined the international pantheon, each seeking to stand proud.
All knew that they had to be economically strong if they were to count. Thus began their
search for the means of effective economic development. And many turned to economists
to guide them, whence began the growth of the profession of developmental economics,
with increasing numbers of economists in international developmental institutions and
national planning commissions. However, the focus of the emerging profession was
almost entirely on the means for economic development, as Arndt points out in his book,
Economic Development: The History of an Idea.
Whereas dialogue about the goals of development, and how development should change
the nature of societies and the lives and cultures of people, was generally outside the
equations of the new economic scientists. Thus, the dialogue amongst the people for
whom development is required was left to politicians and NGOs, who came to be seen by
economists and businessmen as troublesome and ill-informed meddlers in the systematic
growth of economies.In at least one fundamental way the development of the capability
of societies is not unlike the process of transformation of corporations that, in a
competitive world, have to continuously improve capabilities and performance.
People have to be engaged with the process of change and must be able to visualise the
potential outcomes in terms that mean something to them personally. In a Mexican
company that set itself on a path to international growth and radical performance
improvement, the outcome of successful change could be visualised by the CEO as his
picture on the cover of Business Week someday. The maintenance worker in the factory
visualised a happy place to work and a place of pride in his local community.Both would
get what they aspired to if the transformation was successful. Moreover, the worker was
able to visualise how the steps of change would lead to the outcome he aspired to, just as
the CEO could see the possibility for himself. Everyone admitted that their current reality
with which they were comfortable, was far short of what they aspired to. This painful
discrepancy created a crisis of aspiration.
Which aligned people, and there was great commitment through the process of
transformation. The desired outcomes were obtained: the CEO was on the cover of
Business Week, and the company became a global benchmark for operational excellence
through participatory practices. The lesson throughout history has been that great leaders,
of societies and companies, enable people to visualise aspirational goals they all desire
and thereby commit to often-painful change. It is high time we paint together, through
dialogue, a meaningful picture of the India we want. Or else we will slip from 'chalta hai'
to crisis.
ARUN MAIRA Economic Times [ WEDNESDAY, JUNE 19, 2002 12:37:44 AM ]

Foreign aid is a dangerous drug that can stimulate in small doses but
become fatally addictive in larger doses
Recent calls for the expansion of the Official Development Assistance from 0.22 per cent
of the donor countries' GNP to 0.7 per cent deserve a closer scrutiny. This is doubly
essential because those making the calls most forcefully, notably the World Bank
President James Wolfensohn, are themselves engaged in the distribution of aid and,
hence, face a potential conflict of interest. At high profile conferences held at equally
high frequency, you can hear continuous and repetitious affirmation of the Millennium
Development Goals, followed by admonition to the donor countries for their less-than-
generous contributions. Missing from the exhortations, however, is a clear roadmap of
precisely how the extra funds are to be spent.
The Pearson Commission had first recommended the 0.7 per cent target in its carefully
crafted 1969 report Partners in Development. With more than 30 years elapsed since
then, the donor countries are much richer today than in 1969 and 0.7 per cent of their
GNP a much larger sum. In parallel, poverty has declined significantly, with many
countries in East Asia completely eliminating it. Nevertheless, many in the aid
community have chosen to coast along with the 0.7 per cent target without re-examining
its relevance under the changed circumstances. A refreshing exception, however, is a
recent paper by distinguished economists Peter Heller and Sanjeev Gupta of the
International Monetary Fund.In the paper "Challenges in Expanding Development
Assistance," the authors offer calculations that decisively lay to rest NY claims that the
large increase in aid is required to outlaw poverty in the 49 Least Developed Countries on
which Wolfensohn and others focus tirelessly as reasons for aid expansion.They conclude
that if such a large increase in aid is to be absorbed effectively, two thirds of it will have
go to two countries outside the LDC group, India and China.Not only do these countries
house half the world's poor, they also have the necessary absorption capacity.
I will argue shortly that even this solution to the aid-absorption problem is unrealistic.
But consider first the obvious problem in justifying the 0.7 per cent target as a means of
alleviating poverty in the least developed countries that have per-capita incomes of $500
or less. Meeting the 0.7 per cent target would yield a whopping $175 billion in aid.
According to Heller and Gupta, spreading this amount evenly on a per-capita basis across
LDCs would result in aid flows ranging from 84 per cent of GDP for Sudan to 302 per
cent for Ethiopia. In every country, aid would be several times its total government
expenditure. The addition of "other low-income countries," which have per-capita
incomes between $500 and $800 and include such large countries as India, Indonesia,
Nigeria and Pakistan, lowers per-country aid flows to LDCs but still leaves them well
beyond their respective absorption capacities.Replacing the allocation criterion by the
number of poor rather than total population does not materially alter the picture. Heller
and Gupta conclude that the only realistic poverty-based allocation consistent with the
countries' absorption capacity is the one that gives the lion's share of ODA to India and
If the allocation is based purely on the number of poor, India would receive $73 billion
and China $39 billion and if policy effectiveness is given appropriate weight, India would
receive $40 billion and China $76 billion. Can India and China absorb such large
allocations? Contrary to Heller and Gupta, even these large countries cannot absorb the
proposed inflows. Thus, consider just India.To maintain export competitiveness, the
Reserve Bank of India has had to purchase more than $10 billion worth of foreign
exchange within last one year, bringing the total foreign exchange reserves to $57 billion.
Even replacing all of the present capital inflows other than foreign investment by aid, $40
billion in aid would result in new inflows of $35 billion annually.Such inflows would
lead to a huge appreciation of the rupee and a collapse of India's exports.
The only realistic option would be to retire the existing debt of $100 billion but that too
would be accomplished in less than three years. This is only a part of the story. The
advocates of aid tirelessly emphasise the importance of good governance for aid
effectiveness. Yet, they overlook the adverse effects such mega sums of aid themselves
would have on governance.Unlike foreign investment flows, government disbursements
of aid inflows are not subject to the continuous market discipline. The politics of aid
makes it even less likely that countries such as India and China would accept the
proposed inflows. Donors can and do use bilateral aid to promote their favourite domestic
agendas and interests, sometimes in ways that encroach upon the sovereignty of the
recipient countries.Likewise, multilateral aid is not costless and often comes with
conditionality. Even the World Bank's IDA allocations are loans at concessionary rates
rather than pure grants and, thus, add to the recipient country's external debt.And not too
long ago, the World Bank and IMF temporarily blocked debt relief to Uganda under the
Heavily Indebted Poor Countries initiative because its President wanted to buy a jet.
Setting the aid target without a broad roadmap of how such aid is to be spent puts the cart
before the horse. What the advocates of increased aid need to do is to ground the aid
target in a credible spending plan.In this respect, Professor Jeffrey Sachs is to be admired
for having linked his calls for increased aid to an explicit plan to fight the health crisis in
the Third World. Unsurprisingly, his calls for additional aid are limited to the modest sum
of 0.01 per cent of developed countries' GDP. The idea that nations can be lifted out of
poverty just by throwing enough money at them belies the aid experience of the past fifty
years. Countries that adopted sound policies, irrespective of their aid status, have done
much better at poverty alleviation.

Globalisation is good for developing countries

MOST developing countries are both integrating with the world economy and devolving
power to local governments and communities. This combination of globalisation and
localisation is best called glocalisation. The centralised nation-state is giving way to both
supra-national and sub-national institutions.
Underlying both trends is a single force: the empowerment of individuals and
communities at the expense of the monolithic nation state. Glocalisation improves the
voice, participation and prosperity of individuals and communities. It is an idea whose
time has come.This reverses decades of centralized rule and autarkic economic policies in
developing countries. Colonial experience led them to believe that globalisation meant
imperial enslavement. And many claimed that political decentralisation could spark
secession, endangering their new-found nationhood. Alas, too often centralisation and
autarky proved to be excuses for concentrating all political and economic power in the
hands of ruling cliques, thus disempowering citizens.
A few countries like India genuinely sought to use autarkic centralization for the public
good, and made some modest gains. But most developing countries suffered economic
stagnation and political oppression. Self-sufficiency and centralization did not produce
prosperous, united countries. Instead they produced more than 100 weak, misgoverned
countries which, by the 1990s, needed to be rescued by the IMF. The collapse of the
Soviet Union and rise of Deng's China showed that more socialism was not the solution.
And so developing countries began moving in two new directions, globalisation and
localisation.Why did post-independence leaders in developing countries go so badly
wrong? Mainly because they equated globalisation with 19th century colonialism. They
failed to see that, in the late 20th century, globalisation was not political conquest but
economic partnership, creating unprecedented opportunities for the poor to rise.
This faulty interpretation led to faulty policies aimed at de-globalisation.Indian socialists
cheered as India's share of world trade fell from 2.5 per cent at independence to 0.4 per
cent by 1985. They thought such self-sufficiency was a passport to prosperity, and
derided outward-looking countries like Singapore and Taiwan as neo-colonial puppets.
Alas, the supposed puppets rapidly became rich while India remained poor. All colonial
masters extracted large sums from their colonies. The net transfer of capital from India to
Britain averaged 1.5 per cent of GDP. The drain from Indonesia to Holland was as high
as 10 per cent of GNP. To make these payments, the colonies had to chalk up large trade
surpluses, and so were very export-oriented. India's export-import ratio ranged from
172.5 per cent in 1840-69 to 133.4 per cent in 1913-38.
Socialists like Nehru interpreted this to mean that export-orientation was a tool of
colonial exploitation, and free trade a ploy to help Britain dump its manufactures on a de-
industrialised India. He and other Third World leaders knew that globalisation in the 19th
century had produced alien rule, poverty and transfer of wealth to colonial powers. They
assumed that 20th century globalisation would do the same. They were wrong in several
ways:u19th century globalisation represented colonialism. 20th century globalisation has
been the era of decolonisation.uIn the 19th century, wealth flowed from colonies to their
imperial masters. In the 20th century capital has flowed the other way, through aid and
FDI.19th century globalisation yielded GDP growth rates of no more than 3 per cent
annually in the fastest-growing countries like the USA. But 20th century globalisation
has yielded GDP growth rates of up to 10 per cent in many developing countries, creating
huge opportunities for the poor. Indians moan today their GDP growth rate is only 5.4 per
cent, but this is double the British rate a century ago.In the 19th century, the rich imperial
powers grew fastest.
But in recent decades the fastest-growing countries have all been in the Third World,
mostly in Asia but also in Africa. Income per head is now higher in Singapore
($24,740)and Hong Kong ($25,920) than in their erstwhile colonial master Britain.Low-
income countries averaged 4.5 per cent annual growth in 1980-90 and 3.2 per cent in
1990-00. High-income countries registered 3.3 per cent and 2.5 per cent respectively,
lower in both cases. In the 19th century, British manufactures decimated textiles and
other traditional industries in India and other colonies, shifting manufacturing jobs from
the poor countries to the rich ones. But 20th century globalisation has shifted millions of
manufacturing jobs from high-income to low-income countries.In the 19th century, most
Western foreign investment in and trade with developing counties was in minerals and
agricultural commodities. So Nehru and others thought globalisation was a trap to keep
poor countries as commodity producers, as "hewers of wood and drawers of water."
But in the 20th century, foreign investment in developing countries has been
overwhelmingly in manufacturing, mostly for export back to rich countries. The share of
manufactures in the exports of low-income countries rose to 53 per cent in 2000, and the
share in East Asia was a whopping 83 per cent.Developing countries actually chalked up
a trade surplus in manufactures with the USA of $57.2 billion in 1997. And developing
countries now have their own multinationals, who accounted for 30.2 per cent of all FDI
in 1997. Globalisation is a two-way street.In the 19th century, and indeed for most of
history, poverty was a major disadvantage. But in the 20th century, factories are shifting
from richer to poorer countries provided the latter have decent policies, institutions and
infrastructure. So, globalisation has made poverty an advantage for the first time in
history. That is revolutionary.uIn the 19th century, the fastest-growing income gaps were
between imperial powers and colonies. But in the 20th century, the fastest growing gaps
have been between developing countries that globalised and those that did not.Many
critics think globalisation has impoverished the poor. The very opposite is true.
A new study by Prof. Sala-i-Martin of Columbia University shows that the number of
people living on under one dollar a day has fallen from 550 million in 1970 to 350 m in
1999. As a proportion of developing countries' population, this is a decline from 17 to 6.7
per cent. Never in history has poverty fallen so rapidly for so many.Poverty remains
stubbornly high in Africa. Most countries there have not created the institutions or
policies needed to climb onto the globalisation bandwagon. Many have been autocratic
kleptocracies. No wonder they failed. They deserved to.
Globalisation versus nationalism
The stern travel advisory that foreign nations issued in June urging their citizens to leave
India provokes a set of questions that should be debated against the context of
globalisation and liberalisation.Do governments on account of their obligation to
safeguard their citizens have overriding "rights" to expect compliance, in matters such as
where, when and for what purposes, citizens should travel?Should MNCs subordinate
their responsibility towards their host society, not to mention their shareholders, to
comply with the directives of their parent government?Should the political risk
assessments of foreign office functionaries be accepted as gospel notwithstanding the fact
that most companies carry out their own sophisticated internal assessments?
I ask these questions not because I have any doubts about the motives for the June
advisory. I can appreciate governments acting with prophylactic caution in anticipation of
what could have become a logistical nightmare of large-scale evacuation had the border
situation spiralled out of control.I ask these questions because, right or wrong, the
advisory triggered reactions that tells us something important about the context in which
MNCs and governments operate today. The CII, for instance, saw the advisory as a form
of economic sanction; others as a component of a broader geopolitical plan to pressure
India and Pakistan to de-escalate; yet others as simply a misreading of ground
realities.The advice also put MNCs in an awkward situation. They had to decide whether
to accept the advice and evacuate all expatriates notwithstanding possibly their own more
optimistic assessment but risking thereby the disruption of operations and the erosion of
carefully built up local relationships. Or to demur and then risk criticism from their
embassy.They also had to consider the impact on staff morale. After all, if the situation
was indeed dire enough to warrant immediate evacuation of foreigners then surely the
security of local staff who after all are no less a part of the organisation also needed to be
This article cannot answer all of these questions but it can provide one backdrop against
which I believe, the answers should be formulated.There will no doubt be other
perspectives. The point is to ensure that in the event border tensions escalate again the
resultant actions and reactions will be less divisive and preemptory.We live in a world
today, which is in many respects truly global. This does not mean that the nation state and
nationalism is dead; rather that there is now greater interaction amongst societies.There
are a large number of issues in which governments and companies (not to mention NGOs
and the public) have overlapping, though often conflicting, interests.Global terrorism,
environment, narcotics , AIDS, are but a few such issues. The challenge for governments
in this "new order" is to manage the tension between, the "germ of a universal
consciousness" (to quote the scholar Raymond Aron) in the value of transnational
cooperation and liberal open market norms on the one hand, and the continued pull of
national self interest and "unilateralism" in decision making on the other. The travel
advisory in June has highlighted this challenge. MNCs face a not too dissimilar set of
Globalisation and liberalisation has given them greater freedom of action and a greater
say in policymaking in many countries.It has opened up new avenues for investment and
growth and facilitated a "footloose" manufacturing and marketing strategy wherein
components are often manufactured in one country, assembly is done in another and sales
of the final product are made to a third.The challenge for companies is to run a
multinational and multicultural operation that respects local, religious, cultural and
national identities, but simultaneously, operates within well defined and agreed global
principles.The challenge is compounded by the heightened expectations of the public
regarding environmental and social performance. Companies that do not behave
responsibly risk harsh reactions and possibly the withdrawal of their licence to operate
and grow.Companies make a commitment to local relationships and wider community
development not simply out of philanthropy.The call for the unilateral evacuation of
expatriate staff without consideration of the impact on local stakeholders belied
recognition of the complexity of the various commitments that globalisation entails.These
arguments should not be unduly stretched. There is no denying that governments and
companies must forewarn visitors against travel to potential trouble spots; nor that
foreigners especially westerners are often the targets of random attacks; and that most
people feel a heightened sense of insecurity in a foreign land.There is also no denying
that globalisation has not altered the "enduring national nature of citizenship".
A primary driver behind the June advisory was domestic public opinion -- what if indeed
one of their citizens got hurt? Equally, however, one must not deny that in this emergent
"new order" the adoption of narrowly self interested policies have consequences, often
unintended, that can reach well beyond the target audience.The June order has dealt the
Indian tourist industry a severe blow and the Indian IT companies are scrambling to
reassure their international clients of uninterrupted service.Notions of sovereignty predate
the imperatives of globalisation. A clash is not therefore surprising. The question is
whether, notwithstanding the conflicting constituencies of governments and industry, the
consequences of such a clash can be contained.The tools of technology exist to share and
scrutinise information and facilitate collaboration. Next time a border crisis occurs it
should be deployed to bring together all concerned parties (CII, embassies, companies,
NGOs) to ensure that at least each eschew the simplistic "unilateralism" of the status quo

Government pumping money into the economy is not the

solution for our economic problems
In this column last fortnight, I took some pot shots at simplistic Keynesian pump-
priming. But I lacked the space to elaborate on a special reason for the diminishing
impact of pump-priming. This is globalisation. Keynes conceived his model in the
context of a closed economy, and so did many of his successors. When I studied
economics at Oxford in the 1960s, I learned about Keynes from the standard textbook by
Samuelson.This stated that GDP was the sum of private consumption, government
consumption and investment. No mention at all of imports or exports. Or of the impact of
international capital flows.
A modern textbook will define GDP differently: as the sum of private consumption,
government investment and investment, plus exports minus imports.Exports must be
added since they represent domestic GDP, even though they are consumed abroad.
Imports must be subtracted since they represent the GDP of other countries, even though
we consume them. In many countries, imports and exports are roughly equal, in which
case neglecting trade may not greatly affect GDP calculations. However, the very
existence of imports and exports can greatly affect the impact of Keynesian pump-
priming.Globalisation has steadily increased the share of international trade and capital
flows in economic activity. This has increased the leakage of pump-priming out of the
country through trade and capital flows, reducing its domestic impact.
A good example, I think, was the attempt of US President George Bush Sr to tackle the
1991 recession, and thus improve his re-election chances. He stimulated spending by
letting the budget deficit widen.But this seemed to stimulate the purchase of East Asian
goods rather than domestic goods. Bush also went for low interest rates to stimulate
investment. But part of this cheap money was simply used to invest abroad.Such a large
proportion of the fiscal and monetary stimulus leaked abroad that recovery from the
recession was slow and virtually jobless. Bush thought his victory in the Gulf war would
ensure his re-election in 1992.But the Democrats focused on the economy, and
distributed car bumper stickers saying, "Saddam Hussein has kept his job. Have you?"
The result: Bush was defeated, not just by Clinton but by globalisation.
Earlier, France too discovered the limitations of Keynes in a globalised world. In 1980-
82, a global recession had set in, and Reagan and Thatcher were determined to use the
opportunity to kill inflationary expectations rather than attempt a Keynesian
rescue.French President Mitterand, a socialist, denounced the Anglo-Saxon approach and
swore to revive the French economy by pump-priming. He failed miserably. It became
clear that one open economy in isolation could not reflate out of a global recession.
In Japan, right through the 1990s, a huge fiscal stimulus did not translate into either
domestic purchases or imports on a big scale. Near-zero interest rates did not stimulate
domestic investment. Rather, the Japanese preferred to save rather than spend.Some
analysts called this a liquidity trap, but I think that is an exaggeration, perhaps an outright
error. The Japanese are not keeping all their money liquid: they are investing billions
abroad.Besides, Japanese companies are investing in factories in China rather than at
home, and then importing these goods made in China. When you buy a Sony or Mikasa
product, you are probably buying something made in China or South-East Asia, not
Japan. Here too, a big fiscal and monetary stimulus has leaked into the global economy.
What are the lessons for India? Well, the combined fiscal deficit of the centre and states
has been a huge 9-10% of GDP for most of the last decade. Money supply has been
galloping upward by 14-18% annually.Despite such a big fiscal and monetary stimulus,
many industries complain of slack demand. Why? The answer clearly lies in the realm of
microeconomics, not macroeconomics.At the macro level, the finance minister has done
more than enough to stimulate overall demand. If this still does not translate into demand
for particular industries, the problems lie in the micro-issues of the relevant industries.
The bankruptcy of the power sector means that all industries connected with it are going
to be in trouble till its solvency issues are sorted out. High procurement prices have
created problems in the food economy which cannot be solved by pump-priming.High
real interest rates, poor infrastructure, low labour productivity and faulty labour laws
have made entire sectors look uncompetitive. Laws that make it difficult for banks to
recover loans have constrained fresh lending. These problems cannot be solved by pump-
priming. They need purposive reforms.
How does globalisation come into this? In many ways. First, India's gradual opening up
has revealed to businessmen and banks alike the uncompetitive nature of much of our
industry.The answer to much of our excess capacity is closure, not pump-priming.
Second, we need reforms to ensure higher productivity and global competitiveness before
going for an investment binge.Third, globalisation has hit India through trade twice in
succession, first in the Asian financial crisis of 1997-99 and again in the global recession
of 2001.The Asian financial crisis caused huge depreciations in the currencies of Asian
countries with whom India competes, eroding India's competitiveness.The global
recession has done the same again. We know from Mitterand's experience that one
economy cannot reflate in isolation in a global recession.Finally, the trade data of the RBI
yield ample evidence of stimuli leaking abroad. DGCIS data show a modest trade deficit,
but RBI data (based on actual payments) show a whopping trade deficit of $ 14
billion.This has been cloaked from public view by the inflow of NRI remittances. But the
leakage of domestic stimuli to the global economy remains a reality. Additional pump-
priming cannot reverse this.
[ WEDNESDAY, JUNE 12, 2002 6:45:52 AM ]

Government should clean its own hands before pointing finger

at the private sector for corruption
THE MUDDY waters of global corporate fraud are lapping at our shores with the
formerly inviolate Tatas embroiled in a financial controversy and Xerox's Indian
subsidiary involved in bribing Government officials. This is not to say that our very own
domestic corporates have remained untainted by scandals till now. The country has faced
a spate of such scams in recent years but little has been done to stem the rot in the system.
At least in the case of multinationals mired in financial fraud, action has been taken by
the market regulators, the courts and the U.S. Government. Enron, Worldcom and
Andersen have not been able to wriggle out of their quagmires and entire global
conglomerates are being wound up.
In sharp contrast, scams in this country have left the perpetrators virtually untouched and
small investors especially remain highly vulnerable with the market regulator remaining
toothless in many cases. It has to be seen whether the latest initiative to bring the dormant
Department of Company Affairs under the Finance Ministry rather than under the
purview of the Law and Justice Department will make it a more pro-active agency. In
addition, the Finance Minister, Jaswant Singh, has set up a Serious Frauds Office, to
signal that the Government is determined to bring corporate criminals to book.
Till now, however, it seems that the little man has been the hardest hit by the corporate
frauds. The problems began for small investors when the stock market became an
attractive investment prospect for the middle class after Dhirubhai Ambani launched
Reliance Industries' first public issue in the early 1970s. This coincided with foreign
companies taking the public issue route to dilute their equity, in line with the norms laid
down by the then stringent Foreign Exchange Regulation Act (FERA), to below 50 per
cent. Many small investors applied for these blue chip companies ranging from
Hindustan Lever and Cadbury's to a whole host of pharmaceutical companies. With the
share market appearing to have become a relatively secure investment, unwary investors
applied in virtually each and every company launched in the then stock market bubble.
Several companies simply disappeared when the bubble burst and were no longer listed
by the stock markets while the addresses turned out to be non-existent. Others were
genuine companies where the share values crashed, making the share certificates
It was at this time that the role of the market regulator began to emerge with the
Securities and Exchange Board of India (SEBI) seeking to protect investors' interests.
The fact is, however, that there have been too many scams in the Indian financial markets
and too little effort to ensure that anyone is actually punished for wrongdoing. The most
widely publicised scandal was the securities scam involving the Reserve Bank of India,
high-profile stock market brokers such as the Big Bull, Harshad Mehta, and several
banks. Despite the unending parade of testimony before a joint parliamentary committee,
it took years for a single conviction to actually take place. The banking system also went
through turmoil during this period as several reputed banks were involved in routing the
funds through their systems. Some small banks collapsed in the process and middle class
depositors saw their life's savings wiped out.
It is not quite clear whether the newly created Serious Frauds Office will focus merely on
corporates or whether the banking system will also come under the glare of its scrutiny.
In any case, merely setting up a special division to deal with scams is not enough.
As the Xerox case shows, fraud is not limited to the corporate sector alone. With what are
described as "improper payments" having been made to Government officials on
purchases of copiers and other such equipment, the spotlight must also move to
improving governance within the Government itself. The most effective way of curbing
corruption in the Government is to reduce regulatory powers as has been done in a
phased manner through economic reforms. One of the success stories of the reforms has
been that the corridors of Udyog Bhawan are no longer crowded with wheeler-dealers
trying to utilise the licence raj to their advantage by interacting with key Government
officials. Power brokers almost disappeared from the scene after the Industry Ministry
was stripped of licensing powers. Similarly, the chief controller of imports and exports
has had its controlling power withdrawn and the agency has been converted to a trade
promotion organisation, the Directorate-General of Foreign Trade. But there are still
large segments of the Government with enough powers to harass both corporates and
individuals, notably on the revenue side such as income tax, customs and excise.
As a result, "improper payments" remain the norm rather than the exception in dealings
with Government agencies which continue to have regulatory powers.
In fact, bribery involving Government officials is not quite so improper in this country.
Indeed, it is the very essence of the system of Government functioning. Every company
knows that files do not move without bribes, projects are not cleared without bribes and
inspections are not completed without bribes.
No wonder the outcry over "improper payments" by Xerox Modicorp has left most
people cold given the fact that little progress can be made in the corridors of power
without these essential lubricants for the system.
It is thus essential for the Government to look at corporate fraud from both sides of the
lens. Not just from the perspective of good corporate governance, which is undoubtedly
essential, but also from the viewpoint of good governance within the Government. In this
context, it must be pointed out that leading software companies such as Infosys are noted
for good corporate governance but these are also the ones with the least interface with the
Government. Even Pramod Mahajan has conceded that the success of the Indian
information technology sector may have been due to the lack of governmental
In fact, the creation of the Information Technology Ministry had raised concerns that it
would introduce regulations and controls and thereby put roadblocks in the growth of this
thriving sector of the economy. Fortunately, it has not done so and the problems of the IT
sector are linked to the worldwide recession and slump in demand rather than any hurdles
placed in its way by governmental interference.
Good corporate governance is closely linked to the Government's own performance.
Pious pronouncements about the need for ethics in the corporate world carry little weight
when they come from a Government facing flak for favouritism and nepotism in
allotment of petrol pumps and land.
At the same time, steps to curb corporate fraud in any manner such as setting up a special
cell or strengthening the SEBI are to be welcomed as the small investor needs to be
protected at all costs. The only rider is that all these measures would carry greater
conviction from a Government whose own track record on ethics can at least be described
as commendable, if not of the highest standards.
The ruling party which sought to be different still has to prove itself to be on a higher
moral ground than past regimes on the score of good governance.
Sushma Ramachandran , Hindu Editorial, August 26, 2002

How can business get rid of the bad name that it has earned?
Business leaders seem to have fallen off the pedestal on which they were placed in the
go-go Nineties, a decade which sought to celebrate the triumph of global capitalism.
Recent surveys, in the US and Europe, of public respect for different professions place
business leaders dead last, even below trade union leaders! Glaring breakdowns in
corporate governance in many companies resulting in enormous losses to small
shareholders and employees, while CEOs were awarded huge salaries, stock options, and
retirement packages, have fuelled the public outrage.Corrective action focused on
stronger rules for disclosure, penalties for wrong information, and accounting of stock
options is being hastily taken in the US. However this will not get to the systemic causes
of the alienation of the public from big business and its bosses.
The Aspen Institute held a seminar last month on the Challenges of Global Capitalism, in
the context of global economic uncertainty, increasing income disparities, persistent
poverty, and terrorism.The seminar concluded that the solution to these problems
required reform in many institutions including business corporations. In the 1990s, the
influence of Wall Street dominated the business world. There was excessive focus, firstly
on stock prices to the exclusion of almost any other measure of corporate performance;
secondly, on opinions of analysts and investment bankers; and thirdly, on shareholders as
the only stakeholders of the business.Moreover, while improvements in corporate
governance were high on the agendas of business regulators in many parts of the world,
including India, the improvements were generally limited to changes in board structures
and information disclosure to shareholders.
These improvements, while necessary, are insufficient for two reasons. Firstly, these
reforms are focused entirely on the accountability of corporate managers to shareholders,
whereas it is becoming clear that corporations are responsible to a wider constituency that
includes their employees and the communities in which they operate. Secondly, changes
only in structures and rules will not cause corporate managers to behave
responsibly.What they need is 'integrity', in both meanings of the word-a moral compass,
and empathy with the wider world around them. The solution lies in reshaping the
governance of business corporations in three ways. Firstly, the fundamental charter of
corporations must be expanded: they must produce value for shareholders and fulfil a
broader responsibility to society.
It was interesting to observe at Aspen how US business leaders recognised that
corporations can no longer afford not to engage with societal needs, whereas in India,
there seems to be some debate on whether our companies can afford to engage with
social needs if they have to compete internationally! Secondly, metrics must be
established to gauge performance against the requirements of multiple stakeholders, and
corporations must report against these broader measures that may go beyond the scope of
stock market regulators.Fuzzy notions of social responsibility will have to be made
precise. In fact, leading western companies are already working to define measures and
set standards.
There will be trade-offs between the interests of investors and the community.It is the job
of the board and the CEO to manage these difficult trade-offs rather than take the easy
way out of focusing only on a narrow set of measures oriented towards quarterly financial
results and the stock price. Which brings us to the third part of the solution. A major
failing of corporate boards and CEOs is their inability to really listen to different views.
Companies are required to have outside directors on their boards to bring in diverse
perspectives so that risks to the company can be anticipated and avoided.However if all
directors, whether internal or external, come from the same social and ideological
backgrounds, and view the world through basically the same lenses, there cannot be any
fundamental dissonance.
Some boards do have directors with diverse backgrounds and perspectives. But studies
show that in many of these boards the processes of discussion do not permit difficult
questions to be thoughtfully explored before moving quickly to decisions for the sake of
efficiency. Good governance would require the inclusion of people with different
perspectives and also effective processes that surface and address difficult issues of ethics
and social responsibility. Only then can boards fulfil their principal responsibility to
shareholders of guiding the company's management through potential minefields of risk.

How should privatisation proceeds be utilised?

With a little bit of luck (and provided Pramod Mahajan is quickly shown his place),
chances are the government will exceed the disinvestment target for the year. 'My aim is
to get privatisation off the front pages.It should become a routine affair.' That was the
disinvestment minister, Arun Shourie in an interview in Singapore in April this year. He
may not have succeeded entirely - disinvestment still makes it to the front pages.
But it has certainly become a pretty routine affair.Indeed the very success of the
disinvestment exercise in the past few months brings to the fore an an issue that has so far
been relegated to the back burner: How should privatisation proceeds be utilised?Should
they be treated on par with other budgetary receipts? Or should they be earmarked for
specific purposes after a wider public debate? In the past, the amounts raised were
relatively small. Consequently, how the funds were used was largely a matter of
academic interest. But not any longer.
The twelve months to June 2002 have seen as many as twenty four sell-offs. Sure, some
were small like Hindustan Teleprinters, a couple of hotels of ITDC and so on, but the list
also includes a handful of big-ticket sales like VSNL, CMC, Maruti Udyog, IPCL and
IBPL. The months ahead are likely to see many more PSUs on the block - HPCL, BPCL,
SCI, Balmer Lawrie, National Fertilisers Ltd, Rashtriya Chemicals and Fertilisers,
Engineers India, MMTC, STC, the nationalised banks….After three consecutive years of
falling short of the target set in the budget, there is now the distinct possibility that
privatisation will deliver the kind of bounty it has delivered in many countries the world
over. But remember, money raised through privatisation is not like tax revenue. It is a
one-off inflow.
And just as no prudent family would use money raised by selling its house or jewellry to
settle its monthly provision bill, no prudent government ought to use privatisation
proceeds to meet its current expenditure. Yet that is precisely what the government has
been doing in the past few years.Take a look at government budgets in the nineties. The
revenue deficit or the excess of revenue expenditure over revenue receipts has been
steadily growing. From Rs18,562 crore in 1991-92, it has now crossed Rs 90,000 crore
according to the revised estimates for 2001-02. In fact, close to 70% of the country's
fiscal deficit is now accounted for by the revenue deficit.
What this means is that a large part of the government's routine expenditure is being met,
not from current receipts like tax revenues and user charges, but from privatisation
proceeds, external assistance and borrowing. In effect, we are liquidating family silver to
meet our daily expenses. This is an invitation to disaster. The full benefits of privatisation
can be reaped only when privatisation proceeds are regarded as a kind of bond financing
and used to finance additional investments in productive avenues or to restructure public
finances by repaying debt.According to George A Mackenzie (IMF Papers on Policy
Analysis and Assessments, November 1997), there must be 'very convincing reasons to
justify treating privatisation proceeds as revenue.'Unfortunately, while privatisation itself
has been widely debated, the related issue of how privatisation proceeds are to be utilised
has not received much attention.
In his budget speech last year last year, the FM declared his intention to use Rs 7000
crore of the sell-off money to restructure PSUs and the balance Rs 5000 crore as
budgetary support to build social infrastructure.In the event, not only did the final amount
raised fall well short of the target. but there is no mention at all in the subsequent 'Action-
taken Report' on how the money has been spent. This year's budget is no better. It is silent
on the utilisation of privatisation proceeds. Is that a deliberate omission? Or is it that the
FM, stung by criticism about setting targets that are never realised, decided not to make
any promises? Whatever the reason the fact is that we have no clue. And we do need to
know. Agreed, raising budgetary resources has been a key element in privatisation
exercises everywhere.
But in most countries, the exercise was also accompanied by greater public debate on
how the money would be spent. In the UK and Italy, for instance, it was mostly used to
retire debt. It is imperative, therefore, that we in India debate the issue of what's the best
use of this money. Given the crippling burden of our public debt and hence of interest
payments, the wisest course would be to retire some of the more expensive debt
contracted in the mid nineties. It is possible that some will argue that our public debt at
about 60% of GDP is nothing to get worried about, especially when compared to Japan's
140 per cent of GDP.But the fact is, public debt, as defined by the authorities in India, is
a gross under-estimate of the true extent of government's liabilities.It does not include the
debt of state governments, or that of public sector undertakings and quasi sovereign
undertakings like state road transport corporations, state electricity boards and so on.Nor
does it include contingent liabilities - guarantees, letters of comfort etc - of these bodies.
External debt is also computed at historical cost.Adjusted for all these factors, the total
debt/GDP ratio is likely to be much closer to 90 -100 %, maybe. The problem is we don't
even have very precise figures on this. A situation where interest payments alone account
for 50 per cent of revenue receipts and the government has to borrow steadily larger
amounts to repay maturing debt is hardly conducive to fiscal health.Reducing public debt
to more manageable levels must therefore be the first charge on privatisation proceeds.
However, the entire exercise will be meaningless if government does not prune its fiscal
deficit so that the reduction in public debt is not taken as a licence to borrow wildly once
again.This is where the Fiscal Responsibility Bill comes in. We need to debate both the
bill and privatisation in tandem and more fully.

If India is poorly governed, the reason is that we have designed our system
of governance for protecting, if not encouraging, corruption?
The recent spate of scandals of corruption like the one involving the former chairman of
the Punjab Public Service Commission (PPSC), allegations about the Haryana State
Public Service Commission as well as the continuing communal riot situation in Gujarat
have focussed attention on the issue of governance in the country.Some time back there
was talk about "Suraj" or even "Ramraj" but what we have instead is very poor level of
Corruption is a direct index of the lack of good governance. India is one of the most
corrupt countries in the world, ranking 72 out of 91 in the Corruption Perception Index of
M/s Transparency International, a Berlin based NGO.If India is poorly governed, the
reason is that we have designed our system of governance for protecting, if not
encouraging, corruption.The PPSC case only highlighted how a constitutional body
which was designed to ensure that there was fairness and probity in selection to public
service itself could be compromised.
But in every sector we find that we have designed systems for encouraging corruption
and poor governance and then complain that we are not able to check corruption. Let us
look at some examples. The voluntary disclosure of income scheme (VDIS) under which
those who had black money could convert their black money to white on payment of 30
per cent income tax against a situation earlier when those who were in higher income
brackets had to pay 40 per cent, clearly put a premium on dishonesty! It was a slap in the
face of all honest Indian tax payers. If we find that 40 per cent of the Indian GDP is black
money, how can we complain? After all we created the black money by policy. Black
money has many avatars. Mostly it is in the form of benami property or accounts. In 1988
September, the Benami Transaction Prohibition Act was passed. Section 5 of the Act
empowers the government to confiscate benami property.Section 8 provided that
government would prescribe the rules under which the benami property could be
confiscated. It is more than 13 years but still government of India have not prescribed the
rules under Section 8 for confiscation to be implemented.This is a case where even
though legislation may be passed to check corruption, when it comes to implementation,
we fail completely.
Industries in our country can become sick but our industrialists do not become bankrupt.
This is because the Sick Industries Companies Act (SICA) and the institution of the
Bureau of Industrial and Financial Reconstruction (BIFR) has been so totally transformed
to serve the interests of the unscrupulous industrialists and the labour aristocracy that the
original intention of protecting the interest of the creditors is totally lost in its Indian
avatar.Year before last the finance minister announced in the budget speech that SICA
will be modified and BIFR scrapped. But there is still zero action. The burgeoning non
performing assets (NPA) in the Indian banking system, a polite word for bad debts, has
crossed already Rs 58,000 crore. When the RBI was asked why the names of the wilful
defaulters, namely influential people who had misused the bank loans could not be
published on the web site like what the CVC did so far as the public servants are
concerned, the argument of the RBI was that because the Banking Secrecy Act, Article
14 of the Constitution and Chapter 3 of the Reserve Bank Manual, this could not be
done.After all, these rules were all made by us.
If we really want to check continuous looting of the public sector banks by influential
people why not change the requisite rules including the Banking Secrecy Act? The basic
reason why corruption flourishes in our country is because the way our democratic
system operates. All political parties are dependent on black money. This is the route of
political corruption which, in turn, leads to business corruption, bureaucratic corruption
and criminalisation of politics.Fortunately we have still hopes in the form of institutions
like the Supreme Court which has at least taken the initiative to prescribe in its judgment
of 2 May that the candidates to elections must give an affidavit about their criminal back
ground and track record.The Representation of Peoples Act must be amended so that the
directives of the Supreme Court becomes part of the rules and the present pathetic
situation of the law breakers becoming law makers in our country can be stopped.
Another reason why our governance is so poor is because corrupt political leaders
support corrupt bureaucrats who occupy sensitive posts. We find these days political
parties are asking for "lucrative ministries".To prevent this nexus between corrupt
politicians and corrupt bureaucrats, all that is required is a public interest litigation in the
Supreme court.The court had, in the Vineet Narain case (Hawala case) directed directed
that the director, CBI would be appointed from a panel of names recommended by a
committee, chaired by the CVC, including Home Secretary and Personnel Secretary as
members.Once a person is appointed as director, CBI he will not be shifted for two years
without the permission of the CVC. This was done to prevent outside influence on
sensitive organisations like the CBI.
In order to break the nexus between the corrupt politician and the corrupt bureaucrat, the
Supreme Court should be requested to direct the government to identify all sensitive or
lucrative posts and for filling up these posts a procedure similar to that for filling the post
of the CBI director must be followed.In one stroke a substantial step would have been
taken to break the nexus between the corrupt politicians and the corrupt bureaucrats
which is at the root of the poor governance of our country.Concerned members of civil
society and chatterati who bemoan the quality of poor governance in our country can at
least take the initiative of filing a public interest litigation on the above lines. Can we
move towards better governance at last?
[ SATURDAY, JUNE 01, 2002 12:54:24 AM ] Economic Times (The author is Central
Vigilance Commissioner)
In our economic matters, there is an excessive tendency towards the
thinking rather than doing
While I was remorsefully growing out of competitive, university level tennis, I was
consoled by a comment made about the great Ken Rosewall, who was moving past his
prime, "His mind makes the appointment, but his body is unable to keep the
appointment."This elegant expression has relevance for organisations also. A new book
(Execution: The discipline of getting things done) by Larry Bossidy and Ram Charan
brings out some relevant ideas very readably. In our economic matters, there is an
excessive tendency towards the thinking work.
Perhaps, it demonstrates a national bias for the more Brahmanical work rather than the
Kshatriya / Vaishya mode of doing things.I served on the Rakesh Mohan Committee on
the Indian Railways last year and found that any sensible idea about the Railways had
been well argued and documented in one report or the other of committees set up by the
Railways themselves at an interval of two years for the last 15 years.I am now on the
Deepak Parekh Committee on the Restructuring of our SEBs, and there is a similar
pattern. The thinking part has captured management people's imagination. Young people
find it more attractive to be in investment banking and consultancy than in
operations.Thinking (and talking) is very valued in organisations, and people who say
thoughtful things, people who say the right things at the right time are likely to be judged
as more influential, high status and as leaders.
I do not discount the value of thinking or talking, but it can become an end in itself,
without the accompanying doing. That is dangerous because the 'think only' types usually
impress better than the 'do only' types!That is why good training programmes involve
strong 'doing jobs' at the very early stages, e.g., being a district officer in the IAS or
becoming a field manager at HLL. Whenever a company gets into trouble, management
rightly seeks new strategies. However, often equal attention is not paid to the execution
of these strategies.In my experience, the difference between successful turnarounds and
less successful ones usually does not lie in ideas or strategies per se, but in execution.To
understand execution, one needs to remember three things - first, it is a discipline and
integral to strategy; second, it is the essence of the job of the leadership; third, it must be
a core element of an organisation's culture.
This looks quite obvious, but as the following story about Lucent shows, the obvious
does not automatically happen. The story is about Richard McGinn, who took over as
CEO of Lucent in 1996 from Henry Schacht. A strong marketer, McGinn was adept at
explaining the company's bright prospects to the investment community. But he had
difficulty getting things done in the company.As Henry Schacht put it, "We got ahead of
our capacity to execute." In October 2000, McGinn was fired and Henry Schacht was
recalled from retirement to head the company.So how did inadequate execution capability
manifest itself at Lucent? Here are the eight answers - cumbersome structure, inadequate
financial information about profit by customer / product line, unwillingness to confront
non-performing executives, missing technical milestones for new product development,
not changing work processes fast enough to take advantage of the huge investment in
SAP, huge credit / financing to customers by sales people, recording shipments to depots
as sales, and amassing huge debt. Many Indian companies will recognise these
symptoms. All this may appear elementary, but poses substantive issues in large
organisations. When HP's instrument division at Santa Clara tried to bring more of a
customer focus to the engineer-dominated culture, they faced huge problems.GM created
Saturn in 1985 at Spring Hill, Tennessee to create a completely new work culture, so also
NUMMI, the Toyota-GM joint venture at California.These created such strong social
identities among divisions that it became very difficult to achieve reverse transfer of
learnings into the main company divisions.
How to create a doing culture? I have learnt five valuable lessons - as always, self-
evident. Secure people's buy-in: Many have toured Toyota's facilities to learn about Lean
Manufacturing. Very likely, all have understood it but very few have successfully
replicated.For successful transfer of learning, it is more important to understand the why
in terms of the philosophical underpinning than the details of how. Learning comes from
doing: It is assumed that doing comes from learning, but the converse is more the reality.
You can teach the explicit knowledge through courses, manuals and reports. The more
insightful tacit knowledge is transmitted only through mentoring and doing. Fight the
external competition, not the internal strife: In 1984, Apple used the external threat of
IBM to provide organisational energy against the "common enemy."Likewise with Nirma
,at HLL in 1987 and once again in my experience at Unilever Arabia in 1992, when
Unilever mounted a frontal assault on a dominant Tide Detergent. Beware the Pygmalion
effect: The Israeli army did a study on incoming soldiers who were told that from a
battery of tests, they could predict which one-third had high command potential.In
reality, they were arbitrarily divided into three lots called High, Regular and Uncertain
potential. At the end of fifteen weeks, the High performed with more positive attitude. A
self fulfilling prophecy. Leverage the co-operative instinct: There is a laboratory game
called Prisoner's Dilemma in which the neural activity of the players is studied as they
select from an array of greedy or co-operative options as they pursue financial gain.In the
journal Neuron, Prof Gregory Burns has written "We were really surprised by the results.
The brightest brain signals arose in co-operative alliances and in that part of the brain
which responds to desserts and pretty faces! It seems the human mind is naturally wired
to co-operate."
R GOPALAKRISHNAN [ Economic Times FRIDAY, AUGUST 23, 2002 12:53:30
AM ]

Is disinvestment really that good for India or is a rethink in order?

The frisson of excitement generated by news of a great leap forward in privatisation is

almost palpable. Where ministers were loath to mention any target for a given year, the
tantalising prospect of upwards of Rs 25,000 crore in revenues is now being dangled
before our eyes. Light at last, it would seem, at the end of the fiscal tunnel. Yet the notion
that privatisation is a miracle cure for fiscal problems rests on such weak foundations that
it is astonishing that this proposition is heard so often in popular discourse.
The secretary for the ministry for disinvestment, Pradip Baijal, adumbrates this
proposition in a recent article in the Economic and Political Weekly (April 27, 2002). He
argues that the government has realised Rs 7164 crore from strategic sales in the past two
years. Given the government's borrowing rate of around 10%, this translates into an
annual benefit to government of around Rs 700 crore (which would imply a
corresponding reduction in the fiscal deficit).
The fallacy in this argument has to do with the conventional measurement of the fiscal
deficit. Such measurement includes the government's liabilities but not its assets.If we
think of the government's deficit as changes in net worth - that is, changes in debt minus
changes in assets - then it should be apparent that the sale of assets makes no difference
to the deficit. When the government uses asset sales to retire debt, the stream of future
interest payments is reduced to the same extent as the income stream foregone through
the sale of the asset.
The point was made years ago by an economist, George Yarrow, co-author with John
Vickers of the classic treatise, Privatization (MIT Press). In his paper, "Privatisation in
theory and practice" (Economic Journal, April 1986), Yarrow went on to add, "Thus, as a
first approximation, selling public assets is equivalent to selling fixed-interest debt. Both
imply the mortgage of future income to improve current cash flow. For this reason, it
would be surprising if asset sales represent a free lunch through which current
government deficits can be financed without upward pressure on interest rates and
consequent crowding out of private sector expenditure". So much for the notion that
privatisation proceeds could, by retiring public debt, induce a virtuous cycle of lower
interest rates and higher private investment.
In their book, Vickers and Yarrow provide two important qualifications to this
proposition. The net worth of the public sector remains unchanged only if the sale is
correctly priced and there are no transaction costs. Neither of these conditions is met in
practice. The odds, therefore, are that privatisation actually worsens the government's
long-term financial position.The impact on public finances would be positive if the
efficiency of the firm sold improved markedly under new management. But this requires
competition, strong corporate governance, and an active market for corporate control,
conditions not easily met even in developed markets, let alone in the Indian
context.Indeed, it must be recognised that there is an inherent tension between the pursuit
of strategic sales and the objective of improving firm efficiency.The focus on strategic
sale is leading up to a disregard for the market structure implications of such sales.
This was seen in the sale of IPCL to the Reliance group. It could happen again if the
Hindalco-Indal combine ends up bagging Nalco.One of the paradoxes of privatisation
world-wide has been that, while in principle it is intended to usher in greater competition,
it has ended up creating greater concentration, which militates against the objective of
improving efficiency.Strategic sales are also likely to undermine the central objective of
improvement in firm efficiency by perpetuating forms of ownership that are inimical to
this objective.
What is required is the rejuvenation of the public sector through an altogether new culture
of governance - broad-based ownership of shares and professional management subject to
control by institutional investors.But the emphasis on strategic sale raises the
disconcerting prospect of enormous assets being handed over to precisely the narrow set
of family-managed industrial groups that are themselves in need of radical change.It is
hard to conceive of a greater tragedy for the economy. We need to abandon wrong-
headed notions of using privatisation to manage fiscal problems and to focus instead on
the central issues of governance and efficiency. Once we do that, the merits of phased
disinvestment as distinct from strategic sale will become apparent at least in the case of
the better-performing PSUs.
T T RAM MOHAN Economic Times THURSDAY, AUGUST 01, 2002

Is industryless growth here to stay?

READERS are familiar with the concept of jobless growth. But India is now
demonstrating a less familiar phenomenon, which, for want of a better phrase, can be
called industryless growth.This was unsurprising last year, when the global recession
forced down industrial growth everywhere, including India. Industry typically grows
more slowly, or falls faster, than GDP in a business downswing. But in 2002 the world
has swung up out of the recession, notwithstanding some fears of a second downward dip
in coming months.Many of our Asian neighbours have recorded big jumps in industrial
growth, with Singapore leading the pack at 18.9 per cent. But in India industrial growth
continues to lag behind GDP growth even in a global recovery.
Now, the phrase jobless growth does not mean no new jobs whatsoever. It simply means
that jobs grow proportionately less than GDP. Similarly, industryless growth does not
mean no industrial growth at all. It means industry is growing more slowly than
GDP.Instead of being the locomotive of growth, as in most developing countries, it has in
India become a passenger that has to be pulled forward by the services sector. Ever since
the global recession set in, India has been the second fastest growing economy in the
world. This has been a matter for some satisfaction. Many miracle economies in East
Asia ground to stagnation in this period, while Latin America has been imploding. The
accompanying table gives recent data for top developing countries. The data are not
always comparable across countries. GDP relates in some cases to the second quarter and
in others to the first quarter. Industrial growth relates in some cases to May, in others to
June or July. Yet it is gives a bird's view of trends.It shows that India has the second
highest rate of GDP growth but only the eighth highest industrial growth among the
countries in the table.
Many countries that lagged well behind India during the recession are soaring industrially
in the global recovery.Singapore, whose GDP growth was just 3.9 per cent in the latest
quarter, has registered industrial growth of 18.9 per cent in June. The Philippines has
recorded 3.8 per cent GDP growth but 10.7 per cent industrial growth.Taiwan has
registered barely any GDP growth at 0.9 per cent in the latest quarter, yet its industrial
output has soared 8.4 per cent in June. By contrast India, with GDP growth of 6.4 per
cent in the most recent quarter, has registered a pretty pathetic industrial growth rate of 4
per cent in June. True, this is virtually double the rate a year earlier. But that is cold
comfort.Almost everywhere else in Asia - Hong Kong is the one exception - a modest
acceleration of GDP has spurred a most faster acceleration of industry. Even Russia, now
regarded as a commodity producer like OPEC or Africa, is currently registering faster
industrial growth than India.In Latin America, industrial growth is swinging downwards
rather than upwards. This is because of the region's financial woes, which originated in
Argentina and are now spreading like a virus to the whole region.Brazil, by far the
biggest country in the region, is in serious danger of going down the Argentinean path for
no good reason other than international financial panic, which may becoming self-
fulfilling. Even Chile, long a miracle economy, is caught in the downdraft.
Now, in a downdraft it is common for industry to suffer as much or more than GDP.
India, however, is witnessing lagging industrial growth even in an upswing.Some
pessimists will say that, given the poor monsoon, India may not experience an upswing at
all. Some forecasts put GDP growth at no more than 4 per cent this financial year.
However, these downbeat forecasts reflect rainfall conditions from July onwards.Rainfall
had no impact on industrial data for the first six months of 2002, a period when the rest of
Asia has surged way ahead of India industrially. No, monsoon failure is a minor
explanation for India's industrial stagnation.Many businessmen feel that India cannot
compete with China, which is beating Indian producers in both the Indian and global
markets. But businessmen have similar fears all over south-east Asia.China seems to be
able to beat everybody. Despite this, many Asian countries have surged ahead industrially
in recent months. India has not.
I have no space in this article to dwell at length on the many issues that depress our
industrial prospects. Appreciation of the real exchange rate, high real interest rates,
reservations for small scale industries, high import tariffs that make raw materials costly,
inflexible labour regulations - all these issues have been analysed in detail by many
others. After the Gujarat riots and threatened war with Pakistan in June, security has
become an additional drag. But while we have a long list of problems, we do not have a
crisis. Without vibrant industry, GDP cannot grow faster than 5 to 6 per cent, but that
seems a perfectly acceptable rate politically.Every reform tends to create losers before it
creates winners, which is why politicians are reluctant to reform radically save in a crisis.
Our political economy has settled into an equilibrium where there is little political
incentive to rock the boat with radical change.So, slow industrial growth looks here to
stay for some time. Indeed, even as the rest of Asia speeds past India industrially, this
country could remain the second-fastest growing economy after China, thanks to its
burgeoning service exports.Many countries of the West have agonised about jobless
growth and then shrugged their shoulders. We are agonising about industryless growth,
but may end up shrugging our shoulders too.

Is the budgeting exercise of any use?

During the last 12 years the Indian budget has been twisted and distorted in quite some ways.
For one thing, the Finance Minister has not had much freedom in formulating a budget. Frequent
elections have put governments under populist pressure. The only period when the budget was
guided by fiscal objectives and that too to a limited extent was when Manmohan Singh was
Finance Minister and he was not immune to criticism. His focus was on the reduction of fiscal
deficit. In 1992-93 and 1993-94 Dr. Singh achieved a measure of success in this area but the
process involved a drastic slashing of capital expenditure of the State and public spending on the
social sector. There is the oft-quoted reported admonition of Dr. Singh by P. V. Narasimha Rao
the then Prime Minister. "Deficit reduction is perhaps a critical need. But Mr. Singh, do remember
we have to win the next elections and come back to power.''
It may sound paradoxical that the fiscal policy orientation during the last five years, guiding
Yashwant Sinha is not so much as reduction in the level of fiscal deficit as mobilisation of
resources and re-deployment of resources towards education, health and social welfare. But with
what results? The belief that more public funds of these sectors will start a process of expansion
of access to education or to health facilities for the poor has not come true.
The one major dimension of the budget that has continued to defy policy correction is the
question of subsidies covering food, fertilizers, kerosene, transport, power and a host of services.
In a country where 300 million poor do not have even a minimum conceivable economic security,
it would be a crime for the Government to abolish subsidies, especially for foodgrains.
Even though Mr. Sinha's regime witnessed some positive movement towards the rationalisation
of excise duties there has been little action on rectifying the anomalies in the enforcement nor
addressing the widespread corruption.
The budget for 2002-03 was literally hanging in the balance for four weeks before the
Government inducted Jaswant Singh as the new Finance Minister. It looked as if the BJP
believed that Mr. Jaswant Singh was capable of mollifying its major vote bank, namely, the middle
class with liberal tax concessions. Mr. Jaswant Singh has not totally failed in the party's
expectations. The salaried middleclass and the senior citizens have obtained some relief in the
tax proposals made by the new Finance Minister. But it will be difficult to find any rationale in the
new patch-up. While the need for interest rates to come down is imperative there is no point in
placating the relatively well-to- do salaried class with the assurance that they would not be
affected by a general decline in interest rates. From the long- term point of view, the interest rate
policy leaves a lot to be desired. And it is no wonder the BJP government suffering from a
drought of ideas has appointed special committees to explore the possibilities of fine-tuning the
In the meanwhile, the economy is showing clear signs of deterioration. Agriculture, the main prop
of the economy, might not only undermine growth but might cause devastation of the lives of the
rural masses. Are the ministers able to pay attention to the economy in the midst of their own
political squabbles?

By S. Swaminathan Hindu Editorial, August 6, 2002

Is the business of business only business?

Would the carnage in Gujarat have happened had Indian business leaders been more
actively engaged with socio-political developments over the past 30 years?Participating
in a heated debate on the role of the government in Gujarat at the annual meeting of the
CII last month, Mr Punj of the BJP wondered why industry was making a noise about the
mayhem in Gujarat while it had been silent when Hindus were driven out of
Kashmir.Trying to turn the tables on industry, he suggested the Gujarat riots might not
have happened had industry intervened in earlier problems!
Similarly, Royal Dutch Shell was accused of complicity by remaining silent when the
Nigerian government executed Ken Saro-Wiwa. Shell was in a quandary at the time. Its
business philosophy was to be a good corporate citizen and to work in 'partnership' with
local governments everywhere.Remember the old Burma-Shell line: "Burma-Shell in
India's life and part of it"? But what if the government is not effective in protecting
human rights? According to Shell's critics, the company should have stood up for what
was right in Nigeria even if its business suffered.
Gujarat has brought home to India the debate on the role business has in influencing
broader socio-political change. For many business leaders everywhere in the world, the
question is no longer whether business has a role in social change but how it should play
its role.There are at least two good reasons why business must now face up to its broader
role in society. The first is responsibility that comes with freedom. Increasing freedom
from controls on business and the growing respect for market institutions in the later part
of the last century, accompanied by the decline in the role, resources, and even respect for
governments, has given more power to business leaders.
With this power comes responsibility for making sure the right things are done in
society.The second reason is that a backlash may be brewing and business institutions
may find their power and freedom curbed if they do not act responsibly towards a wider
set of stakeholders. Even in the USA, the bastion of free markets, the self-interestedness
of corporations and their leaders is now causing a reaction from society.Now the integrity
of business and its leaders is being questioned, in both meanings of integrity. On the one
hand, integrity is the quality of being honest and uncompromising of values and
principles, which is where Enron and Andersen failed. Integrity also means the quality of
being integrated, of being in tune with and connected with the wider society - about
which business leaders in India and elsewhere have a need to ponder.
Business leaders with great personal qualities of honesty can be deeply pained, and their
businesses hurt as Shell was, when society questions whether business practices are in
tune with the evolving values of society such as human rights.The simplistic view that
seemed to prevail in the 1990s that business leaders need to focus single-mindedly on
shareholder value as determined by the share price, and that financial analysts are the best
judge of business strategy, may have clouded better judgements. While the truly great
companies, such as Tatas and Shell, did not forget their values and role in society during
those dizzy days, they have been rightly challenged to find ways to fulfil their leadership
role in society more effectively.These leaders have two principal challenges. The first is
the pressure to reduce costs.
The traditional model of being a good corporate citizen was to give handsome benefits to
employees, provide services to the community, make donations to social causes, and
invest in environmental protection processes. All these measures add costs and reduce
profits.The challenge now is not to walk away from these obligations but to find new,
innovative ways to contribute to the broader needs of society that improve the revenues
and operating margins of the business. The second challenge is to influence change in
society - to prevent bad things from happening and induce good things to happen -
without meddling with politics, which most business leaders are loath to do.
Therefore, new models of engagement are required by which business can enable social
and political leaders to discover ways in which desirable outcomes can be brought
about.In summary, it is time to contest the notion that the role of business must be
restricted to business. Business has to play a more integrated role in society and has to
develop new ways to fulfil this role purposefully because old models are no longer
effective. Business leaders must engage in more systemic thinking and stimulate
innovation in business processes.To facilitate this, business associations can take the lead
to bring together many stakeholders. However, they must do this in innovative formats
that stimulate systemic thinking and dialogue rather than posturing.
ARUN MAIRA WEDNESDAY, MAY 15, 2002, Economic Times

Is the consumer really the king in India?

Thursday was a red-letter for consumers in the country. Parliament put its seal of
approval on the National Legal Services Authorities (Amendment) Bill. The Bill, which
among other things, puts lok adalats on a permanent basis, offers a much-delayed but
sorely-needed alternative mechanism for dealing with disputes.
Consumers, long at the receiving end, especially in their dealings with public utilities,
will now have an alternative avenue for redressal of their grievances. About time too.The
steady deterioration in the quality of governance over the past few years, has been
matched by a corresponding decline in the quality of delivery in public utility services.
Unfortunately, consumers had very few avenues where they could take their grievances.
Sure, they could take their complaints to the consumer courts but the latter could barely
cope with the pressure. Consumer courts, moreover, can address only 'consumer'
complaints. This effectively keeps public utilities such as health and civic services out of
the purview of these courts. The amended Act also gives the adalats adjudicatory
powers.This is a major improvement over the erstwhile system under which they could
only try to settle disputes on the basis of a compromise formula. Especially since the
decision of the adalat will be binding and treated on a par with the decree of a civil court.
It is not only consumers who have reason to be happy. Lok adalats have made a
significant contribution in settling industrial disputes and in disposing of cases where
banks have filed suits against erring borrowers.
Given the numbers involved -according to the Standing Committee on Home Affairs
there are 24 million cases pending in different courts - lok adalats can offer only one kind
of remedy for a legal system that is close to choking. Part of the reason for the huge
backlog of cases is the inadequacy of judicial officers. There are only 10.5 judges for
every one million of our people as compared to 107 in the US. Moreover, the majority of
our laws are antiquated.The remedy, therefore, lies in tackling the problem on many
fronts: making our laws more relevant to the times, strengthening the judicial system,
allowing courts to function uninterruptedly and dealing severely with litigants who
deliberately create delays. Lok adalats can only help at the margin.
EDITORIAL (SATURDAY, MAY 18, 2002 Economic Times)

Is the NPA ordinance too harsh?

The ordinance removes a critical shortcoming which has been debilitating the entire
credit system in the country.Inability of the banks and the financial institutions to lay
their hands on the securities made it plain to the borrowers that the creditor had little or
no means to enforce performance of the credit contract and in effect depended largely
upon their goodwill for the recovery of the loan. The result, as we all saw, was delays and
The provisions of the ordinance have been termed by some as harsh. It would appear
harsh only if the agreement has been entered into with the assumption that whatever be
the extent of the borrowing party's failure and default and howsoever much the covenants
contained in the agreement may have been violated, the creditor must forbear and not
enforce its rights in respect of the securities which the borrower so readily offered at the
time of availing of the credit.It has also been argued that this approach need not be
adopted in the case of a defaulter who does not default wilfully. That is true but only to a
certain extent.
The distinction between a wilful and unwilful defaulter is extremely thin and it is hardly
ever possible to distinguish in which category a particular defaulter falls.In any case, the
decision in this regard will have to lie with the creditor because a misjudgement means
for him much greater losses. It must be appreciated that any bank/FI would not proceed to
take possession of the securities without exhausting all other means of recovery.
Prudential and social concerns, which have always been there, will continue and the
creditor just cannot act trigger-happy.
What this present ordinance will actually do is to change the mindset of the creditor as
well as the borrower. It will remove from the minds of the creditor the sense of lack of
control it gets as soon as the amount of credit is out of its door and from the minds of
most borrowers remove the sense of total complacency which many of them have about
meeting the terms of agreement under which credit has been extended.These will
incentivise both credit delivery by the Banks/FIs and its return by the borrowers. M S
Verma, Chairman, TRAIThe time for such an Ordinance has arrived. No complaints
against unfettered recourse to security by a creditor. But the Ordinance needs revision to
iron out inequities.For disposal of security, the seller and the beneficiary are the same
party. If the value of the security exceeds the dues to a secured creditor, a sale at a value
enough to cover his dues would be adequately self-serving but unfair to all other
In law, you cannot do indirectly what is prohibited directly. The provisions transferring
management control effectively give rights to secured creditors over "all properties"
thereby permitting them to take recourse to unsecured assets contravening the stipulated
intent. Secured creditors can proceed against guarantors "without court intervention" and
"without first taking the measures for disposal of security from the
borrower".Considering that personal guarantees are taken from all small borrowers but
not necessarily from corporate borrowers, this provision in particularly unfair. Sale of
security under the Ordinance, which clears the default that created an NPA, does not
revert rights to the borrower. Only on repayment of the entire outstanding, including
those not currently due, are a borrower's rights revived.Also, in theory and practice, an
acquirer can be unfairly accommodated with preferential terms.
The absence of time bound decision-making regulations in respect of restructuring
proposals aggravates the Ordinances' inequity.Consequent to risk aversion in the system
and financial difficulties of lenders (such as IFCI), the provisions of the Ordinance will
probably be applied as a first resort, avoiding compromise and responsibility for
inadequate action.The Ordinance targets large defaults but is applicable to small
borrowers too. Segregation by size and product categories (home/ industry) is necessary
for deliverable regulations. Willful defaulters is not a relevant category, incompetent
should be equally liable. Even stronger regulations for large defaulters including absent
provisions for shareholding transfers are fair. But discriminatory action as evident from
publicised threats to Haldia Petrochemicals is avoidable.Sanjiwan Sahni, Management
and economic advisor
Editorials Economic Times WEDNESDAY, JULY 31, 2002

Is the patents bill good for India?

Global pressure, coercion, ignorance, cowardice and conspiracy and not national interest
are forcing India's Parliament to amend our exemplary Patents Act 1970 under threat
from WTO and its TRIPS treaty.America's Super 301 places India on 'priority watch'
threatening sanctions.
India has buckled supinely. Public debate was throttled. Signing WTO was deliberately
not fully discussed in Parliament.Bills to implement TRIPS are being cascaded through
on voice votes and minimum attention. The Joint Committee (1999-2001) ignored most
suggestions and toed the line - with many legal stalwarts barely attending meetings.
Parliament became Geneva's rubber stamp.The issues are simple. A patent is a monopoly
which, in a free trade treaty is, itself a contradiction. But, we know that 60-90 % of
patents are, and will be, owned by foreigners.
Why has India followed TRIPS to grant 20-year monopolies to foreigners through
patents? The argument that research will stop without the incentive of luxurious returns is
bogus.Research gets huge tax benefits. Good returns follow in 3-4 market years. India's
sovereign Parliament could have declared a shorter patent of 5-10 years from the date of
sealing.To protect public health, patents should be given only for molecules. Patented
combinations can last forever. Researchers are troubled by issues relating to micro-
organisms, genetic research and steps in basic research being patented.This will stifle
basic research. Doha required stronger compulsory licensing provisions, fixed royalties of
around 4 % and better public interest provisions enabling a modified licence of right as
scheduled by the government for health, food and energy and research.Poor nations with
ailing needs should be empowered to break corporate monopolies at will to meet their
needs. The Parliament cannot mindlessly translate treaty into law.American law declares
that its law will prevail over the WTO. India would have been better off telling WTO that
its sovereign parliament does not accept certain provisions.It was cowardice not to do so.
The promise of a possible third amendment is illusory. Yet, another ruse.
Rajeev Dhavan Economic Times WEDNESDAY, MAY 29, 2002

Is the US economy headed the Japanese economy way?

Unfortunately, this is not just about M Night Shyamalan's latest blockbuster - Signs.
These lines from the movie trailer are today as applicable in the economic and investment
circles, where a debate is raging on whether there are signs of a Japanese-style bust in the
current US experience.
For years, the signs have been appearing but could be explained away. Now we're at the
stage where the signs can't be ignored. Of course, as the teaser states: " Either this is one
of the most elaborate hoaxes ever created or this is for real".And in the present analogous
case it could well be only paranoia, given the fact that the world is still smarting from the
Japanese boom-bust cycle.
The comparisons with Japan have gained currency of late as 29 months after the bubble
peaked US equities have fallen by almost a similar magnitude as Japanese stocks
following their December 1989 top.The US economic outlook continues to be terribly
uncertain. By most measures the structural excesses haven't been weeded out and with the
passage of time the preceding boom seems increasingly flaky.
It appeared quite different till as recently as this June. The stock market may have been in
a funk but the US economy was apparently responding to all the stimuli.After all, the
consensus was then calling for a nearly 3.0 % real US GDP growth in 2002. A few
negative economic reports over the past few weeks though have dramatically changed
that perception.Now the continuing sharp downward revisions to GDP growth forecasts
are eerily reminiscent of the Japanese experience in the early '90s. Economists and
financial markets consistently overestimated actual growth and inflation rates in Japan till
the second half of the 1990s. Parallels with Japan really begin with the boom.
The argument runs that as with Japan in the late eighties the new era for the US was
exaggerated and led to financial mania with concomitant effects on the real economy.The
over-investment in the US was mainly in technology goods whereas in Japan it was in
real estate. Excesses in Japan got built up on the manufacturing side and in the US
excesses seemed to have stacked up on the consumer's balance sheet.Market valuations
were thrown out of line but rationalised all the way up and (wrongly as early buying
opportunities) on the way down. And like then, policymakers in the US remain overly
optimistic on future growth prospects and are thereby making the wrong assumptions in
setting policy.Well, the non-believers in the Japanese parallel like to turn all these
arguments on the head.
They say it is precisely because the US has Japan as a cautionary guide and policymakers
like Fed chairman, Alan Greenspan, are obsessed with the Japanese parallel that the US
economy will not face the same consequences.A discussion paper by the Fed titled:
"Preventing deflation: lessons from Japan's experience in the 1990s" has captured the
imagination of many policymakers. The paper argues that Japan's sustained deflationary
slump was unanticipated by Japanese policymakers and so was a key factor in the
authorities' failure to provide sufficient stimulus to maintain growth and positive
inflation.The general lesson the paper draws from Japan's experience is that when
inflation and interest rates have fallen close to zero, and the risk of deflation is high,
stimulus should go beyond the levels conventionally implied by baseline forecasts.Most
economists agree that the Fed this time has indeed been quite proactive and real short-
term interest rates in the US have, by several inflation measures, been running at or
below zero.Similarly, in contrast with Japan, the US political system too is responding
swiftly by both easing fiscal policy and tightening the regulatory framework to restore
broken confidence.
No two situations are completely identical.There'll always be differences, like there were
between the Great Depression in the US and Japan post-1989 even though the two
experiences are often clubbed together.So we will never definitively know till the end
how the current US episode fully plays out. But it's increasingly turning out to be a
philosophical and ideological divide between Hayek versus Keynes, as most other
schools of thought - like the productivity miracle one - stand discredited.The Hayek or
Austrian School followers believe this is payback time for the US economy as in a classic
boom-bust cycle, where the excesses of the boom will have to be wrung out of the system
and there is little policy can do about it.In that regard the broad parallels with Japan are
valid. Keynesians think the Japanese slump in the nineties was as much a policy mistake
as a cleansing operation.
Sure, there were excesses but those could be purged with much less pain inflicted.Quite
obviously, the Keynesians believe the US can avoid Japan Redux because policymakers
led by the Fed have been proactive.Every time though doubts surface on the effectiveness
of policy, and the weak string of US economic data of late has increased such doubts,
expect the protracted-downturn-is-inevitable (a la Japan) or the Austrian school to be on
the ascendant.Of course, it's never quite so clear-cut and all sorts of variations are
possible. For one, the Austrian school can still be right but the pain could be in the form
of inflation rather than deflation with the Fed incessantly spraying monetary gasoline to
avoid Japan and the real economy still failing to respond.But that won't detract from the
primary debate, which revolves around whether pain can be mitigated or not (inflation or
deflation both cause pain).To again borrow from the movie, Signs: "What one man
believes will save his family". Similarly, the outcomes in a Keynes or Hayek type
scenario are quite different. But the damage to investors can be limited if positioned the
right way, which in turn will be determined by the school of thought one believes in.
Is there any point in having a business strategy when the world changes
from month to month?
The customer may be king, but he's largely been ignored by most eminent management
thinkers. Father of core competency, C K Prahalad, speaks on the relevance of strategy in
times of war and strife; and the shelf-life of existing management principles. And, in the
process, he shatters several conventional management principles - some even of his own
Q: Companies are increasingly beginning to question the relevance of strategy, especially
after September 11. Is there any point in having a strategy when the world changes from
month to month?
A: We need to distinguish between strategy, strategic direction, and forecasting. The
traditional view of demand forecasting is dead. We're unable to forecast demand for
products. There are several reasons for this. The nature of competition itself is changing.
There are several non-traditional competitors who play by different rules. Power in the
industrial system is shifting in favour of the consumer. The consumer can decide whether
to buy or to withhold. More importantly, with the convergence of industries and
technologies, it will be more difficult to predict demand. For example, there was a time
when a printer was different from a fax machine and a copier. Now, I can have all three
in one. As functionalities are intermingling, a digital camera and PC are being substituted
for a camera and film. With co-mingling, you cannot predict how much of what you will
sell. Forecasting is difficult. This is not just because of 911 but due to convergence of
industries and technology, increasing consumer discretion, and volatility in markets that
impact demand around the world. You cannot predict demand but that's different from
having a strategic direction. Strategic direction is more important today. It's about
providing a framework for managers to navigate through the fog of complex choices. No
company can avoid this. It does not mean that you can avoid making continuous
adaptation based on the new information on a short-term basis.It's like running a
marathon 400 metres at a time. You know you have 26 miles to go. The first 400 metres
allows you to see the next 400 metres with greater clarity. In other words, companies
need to have a clear strategic direction and extreme level adaptiveness and
responsiveness. Lots of people say they don't need strategy because they associate
strategy with forecast and a three-year budget. Is such an exercise becoming less and less
useful? The answer is, yes.Finally, you may not plan for specific markets and products
but you certainly can plan for competencies. For example, every company needs to
understand the implications of the internet. What is the infrastructure that managers need
to fully exploit this new medium? It is a new competency that firms must plan for and
create. This process is different from forecasting demand for products, for next three
years, by segments.
Q: One of the outcomes of your book Competing for Future and the theory of core
competency resulted in an entire industry called outsourcing. Are radical measures like
outsourcing a good idea when you don't know what the core competencies of tomorrow
could be?
A: Outsourcing is here to stay. The challenge is not to the idea of outsourcing per se but
what activities are outsourced in a company. Smart companies must ask a simple
question: what are the sources of competitive advantage? Firms must retain influence - if
not legal control - over primary sources of competitive advantage.But firms need a whole
lot of ancillary capabilities that can be outsourced. For example, if you're in the hotel
business, your primary source of competitive advantage is in managing the employees
critical to providing consistent service worldwide. Should the training and HR be
outsourced in a hotel chain? No. But in a different industry it would be fine. The key is
not to follow fashion but to deeply understand your business.
Q: Many companies outsource activities like HR, recruiting, staffing and training. Should
companies outsource such activities? Also, the temp business is booming now more than
ever creating a free floating population which belongs nowhere. Is this not detrimental to
developing talent which is a strategic advantage?
A: For a long time, Japanese companies have done this. They had a core group of people
who were trained in the basic skills that are required to run a company and they were
provided permanent employment. There were a whole group of smaller companies which
literally provided contract labour services to larger firms. It's the same with companies in
the US today. Industries are de-verticalising themselves because they realise that few of
their skills are unique, and that you don't have to do everything internally. This trend will
continue. For example, I expect the next big wave will be sourcing automotive
components from abroad. For instance, India could become a big source of forgings for
global companies. Forgings is not a unique activity for automotive OEMs and can be
outsourced. So, if your are GM or Ford, why have a forgings plant? Companies are also
learning. Consider custom software. What they used to outsource five years ago is very
different from what they outsource now. We, in India, can become the platform for
outsourcing more complex services than we did 10 years ago. Even in outsourcing there's
a learning curve. Companies are learning how to protect their long-term interests.
Q: After the huge success of Competing for the Future, where has your thinking moved?
How have you evolved as a thinker?
A: I tend to think of my intellectual journey in three phases, if you will. In the first phase,
I focused on global competition and global organisation. From 1978 to 1987, that was my
preoccupation. This culminated in the book Multinational Mission (co-authored with
Yves Doz) I believe that it was an interesting book. In this book, for the first time, the
tension between global integration and local responsiveness was explicitly raised. In fact,
the subtitle was Balancing Local Demands and Global Vision. In a global firm you
cannot avoid local responsiveness and neither can you ignore global integration. We can
call it glocal, transnational or metanational. The essential tension remains. Then in 1987,
I decided to move myself into a zone of discomfort and decided to focus on a core issue:
why and how are smaller competitors from Japan and Korea - like Toyota, Sony, Canon
or Samsung - able to take on larger American and European incumbents such as GM,
Philips and GE, Xerox or Motorola? That's what led to Competing for the Future. That
book's not about forecasting the future but about leveraging resources in a unique way.
We introduced an internally consistent set of core concepts such as strategy as stretch,
strategic intent - (it's not a strategy but direction), strategic architecture and core
competency as a way of leveraging intellectual skills. Core competency is nothing but
accumulated knowledge. We identified the need for experimentation at low cost, or
derisking strategy if you will.All companies start small. In a small company you have
high aspiration and low resources; therefore, you invent new ways to compete. How can
you create the same desire to compete? You don't decrease resources but increase
aspirations. Competing For The Future (co-authored with Gary Hamel) is about
entrepreneurship in a large company through strategic intent - it's about creating a
mismatch between resources and aspiration. I'm in the third phase now. I'm focusing on
one of the biggest problems of the world: poverty. There are 4.5 billion people who are
trying to be part of the free markets of the world and are not able to. Over the last couple
of years, I've been working on a strategy for the Bottom of the Pyramid. To build an
internally consistent system for helping the poor, I'm exploring market-based solutions.
The second part of my research, in this phase, will focus on the impact of major
discontinuities such as the internet, deregulation of industries around the world,
globalisation and convergence of technologies and industries. How do these forces affect
the way we compete and create value? That leads me to a consumer-centric view of the
industrial system as opposed to the traditional firm-centric view. I believe these two will
connect - the bottom of the pyramid and the consumer-centric industrial system will
come together. So if you ask me if I've moved intellectually, yes I have. With economies
like India, Russia and China opening up, suddenly the bottom of the pyramid and the
consumer-centric industrial system seem to come together.
Q: Why is it that various manifestations of e-businesses are not delivering or have failed
on their promise?
A: E-businesses have not failed. Dotcoms have failed. I think we tend to associate failure
of dotcoms with the failure of Internet. All dotcoms were experimentations. With the
emergence of the internet, dotcoms rose to experiment: how can take traditional
functionalities as well as new functionalities and deliver them in a fundamentally new
way. Unfortunately, many business models were not robust because they were
experimenting. But today the internet has as much to do with very large companies who
are using it to improve internal efficiencies and external efficiency with customers and
suppliers. What you see is only the tip of the iceberg. The dotcoms challenged the older
options. I don't believe e-businesses is dead.My new research, which is also the basis of a
book (co-authored by Venkat Ramaswamy) is about co-creation and customer as a
partner. We are arguing a shift in how business will be done. So I believe we are in the
cusp of evolution.
Q Critics say the IT revolution even caught Michael Porter by storm and that his theories
are not valid in the light of the IT wave?
A: I don't know anything about that. When you have many discontinuities, it's not easy
for people to identify the discontinuities and amplify weak signals and fully assess its
implications. And we tend to assume the same person should be right about everything.
All through the history of science, established scientists have been wrong. It does not take
away anything from their significant contributions. For instance, Tom Peters talked about
the culture in the workplace as a competitive edge. He got managers to pay attention to
the soft issues that could provide the hard edge of competitiveness. That single
contribution is worth a lot.
Q: Is the changing nature of business making it necessary for managers to crunch reaction
time to make businesses more nimble?
A: Inventories have always been a substitute of managerial reaction time. Since a
manager cannot react fast to changing demand patterns he does forecasting. Money has
always been an implicit substitute to quick reaction time - be it building excess capacity,
holding stocks - and assuming that it's okay. We cannot afford to spend capital like we
used to. There's concern over reducing the amount of time it takes managers to react. This
forces us to decentralise management a lot more so that people on the ground can make
the choices. This is happening in small pockets like GE, 3M and Unilever. Q: On the
book that you co-authored with Gary Hamel, Competing for the Future, your critics say
that companies that spend time looking at 20 years out will never see it. Please
comment.A: Again, we were not asking managers to forecast the future but to create it.
There are three ways of looking at the future. One is extrapolating from the past. This
assumes that the future is like the past. You can use it only as a reference at best. The
second approach is scenario planning. This approach assumes the basic business model
but examines the robustness of the business model. For example, what could happen if oil
prices were at $60, and what would happen if it were at $5. Basically, we took a different
approach. Given the convergence of many interconnected driving forces like
demographics, technology, economic development and information, we can build a
pointer about what the future can be. The reason why its safer is that you're creating the
future and not just reacting to it. For example, you know there's an ageing population in
India and that there are a large number of NRIs whose parents are here and have the
money. So can I put these two together and say that assisted living is a good business to
be in? This is not predicting, but identifying a new pattern and seeing a business
opportunity. Competing for the Future was about building a strategic architecture and
establishing milestones and then making it happen. It was not about forecasting. A lot of
people who don't understand the spirit of the book (I call it superficial reading) say it's
about forecasting. The book is intended to help companies identify new relationships to
see new opportunities and, therefore, make things happen. It's about creating the future
not about predicting the future.
Q: How will the convergence of technology and the internet change the way business is
done? What's your new research all about?
A: First, we have to recognise that consumers' capacity for accessing information and
networking among themselves and activism has changed. You, as a consumer, are not a
passive recipient of what the companies do. The dramatic change in the role of the
consumer can be represented by five basic drivers: information, access, global view,
networking, experimentation and activism. This is not just because of the internet, it's
also due to TV and wireless. The research focuses on developing a framework for
thinking about value creation in a system where consumers can exercise their choice and
value their experiences.Q: What advice do you have for Indian companies? A: The first is
to improve the quality of management. Second, to benchmark and recognise where we
are. According to a recent study, India ranks the lowest in productivity. Low labour costs
are different from low productivity. Third, increasing the willingness of managers to
experiment and change existing business models and approaches to managing. That's
critical. None are rocket science but they are critical.
Q: How can companies boost productivity levels?
A: A lot can be done by using simple tools. Let's take a two-wheeler in India. It is a basic
mode of transportation used to carry a wide variety of things from vegetables to milk.
Often the whole family rides together. Can we experiment and provide various fixtures
that can make the vehicle safe, more productive and useful? There's a huge opportunity
there for those who can provide these fixtures. The other is to have the commitment to
improve continuously. For example, consider the earthquake in Gujarat. Nature
devastated lives. In our rebuilding effort, was there an attempt to build the Indian village
of the 21st century? It's hot in Gujarat. Are there experiments with new materials and
approaches to insulation and ventilation?.The question is: how can companies grow, be
profitable and create value if they do not experiment? We can do good and be profitable
at the same time.
Q: What is the next inflexion point in management thinking?
A: Consumer-centric industrial system and strategies for the bottom of the pyramid. Both
will have huge implications on markets. These are the two problems I am working on as I
believe they are the two big issues.
Q: What issues do you explore in your new book?
A: The book is co-authored with Prof. Venkat Ramaswamy. We explore the basic
revolution in the existing views on what's value and how you create value. Our book
focuses on creating an experience-centric, consumer-oriented industrial system.
Therefore, I'm looking at the underlying infrastructure we need in terms of rapid
knowledge creation and information infrastructure.
Q: You talk of Next Practices as against Best Practices, which have already been tried
and tested by ones competitors 10 years ago. How can companies move to Next
A: You cannot develop next practices unless you have a point of view of what will be the
new sources of competitive advantage. If you believe experience-centric value will
prevail, you'll spend a lot of time on creating innovative experiences as others are focused
on products. A next practice starts with a point of view - what the world can be like and
not what it is.
Q: How can companies decide what's competitive advantage today when you don't know
what will be core tomorrow?
A: We tend to associate time with uncertainty. What's so complicated? Is the population
of India in the next ten years unpredictable? The same goes for income levels, education
and demographics. So we need to ask what the new opportunities are, and how to
leverage them. For example, 70 per cent of India will still live in villages. We need to
build distribution channels to tap the huge rural opportunity. We need a refrigeration
platform to serve and connect the rural-urban markets. These infrastructures and the
competencies to manage them cannot be built in a short period. Today, few retail
consumers are buying an Ambassador car. Why? In the last 10 years, Indian consumers
have become price- and performance-conscious. The same applies to food, entertainment
and everything else. Reducing price is not enough, the performance has to improve along
with competitive pricing. All the data that Indian companies might need is there. The
problem is one of interpretation.
Q: In the last few years, HLL's performance has failed to match its past performance, and
analysts say that the kind of marketshare it has been enjoying in the past cannot continue?
A: I don't think HLL can be dismissed as IBM. It has tremendous internal strength. The
company is repositioning itself and you can already see some of the results. It is much
more focused - it's focusing on some large categories and are doing extensions of large
brands and upgrading all products.In other words, HLL is increasing the price-
performance of each of these products.
Q: How much does CEO personality impact a company's direction? Do certain CEOs
follow certain projects because they are personal ambitions?
A: You cannot remove CEO personality from the company. This is true around the world.
Q: What strategy would you advise Indian companies to adopt?
A: Become high-tech. Focus on a lot on the poorer segments of the population as a
market, and not just on the top tier. Examine critically the assumptions behind business
models. Assumptions have a way of limiting how we think of opportunities. People feel
technology and innovation are expensive, but I don't think so.
Q: Is the theory of core competence in direct contrast with large diversified and unrelated
businesses interests of companies?
A: This is a persistent question in almost every interview in India. Core competence has
nothing to do with lack of diversification and complexity. Take 3M, which has 60,000
products. Its core competencies are in adhesives, coating and substrates. The issue: core
competency-led diversification is more durable than conglomerate diversification.
Confronted with major discontinuities, some core competencies can become a problem.
The core competency in India during 'Licence Raj' was how to acquire a licence. That
may still be relevant in some businesses but not in most. Core competencies can become
core rigidities in the face of discontinuities. The flip side of it is that firms have to
continually build new competencies.
Q: What are the issues in managing diversities by companies like those which are into
businesses that have nothing in common with their traditional businesses? Take Vivendi,
for example - what went wrong?
A: I don't know what went wrong with Vivendi. I believe it's easier to manage a portfolio
of businesses that have strategic similarity rather than just a large number of businesses.
Utilities, music and film businesses have totally different logical underpinnings. How do
you manage the different cultures? There are two problems - for one, you're in a business
you don't totally understand. Second, you can provide no clarity to direction.
Q: What do you have to say about conglomerates like Reliance, which is an infrastructure
company trying to evolve as a marketing company and also has mega Infocom
A: So far they're good at large-scale project management. They complete projects on time
and at lower costs in a country with all the constraints everybody complains about. Now,
will they be able to manage a large distribution system? It's an open question, I would
say. Their competition is not as constrained. The culture of distribution is different from
manufacturing - primarily manufacturing of bulk commodities on a global scale. You
don't manage one facility, you have to make thousands of connections of distribution
chain (of dealers, distributors and petrol stations). I'm not saying it can't be done, but it's a
different culture.
Q: You took a two-year break from your teaching career at the University of Michigan to
implement your own ideas at your company called Praja. Was there a dichotomy between
teaching and practice once you were on the other side?
A: There's no dichotomy between what I teach and what I practice. But small companies
have to constantly worry about their own vulnerability caused by 'cash flow'. And in the
last year-and-a-half, the market for innovative technologies just collapsed. We had to
rethink our strategic direction and reposition the company. We decided to de-feature our
technology and bring a 'light' version to the market. We're offering a subset of our
capability since the industry was not ready to invest. We're at the forefront of a new
competitive space called Business Activity Monitoring (BAM). The good news is we are
ahead of everybody else. Analysts and companies are catching up. I expect the company
to emerge as a leader in the new space of business activity and context monitoring. I'm
associated with the company. Now that the company is reasonably positioned in the
emerging market, I expect to take some time to teach. I don't plan to teach full-time. I
will straddle both worlds - business and academia.
Q: How different is running a business from teaching people to run businesses?
A: I think I have a new appreciation for finding a right balance between consolidating
and pushing ahead. And, certainly, rethinking priorities given continuous changes in the
market for high-tech software. Last year, the changes in the marketplace were dramatic.
70-80 per cent of small companies just collapsed. We survived that. I've a new
appreciation for what it takes to operate in unforgiving markets. Further, I wouldn't have
had such a deep appreciation of technology as I have today if it had not been for my
experience with Praja.

Markets left to themselves encourage greed

It is sometimes feared that a market driven economy will replace "noble" incentives by
monetary ones. Economists' models of utility maximisation, and strategic thinking where
competitors aim to outwit each other feed this fear. Perhaps as Burke wrote, "The age of
chivalry has gone; that of sophists, economists and calculators has succeeded". But
ironically, modern research in economics is making the point that pure self-interested
behaviour can make everyone worse off and contributing more potential ways to align
individual interests and social interests.
Therefore, rather than teaching people to think selfishly, economists are often thinking of
workable ways to mitigate the extent and consequences of such behaviour. Ignoble
incentives arise even when markets and economic freedoms are suppressed. In India we
know how morals were corrupted in the control regime. Markets left to themselves,
however, encourage greed. Reputation and trust, or fear of punishment can contain the
consequences of human greed. Which works better? The collapse in East Asia was
blamed on their poor regulation and connection based market systems. But Enron,
Andersen and now WorldCom have occurred in America's tightly regulated systems.
Laws inspire creative means of avoiding them, unless there is internal motivation. Even
selfish maximisation must be embedded in a framework of morals. Maximisation is only
about the best way to achieve objectives, and there is nothing to prevent those from
including others' utility. Strategic behaviour can lead to conflict or coordination failures
where everyone is worse off, but it can also lead to cooperation, depending on the
structure of interaction. To discover the structures that can bring out the best in people
and societies is an active research area.
Competition, transparency, and openness are obvious prerequisites because any kind of
power corrupts. Externalities, where my actions influence you but I do not take this into
account in choosing the level of my action; asymmetric information, where information
available to market participants differs; and strategic behaviour, where I plan my action
taking into account your future response to it, all can result in market inefficiencies.
Finally there are coordination failures, where, for a number of reasons, the economy may
be trapped in a low-level of performance. But the positive aspect is that potential surplus
exists. It is possible for policy intervention to make someone better off without making
someone else worse off. Information imperfections imply that incentive structures have to
be much deeper than just monetary, since monitoring cannot be perfect and prices do not
convey all the necessary information.
A principal has to motivate his agent: the shareholder and banker must motivate the
manager, the manager his workers. The voter must motivate the politician, the latter his
bureaucrat. Agents retain some rent because their information exceeds that of the
principal. Since input is not perfectly observable, the incentive structure must reward
performance relative to others and subsidise inputs, without too narrow a targeting of
rewards to prevent a substitution away from vital non-observable activities. It must
provide insurance or smooth returns, motivate agents to work, yet prevent them from
keeping too much rent. Variable rent or returns increases incentives to work, but lowers
insurance. It must encourage them to take risks, yet prevent them from taking too much
risk. It must not give them too much discretion, which will increase their rent, yet leave
enough flexibility for them to adjust to unforeseen circumstances.
Examples of market inefficiencies are: insurance premiums are too high because agents
undertake risky actions; firms are risk averse and capital is under supplied because capital
markets are incomplete; prices do not clear markets in order to provide incentives for
individuals to obtain information. But policies and market innovation can reduce the
inefficiencies. Adam Smith's famous invisible hand embedded in a moral framework,
works because of competition or the absence of power. A baker alone cannot raise his
price, since he is a tiny part of the market. But the reverse of this is the problem of
collective action. My contribution is a minor part in the provision of a social good. If I
stop it, it does not reduce the provision of the good, but saves me considerable effort. The
good is under-supplied because everybody's business is nobody's business. As each free
rides on the other everyone is worse off. The problem is aggravated if the polity
stimulates conflict among groups. Fighting over the distribution of the cake can prevent it
from growing.
As it has in India where short-term transfers have harmed long-term growth, and
sustainable re-distribution. As groups seek favours for themselves the common good
suffers. Moreover, Indian controls, monitoring, and administered prices destroyed public
and private incentives to work hard, invest, and produce quality output, while they
allowed politicians and bureaucrats to obtain too much rent. They were often well
meaning but their indirect effects were not foreseen. Small changes make bigger ones
possible. Deep institutional change, which alters incentives for the whole range of market
actors, and their interactions, can trigger a shift to much better outcomes. To some extent,
as the cake increases, conflict reduces. But credible mechanisms to increase trust in
society are required. One key maybe using surpluses released to increase the return to
developing human capabilities. This decreases exclusion in a way that has benefits for all.
Markets will then release human potential, not human greed. Thus investments in
education and infrastructure, will further strengthen externalities, and establish beneficial
cumulative expansions. Such changes will not only be about celebrating strength, but also
about equipping the weak and giving them many entry points into expanding
(The author is a professor at IGIDR)
ASHIMA GOYAL Economic Times TUESDAY, JULY 02, 2002

Modern day sport in industrialised society is an industry, as

anything else
Sports is a reflection of the values of society. Modern day sport in industrialised society
is an industry, as anything else.Football being one of the world's most popular sports is
definitely a very well organised industry.
For a sports to be an industry, some of the most valuable prerequisites are to have very
good TV coverage, and well planned year-round activity.As a result of these two, the
standard of the sport will improve. Indian sport, like the rest of the industrialised world,
inevitably will follow the same pattern.
I feel football in India definitely has all the potential of the making of an industry.Already
football is definitely the most popular domestic sport in India. Even though the Indian
cricket team is well supported, domestic cricket matches cannot draw crowds like
matches between East Bengal, Mohun Bagan draw in Kolkata or Churchill V Mohun
Bagan in Goa or FC Kochi V East Bengal in Kochi.Moreover the organisation of the
National Football League has made the sport popular in more centres like Bangalore and
Mumbai and I am positive this trend could be spread to the North East, Hyderabad and
other places.
The All India Football Federation has also recognised the importance of TV scheduling
and are already working on these aspects. The Asian Football Confederation also feels
that India is one of the countries in Asia that could help raise the standards of Asian
Football.The AFC secretary, Mr Peter Vellappan, personally thinks that India has the
potential to match the top footballing nations of Asia. I am thus confident that football in
India will soon be a full fledged industry.
We have had tremendous response from the sponsors and we hope with the support from
the All India Football Federation, we could help not only football become an industry,
but the standards of football in India would reach its potential of being one of the best in
Asia and realise the aim of qualifying for the World Cup by 2010.I am optimistic and this
is why I have invested in Indian football. I am sure we will have the support of industry
to give Indian football its rightful place in Indian, Asian and World Sport.
A B Kashmiri WEDNESDAY, MAY 22, 2002 Economic Times

Public sector being a guarantor of job security is a myth

The Centre, very often, seems to be in business simply for the heck of it. Dozens of
public sector units owned by the Centre are so thoroughly bankrupt that far from making
profits and declaring dividends, they are unable to even pay salaries and other statutory
dues like provident fund and gratuity.
Their total outstandings now add up to a scandalous Rs 2,000 crore and more. In fact,
fully one-fourth of the central PSUs are now in arrears. Most employees have not been
paid for months, even years.So much for the public sector being a guarantor of job
security. The NTC, long an umbrella organisation for sick private sector mills, is the
biggest defaulter, with dues of almost Rs 390 crore as of December last.There are a host
of other defaulting PSUs, including the National Jute Manufacturing Company, Heavy
Engineering Corporation, Scooters India Ltd, et al.
This is a totally unacceptable state of affairs.There is no reason why people should be on
the rolls of cash-strapped entities which are unable to discharge minimal contractual
obligations.But then, we have thoroughly unreformed laws which nip in the bud any
prospect of a functioning labour market.The Industrial Disputes Act, 1947 disallows
retrenchment in units employing 100 or more workers, without express permission of the
state, which is rarely if ever given.There are some tentative half-measures to hike the
upper limit to 300 - or 1,000 - workers, so that those made redundant in most companies
can seek severance pay and allowances and try their luck elsewhere.
But the actual legislative changes seem some way away, given the legislative paralysis in
Parliament.The better option then is for these PSUs to offer VRS benefits. This is also
better for workers than holding IOUs from PSUs that are bankrupt and likely to remain
so.But where would the money for the VRS come from, especially when the PSUs are
unable to pay even salaries ? The Centre ought to press for an attractive VRS package
nonetheless, paying if need be from its coffers.This would be a cheaper option than
running up statutory dues while labour, capital and land all lie idle.
EDITORIAL Economic Times THURSDAY, AUGUST 15, 2002

Reforms have to grow up

Today, more than a decade after the launch of the reform process, it seems that India's
political system is more than ever in consensus about the basic direction of reforms.What
are the areas it needs to focus on? Significant reduction of fiscal deficit is the first order
of business. Despite several years of fiscal consolidation effort, large and persistent fiscal
deficits remain.India's overall government spending, currently around 33% of GDP
(Centre and states together) will need to be brought down substantially as a proportion of
national product in order for India to achieve its reform goals of macroeconomic stability
and long-term rapid growth.
Government dissavings at the federal and state levels need to be reduced through cuts in,
and refocusing of subsidies, stricter control of non-developmental expenditure,
improvement in the tax ratio through deepening reform of the indirect tax regime and
stronger tax enforcement.Privatisation of India's state-owned enterprises (SOEs) is
critical. Many of the SOEs are inefficient and loss-making.An end to the state
monopolisation of these sectors is crucial to permit new, privately owned firms to
introduce competition and higher productivity into these sectors.
Privatisation of these enterprises is also desirable in most cases, since the government has
no particular comparative advantages in running these enterprises, and may severe
disadvantages (especially the politicisation of key investment and employment decisions
of the enterprises).Reforms to further opening up of the economy to trade and FDI are
crucial if India is to sustain high rates of economic growth.India's average tariff rate of 27
per cent vastly exceeds the average tariff rates of the other economies. India also displays
continuing high barriers to foreign direct investment in contrast to most of the fast-
growing Asian economies.If India has to become an attractive destination for FDI and a
major platform for labour-intensive manufacturing exports, reforms in India's labour laws
and exit policies are extremely essential.
China's experience suggests that while workers in the Chinese state sector are accorded
generous job guarantees, workers in the non-state sector do not receive guaranteed
employment.By contrast, in India, workers in both the public and the private sector, once
employed, cannot be laid off without governmental permission. As a result of liberal
hiring and firing policies in China, there has been rapid growth of employment.Formal
sector employment in China has increased dramatically, from 95 million in 1978 to 158.5
million in 2000. India, by contrast, has experienced a meager rise from 22.9 million in
1978 to 27.9 million in 2000, of which 19.3 million are employed in the public sector.
India has so far made little progress in commercialising the key infrastructural sectors. In
power, for example, most electricity continues to be a public-sector monopoly, run by
state electricity boards (SEBs).Almost all of the SEBs make losses and some are even
unable to pay for coal or the power they purchase. Tariff reform is crucial. Privatisation
of power generation, and the conversion of SEBs from electricity providers to market
regulators would come next. Power capacity will not be expanded until the SEBs are
fundamentally overhauled or eliminated.There is no doubt that geography heavily
influences economic performance. Both in China and to a lesser extent in India, the real
economic success has come in the coastal provinces/states, which can take advantage of
export-led growth.The interior has done much less well. GDP growth in the hinterland
has lagged behind the coastal states by several percentage points per year.
There is a vast amount of economic reform that can be carried out to improve conditions
in rural India, especially in the Gangetic valley.There is no reason for expensive and
counter-productive charity for the northern states, and still less any case for holding back
the fast-growing coastal regions.In India, Tamil Nadu, Maharashtra and Gujarat have the
potential to grow as the fastest growing Chinese coastal provinces of Fujian, Zhejiang
and Jiangsu.Perhaps the key step in the Gangetic plain is to improve the most basic
infrastructure so that the vast rural populations can take part in more rapid national
economic growth.While China's hinterland has lagged behind the coastal regions, the
Chinese hinterland too has enjoyed rapid economic growth.The state governments need
to adopt a strategy for rural India, in which there will be a reliable infrastructure supplied
at commercial prices rather than given for free.
The government's commitment, both at the national and state level should be that every
village will be assured at least clean water, a road to the regional market, reliable power,
and minimal telephone service; but that every village will be responsible for covering the
commercial costs of those services on a normal user-fee basis. In particular, Bihar, Uttar
Pradesh, and Orissa are in desperate need of reform.On the political front, while there
see-ms to be some degree of consensus on the basic direction of reforms, however, there
have been instances when the parties have supported reforms when in power, and
opposed them, when in opposition.
An important aspect of the unfinished agenda should therefore be wide dissemination of
information and debate about the necessity of reforms, which should include a frank
discussion on some its temporary negative consequences and ways of ameliorating their
impact.In conclusion, a decade of opening of the economy has produced new dynamism,
most dramatically in the information technology sector, but in others as well. The new
technologies (information technology and biotechnology) give new opportunities for
economic and social development.The reforms implemented so far have helped India
attain 6%-plus growth, however, should India be able to implement these remaining
reforms and re-orient governmental spending away from inessential expenditures towards
high priority areas of health and education and infrastructure development, then it is very
likely to attain and sustain even higher rates of economic growth.
Nirupam Bajpai FRIDAY, JUNE 07, 2002 Economic Times

Should agricultural subsidies be stopped?

Excess is definitely not success when it comes to India's wheat exports. On the contrary,
the fact that India has been exporting wheat on a scale large enough to trouble major
wheat exporters such as the US is a sign of crisis in Indian agriculture.Instead of
celebrating the 'achievement' of exporting three million tonnes of wheat over the last 18
months, our policymakers should concentrate on a strategy shift. India's wheat exports
ride on subsidy.The export price is less than half the Food Corporation of India (FCI)'s
economic cost. In fact, the export price is equal to or lower than the price at which grain
is sold through the public distribution system (PDS) to those below the poverty
level.Since the grain comes out of FCI's stocks, parts of which are more than five years
old and have degraded owing to poor storage, a lot of the exported grain ends up as
cattlefeed, although some brave souls are reported to be mixing Indian grain with
adequate quantities of superior grain to produce flour fit for humans.
It is crisis indeed when the government subsidises foreign cattle and those who eat them,
even as domestic consumption gets squeezed on account of high prices.Ratcheting up
procurement prices year after year is the root of most problems in the food sector. Since
FCI offers the best price, the bulk of marketable grain in areas where procurement takes
place is sold to the government.As food stocks mount, the loss due to damage and
pilferage increases, along with other costs of carrying the stocks. This pushes up overall
costs and puts upward pressure on issue prices from the PDS.High issue prices depress
offtake, leaving yet more grain with the government and pushing up the food subsidy bill.
This comes in handy to justify high import duties on grain - consumers would desert FCI
for cheap imports.The way out of this tangle is to limit procurement to the needs of the
buffer stock and benchmark domestic production to international efficiency norms by
liberalising imports. Then India's farm output would diversify and turn
competitive.Outlays spent on subsidies could be used for productivity boosting
investment. Export success in such a regime would be worth celebrating, not exports
riding on subsidy and forgone domestic consumption.
(This article, dated June 12, 2002 has been taken from a Times of India Publication)

Should important services like transport be left to market

ISSUES OF ECONOMIC governance are back in focus with the Tamil Nadu
Government deciding to restructure its transport corporations. An important change that
the Indian economy has undergone during the last decade has been the gradual, but
unmistakable, transformation that has taken place at the level of economic management.
At stake in this process is the concept of the welfare state. Essentially a post-World War
II phenomenon, the welfare state was conceived on the need for an intervention by
Governments to prevent market failure. Specific areas of economic activity that engaged
attention the world over were education, health and other public services. India's post-
Independence, Nehruvian economic thinking had also internalised the concept to ensure
that the newborn nation was on the track to growth with equity. The recognition of public
goods and services, their importance in economic development and their effectiveness in
economic management were by then globally accepted. Consequently, India's
management of services was marked by a flurry of Government controls, resulting in the
creation of public sector undertakings in several areas of economic activity.
Public transport is a case in point. While attempts to bring the transport services under
some form of control began in the country as early as 1915, it was a decision taken in
1950 that made an effective intervention into the market to provide for a properly
coordinated transport network. Since 1950, when the Road Transport Corporations Act
was passed, 70 State road transport undertakings have been created all over the country.
The increasing role of road transport is highlighted by the fact that its share in surface
traffic movement has increased since the 1950s, when it handled 20 per cent of passenger
traffic and 11 per cent of freight traffic. Present estimates place these figures at 80 per
cent and 60 per cent respectively. The country's State road transport undertakings, with a
combined fleet of more than one lakh buses, provide mobility to more than 65 million
passengers every day and employment to eight lakh people. The growth of this sector,
however, did not mean its finances were healthy. In the red for quite some time now,
during 1999-2000 these undertakings spread across the country incurred a total loss of
around Rs. 2,000 crores, forcing States to embark upon restructuring exercises.
One dominant line of thinking has been privatisation. The factors that resulted in losses to
the State-run transport corporations are several and include causes that are both internal
and to the system. The sharp rise in modes of personalised transport is an important factor
that cannot be overlooked. The switchover from public transport to two-wheelers, for
instance, was also propelled by the availability of several financial lending schemes.
This, combined with internal failures such as the tendency to utilise State transport
corporations as easy avenues for providing employment, irrational fare structures and
rising costs of fuel, meant a steady drain on their finances. The present efforts at
restructuring public transport should be seen in their entirety and not merely from a
financial point of view. Suitable changes in related fields are also called for. Needless to
say, an efficient and successful public transport system will have a considerable spin-off
in terms of lower pollution levels and reduced crowding. The answer to the public
transport conundrum lies not in dismantling the system totally, but in revitalising it
through rational and economic decision-making, while maintaining equity imperatives.
Given the importance of public transport in daily economic activity, Governments should
not abandon their task of providing affordable and efficient services. Declining financial
health, most of which can be corrected through systemic changes, should not be held out
as a reason to expose such essential services entirely to market forces.
Hindu editorial May 22, 2002

Should PSUs be divested through strategic sale or public offer?

Disinvestment process has been controversial ever since it had been launched. The
disinvestment process as per global trends should have begun in the early 80s.But we
were late in starting the process and it didn't take off for almost a decade. It is proved
beyond doubt that there are no reasons for the government to be in business in the present
scenario.However, there is no justification for the government to disinvest and use the
money to meet its revenue deficit or to subsidise non performing inefficient and bad
The proceeds arising from strategic sale or through public offer must be used to
strengthen the economy: its capacity, efficiency and global competitiveness by building
the necessary infrastructure. The disinvestment process adopted by the government lacks
vision and is procedural and revenue centric. We have enough foreign exchange reserves.
The government doesn't need to sell its gold to reward bad and inefficient organisations
like UTI & IFCI or to subsidise 20 million upper middle class and richer sections who
hold units in UTI.Strategic sale itself suffers from weaknesses and at times it is counter
In many cases of strategic sale the funds used come from public sector banks in the form
of loans.And it is doubtful if these loans would ever be paid back, which means most of
the funding in case of strategic sale comes indirectly from the government.In case of
disinvestment of units holding strategic value being acquired by some MNCs, the nation
may be taken for a ride during most crucial periods.Disinvestment in the oil sector
through a strategic sale may pose serious problems, if acquired by MNCs, during any war
in the future where they would be guided by the government where the holding company
is in operation.But, there is a strong case for disinvestment through public offer since
there may not be any such dangers. The disinvestment process should also focus on
disinvestment in loss making units rather than profit making units so that the level of
subsidies given to them are reduced.Nobody sells valuable assets and keep the garbage
inside the house.
Steal a few lakhs and you're a criminal. Steal a few hundred crores and you
become an industrialist
Steal a few lakhs and you're a criminal. Steal a few hundred crores and you become an
industrialist, rubbing shoulders with the high and mighty of the land. Or so it would seem
from finance minister Jaswant Singh's recent statement in the Rajya Sabha that "non-
performing assets of Rs 83,000 crore is loot and not debt". Still, when one MP pointedly
asked Mr Singh about the antecedents of a member of the prime minister's advisory
council, all he had to say was that the PM was considering the issue. Of course, it's long
been a subject of wry humour that while Indian companies may frequently face financial
woes, their promoters rarely do. Old banking hands are fond of recounting an anecdote
about an industrial association's expert committee, which recommended the shutting
down of some weak banks.
It was subsequently pointed out that the banks had turned sick because of huge loan
defaults, and the list of defaulters included members of the expert panel - whereupon the
recommendation was dropped. Nor should the 'contribution' of politicians be overlooked.
Financial institutions and public sector banks have been used for years to channel money
to friendly industrialists, and never mind if it ever got repaid.As the experiences of Japan
and South East Asia have shown, an ailing financial sector can very quickly wreck the
entire economy. Indian lenders have long been handicapped by the fact that it is almost
impossible to take action against defaulters.
This problem is sought to be addressed by the Securitisation and Reconstruction of
Financial Assets Bill, which would allow creditors to take control of the debtor's assets
and replace the company's management, if need be. The response of some chambers was
to seek a distinction between 'wilful' and 'non-wilful' defaulters, though they remained
silent when some commentators queried whether companies would themselves apply the
same yardstick to customers who failed to pay up. The fact is, this sorry saga of bad debt
reflects poorly on some of India's most high-profile companies, as also on their
influential friends who conduct corporate battles under the guise of political campaigns.
But several Indian companies, from both the Old and New Economy, are widely
respected for faithfully adhering to the norms of corporate governance. If they were to
openly voice their support for the Bill, it would further enhance their stature - apart from
doing the economy a good turn.

The future lies with glocalisation

All opportunities carry risks. Globalisation has created unprecedented opportunities and
unprecedented risks too: remember the Asian financial crisis of 1997-99.Developing
countries must take prudential steps to cope with volatility. But globalisation, warts and
all, is still a boon. Does decentralisation have the same potential for change?
Not at the macro level.But at the grassroots level it can empower those who have long
been supplicants before statism. Localisation can spread the benefits of globalisation to
the grassroots.Global experience of localisation has been very mixed. It works only if
rulers are serious about shifting power from the top to the bottom. Creating local
governments is not enough: corresponding administrative and fiscal reforms are needed
to empower communities with real authority and resources.Local governments must be
elected, not appointed.
Officials must be made accountable to communities they serve, not national
capitals.Communities should participate in the design, execution, monitoring and
maintenance of projects meant for their benefit. Where these conditions are missing,
localisation often fails.But where these conditions are met, enormous improvements have
occurred. Some examples:North-East Brazil, long the graveyard of anti-poverty schemes,
succeeded in the 1990s by switching to a bottom-up approach. Communities have been
empowered, 44,000 community-managed projects have benefited 2.5 million of the
poorest families. Benefit-cost ratios exceed 3.0, over 95 per cent of funds reach the poor,
and project costs have fallen 20-30 per cent.
In Indonesia, the Kecamatan Development Program was launched in 1998 to side-step
corrupt provincial governments and channel funds directly to villages. It covered 10
million people within 3 years, and greatly improved outcomes. It is now being extended
to another 20-30 million people.In the 1980s, donors introduced social funds in countries
where money routed through governments was typically wasted or stolen Social funds
financed projects suggested by communities.Over 90 per cent of World Bank social fund
projects succeeded against 76 per cent of all projects. The Bank is now scaling up social
funds into community driven programmes in Africa.River-blindness, a disease spread by
blackflies, once threatened the sight of 34 million people in 11 West African countries.
Its eradication has been arguably the biggest development success in Africa.Aerial
spraying by donors was supplemented by community action to distribute medicines,
detect and treat the disease. This approach is now being extended to malaria control.
In Zimbabwe, centralised managed failed to check poaching of wild life. So local
communities and district councils were made partners in a new program, called
CAMPFIRE.Hunting quotas were sold to hunters, and the revenue shared with
communities and local bodies, which now had a stake in checking poaching. The result:
wild life boomed.In India too, experience of decentralisation has been mixed. Panchayati
Raj is supposed to shift authority and resources to local governments. But most state
capitals have sabotaged such a shift.Real local empowerment has been achieved only in a
few states? West Bengal, Madhya Pradesh, Andhra Pradesh, Kerala. Decentralisation has
produced major gains in Bengal.Poverty has fallen and agricultural productivity
improved faster than in any other state. But this is a special case of communist-controlled
localisation, not replicated anywhere else.Overall, panchayati raj is not a proven recipe
for success in India.
But spectacular gains have been recorded sometimes through community participation,
often unlinked to local governments. Examples:Traditional top-down reclamation of
saline farmland in Uttar Pradesh yielded indifferent outcomes. Then in 1993 a new
project organized 46,500 beneficiaries to plan and manage reclamation.This approach
worked brilliantly: 69,000 hectares were reclaimed against the target of 48,000 hectares,
and family incomes rose from Rs 12,065 to Rs 20,082 annually. This approach is now
being extended to another 150,00 hectares, and is being copied by other states.
In Andhra Pradesh, the irrigation system was silted and run down by the 1990s. Water
rates were too low to finance maintenance. Then a new chief minister tripled water
charges.He made this politically palatable by creating 10,292 elected water users
associations to help rehabilitate and manage the irrigation system. In six weeks in 1998
the associations completed 22,887 maintenance works at a cost of just $ 28 million.
Effective irrigated area increased half a million hectares, and paddy yield rose 10 per
In Madhya Pradesh, no teachers wanted to serve in remote tribal areas, where hamlets
were often too small to qualify for government schools. Then a new chief minister
created an education guarantee scheme.If any 40 people demanded education, provided a
hut for schooling, and chose a local person to be a para-teacher, the government paid the
para-teacher's salary. Within 18 months, 26,000 schools came up with 1.8 million
students. Literacy in the state shot up by 20 percentage points in the 1990s.
Rural water supply by the state utility failed in UP. A new bottom-up approach called
Swajal was then attempted. Village water and sanitation committees were elected, and
empowered to choose from a menu of water supply options.The beneficiaries had to
contribute to capital costs and pay user charges for maintenance. The village committees
themselves maintained the projects. The approach proved so successful that it is being
expanded into all-India scheme.Forest Departments in Andhra Pradesh could not check
grazing and felling in forests by locals. So joint forest management was attempted with
2,666 village forest committees, which got a share of forest produce.More than 849,000
hectares of forest are now regenerating under improved management.Community
participation seems to work better than mere decentralisation.
Villages are often not united communities but battlegrounds between different castes, and
elite capture of benefits is common. Voluntary associations have a social glue that
villages or districts sometimes lack, though not always.Water users associations, water
and sanitation associations, education associations and micro-credit societies all deliver.
Even if a project is centrally run, making users communities partners in planning,
execution and maintenance has often improved outcomes and reduced costs.I think
community participation is best understood as a form of privatization, where users take
over from the state. The results are good because a callous bureaucracy is replaced by
users with a stake in success.Community empowerment confers property rights on
associations of citizens, harnessing both social capital and entrepreneurial talent.
Empowering communities can be more important than empowering local governments:
the latter can sometimes constitute a new statism. Localisation is still an experiment in
progress. We know less about it than about globalisation. But we cannot go back on
either, since both represent empowerment. The future lies with glocalisation.

The power ministry should cut off supplies to all the defaulting
Even cynics were shaken when Shiv Sena supremo Bal Thackeray ordered power
minister Suresh Prabhu to resign on the ground that he was too honest. We are used to the
notion that politicians should resign if caught extorting bribes. Never before has a
minister been sacked on the ground that he did not make money at all, and so was unfit
for high office. Many supporters of Prabhu moan that the power sector reforms he
championed will now be shelved. In fact, his reforms were well-intentioned but too timid
and half-baked to work.
On assuming office, he found that State Electricity Boards (SEBs) owed an enormous
sum of almost Rs 30,000 crore to various suppliers - Coal India Ltd, the Railways, GAIL,
BHEL, NTPC and others. This was more than the entire GDP of some countries. The
suppliers levied penal interest of two per cent per month on overdues. But the SEBs
ignored the penalties as blithely as the dues. For many years, some overdues were
recovered by Central suppliers like CIL, NTPC and BHEL as deductions from Central
Plan assistance to errant states. The Planning Commission said no more than 15 per cent
of Plan assistance could be deducted in this manner. Soon, the states crossed the 15 per
cent limit. After this, they suffered no additional penalty at all. At many official meetings,
the states agreed to slash power subsidies for farmers and check theft. They then went
back and did nothing, or even increased subsidies.
This surely proved that commitments made by financial and moral bankrupts had no
value. Yet Prabhu sought to solve the problem through a fresh set of commitments. He
proposed a scheme whereby states that agreed to reform could convert their overdues into
bonds.They would also be forgiven part of the penal interest, which they were not paying
anyway. If after this, they still defaulted on fresh dues, these would be deducted from
Central Plan assistance without any ceiling. He hoped this would induce states to pay all
future dues. Only an honest man can be foolish enough to believe that rogues will reform
so easily. The states will promise anything for a little cash, and then return to politics as
usual.When so many cannot even pay staff salaries on time, could Prabhu seriously have
believed they would suddenly start paying all future dues to suppliers? And if they failed
to pay, could Prabhu have believed that the Central government would get tough with its
own coalition partners who ran so many states? When I first talked to Prabhu on this
subject, I said he was ignoring the obvious solution: cut off supplies to all the defaulting
After all the most elementary principle of commerce was ''No payment, no supply.''
Every child in kindergarten knows this from Mother Goose. ''Simple Simon met the
pieman Going to the fair. Said Simple Simon to the pieman Let me taste your ware. Said
the pieman to Simple Simon, Show me first your penny. Said Simple Simon to the
pieman, Indeed, I haven't any.'' Did the pieman keep supplying pies month after month,
while levying imaginary penalties on Simple Simon? No, for he knew that to ignore
default would be to induce further and further default. The same logic applies to the
states. Prabhu told me I was being unrealistic. If he cut off supplies to the SEBs, he said,
many states would be plunged into darkness, and there would be riots. You cannot treat
this as just a commercial matter, he said, it has major political implications. But surely
that is the problem. As long as the issue is treated as political, there is not the slightest
reason for states to reform. If, because of politics, they can keep getting supplies without
payment, why should they ever pay up?
They will stop only if they find that they cannot get any coal from Coal India, any power
from NTPC, any machinery from Bhel. Prabhu is afraid of riots. In fact, urban riots can
be a solution. Often in the past, farmers have rioted against higher power rates, and
forced politicians to lower these. State governments claim it is impossible to charge
farmers realistic rates, impossible to sack corrupt linesman, impossible to stop power
theft.But if supplies to the SEBs are cut off and irate citizens riot, the states will at last
find it politically expedient to reform. They will at last find it politically feasible to raise
rural tariffs, sack corrupt linesmen, and crack down on theft. By now, I think Prabhu
must have realised a fundamental truth. A polity that cannot stomach an honest power
minister also cannot stomach the thought of paying its debts honourably. Only when it is
forced to bear the full consequences of non-payment, will it pay up.

The presidential form is not suited for India

PRESIDENT K. R. Narayanan, while addressing a joint session of Parliament, convened to mark
the conclusion of the golden jubilee celebrations of the country's Independence, echoed the
feelings of a majority of Indians. He voiced his concern over the declining standard of decorum
and debate in the Lok Sabha.

Holding similar views, for Rabi Rai, a former Speaker of the Lok Sabha, frayed tempers, violence
in the Well, and use of unparliamentary language in the Lok Sabha are a logical sequence of the
criminalisation of politics.

Rabi Rai believes that the world's largest democracy is today threatened by the powerful crime
syndicates and mafia, who wield a formidable influence over the country's politicians, bureaucrats
and law enforcement agencies. The vacuum created by the disarray in, if not the disintegration of,
some of the leading political parties, also threatens the democracy.

The former Speaker was in Solan some time back on an invitation to preside over the "August
Kranti Diwas" function, organised by Nivedan, a local voluntary social organisation, engaged in
focussing attention on regional and national problems.

Romesh Dutt interviewed him over the issue of parliamentary decorum and current standard of
debates in the Lok Sabha.


Q) The public image of an average MP, which was that of a self denying person totally
dedicated to the nation till at least the 70s, has taken a beating. What has caused this
downward slide?

A) I will answer that in three words - criminalisation of politics.

Q) This is a strong statement, considering that it concerns the privileged members of the
country's apex democratic institution.

A) Not at all. As a matter of fact, how can one deny something that has been telecast live a
number of times? In any case, I am making a statement about a general trend and not about
individual MPs, some of whom can rub shoulders with the world's greatest parliamentarians
anywhere, anytime.
Also, please remember that as per an Election Commission Report, there were 40 MPs facing
criminal charges in the last Lok Sabha and 700 such MLAs in the different state legislatures of the
country, prior to the last General Election.

Q) But ascribing criminalisation of politics to falling standards...

A) Well, I get your point. In order to answer your question properly, I will have to outline the "hows
and whys" of the process of criminalisation of politics and politicalisation of the criminals. I will
refer to the N.N. Vohra Committee Report, which was tabled in the House sometimes after the
infamous Naina Sahni murder case.

The Vohra Committee Report recorded the statement of the then Director, CBI, who informed that
his agency had prepared a report on the nexus between the Bombay city police and the
underworld wayback in 1986, about seven years in advance of the Bombay blasts which were
allegedly engineered by underworld dons Dawood Ibrahim and Memmon brothers.

Q) Your reference to the Vohra Committee Report boiled down to an allegation that some
of the MPs won their elections leaning over the shoulders of the crime syndicates and the

A) I was not alleging, I stated an unpleasant fact in public interest. Who, do you think, could have
provided the kind of money needed these days to contest Lok Sabha elections? You must be
knowing that the figure these days runs into several crores. Since rules do not permit election
expenditure of that scale, "all that money" must be coming from grey/black sources. No?
It was not merely a question of use of mafia money. Contesting and winning of elections was
associated with the use of muscle-power. The "muscle-power" used was certainly not that of the
police or paramilitary forces. You know it. Everyone knows it.
Q) You have established that a certain nexus existed between the politician and the mafia.
How does this affect parliamentary standards?

A) You see when mafia dons started realising that their money and muscle-power could get even
pygmy politicians elected, they themselves decided to either field their fellow-travellers or, in
some cases, even themselves. Considering the fact that some of the crime syndicates had
international connections, the entry of tainted men in the Lok Sabha and legislatures posed a
definite threat to the future of democracy in the country, leave aside the "standards of debate and

Q) Could the lack of proper education on the part of certain otherwise clean MPs, also be a
contributory factor towards the fall in the parliamentary standards?

A) No, if by education you mean college and university education. You must not forget that one of
the greatest parliamentarians ever to adorn the Lok Sabha was Madhu Limaye, who was not
even a graduate.

Q) What, in your opinion, are the remedies for the malaise outlined by you?

A) First and foremost, we must undertake electoral reforms. The ceiling on election expenditure
must be realistically fixed and necessary infrastructure should be raised to ensure that no
candidate transgresses the prescribed limits with impunity.
Legislation must be enacted to guarantee, in real terms, the people's right to information. The
common man must be empowered to examine all kinds of public documents, particularly those
relating to the expenditure of public money. Of course, documents relating to the security of the
country could be exempted. At the same time, care must be taken to ensure that this exemption
is not misused.
It would be pertinent to recall here that the Official Secrets Act, currently in force in our country,
was enacted by the British to keep prying Indian eyes away from their misdeeds involving the loot
of our national resources, in 1923.
The need to amend it in the light of present-day requirements, cannot be overemphasised. Any
such amendment must be solely aimed at providing the requisite degree of transparency in the
working of the government. Such a step would automatically check the mafia's efforts to promote
and establish the nexus between them and persons in power and authority.
It was a well-known fact that the mafia did not invest any money in bribing officials and politicians
simply to keep the latter in good humour. After passing on large sums of money as bribes, the
mafia expected to multiply their investment manifold, through official patronage.
Empowerment of women through reservation of seats in the Lok Sabha and state legislatures and
other public fora would also play a significant part in curbing the influence of the crime syndicates.
Women, by nature, would be less susceptible to the inducements offered by the underworld.
At least, the established political parties should start imparting a comprehensive, holistic
education to their cadres. The grassroots worker must be enlightened about the working of
various democratic institutions, the history and culture of the country as also about the particular
ideology and programme of his party.
This would ensure the emergence of enlightened political cadres, which would be trained to
facilitate the smooth functioning of democracy.

Q) You said something about the threat to democracy posed by the disarray in, or
disintegration of, some of the political parties.

A) Successive coalition governments fell after the Indian National Congress lost its premier
The coming into power of insecure, coalition or minority governments at the Centre, lead to a
belief in certain political quarters that the parliamentary system of democracy had failed in India
and the American system of presidential form of democracy was more suitable to our peculiar
I would like to emphasise the fact that presidential form of government is apt for a country like the
USA, as it has a single major religion, and primarily the same ethnic stock and, above all, a
population less than that of India.
In a country of over 100 crore people, the rule of a single person could prove to be disastrous.
Imagine enforcing the writ of a single man on people so numerous and belonging to different
regions, religions, castes and ethnic groups.
Experience has proved that the American system was less accountable to the people directly. Of
course, one can impeach a President. But, at what cost and effort! Independent attorney,
Kenneth Starr, had to fish out millions of dollars in addition to his valuable time and energy, just to
establish that his country's President indulged in behaviour unbecoming of a person of his
The United Kingdom was rocked by a sex scandal involving the country's defence minister,
Profumo, in the 60s. He resigned virtually overnight after a public hue and cry. The then British
Prime Minister knew that members of the House of Commons would tear him apart if he did not
press for Profumo's resignation.
Incidentally, the President of our neighbouring country Pakistan, was also named in that scandal
but nothing happened to Ayub Khan, since he was a dictator.
The Profumo example powerfully drove home the merits and demerits of various forms of
government - the Presidential, parliamentary and dictatorship.
Those who were advocating replacement of the parliamentary system with the presidential
system could, in reality, be for the imposition of a virtual dictatorship in the country under the garb
of a presidential form of democratic government. Herein lies the threat that I had talked about at
the beginning of the interview.

The state is above the law?

The Law of Torts is an essential element of a market economy, simply because tort law
complements contract law in regulating human interaction.Contracts are best suited for
circumstances where interaction can be foreseen and contingencies evaluated. However,
as that is not always possible, tort law provides the necessary balance, through an ex-post
process of restitution and assignment of responsibility.
In formal terms, a well-designed liability regime with a system of compensating the
victim at the cost of the negligent injurer, restores incentives and promotes
efficiency.This essential principle is easy to establish and has been the cornerstone of law
and economics. Recognising the importance of this idea in effective market functioning,
we, in a rare moment of rational thinking, decided that we needed to strengthen our law
of torts and sought to enact a Consumer Protection Act.However, so unused are we to
thinking rationally, that we soon began correcting this aberration!
From the very start, instead of seeking to expand and strengthen its reach, we have sought
to limit its application, with quibbles like: who is a consumer? should the act extend to
doctors? to municipal services? and so on.Each affected group has been vociferous in
asking for exemption from its provisions, somehow implying that its members have a
greater right to be negligent.It is to the credit of the courts that they have resisted many of
the more pernicious forms of these arguments; however, several areas of concern remain.
Thus we believe it is acceptable for doctors to follow much lower standards of care in
public hospitals than in private practice. Or that products supplied to intermediate users
(non-consumers!) are somehow less important than those used by 'consumers'. At this
point many learned colleagues will argue that the application of a fast track procedure
like the CPA needs to be limited, as opening up consumer courts to all types of product
liability and civil negligence cases will flood the courts and reduce the benefit to small
consumers.This argument is completely perverse: if the fast track procedures are good,
then they should be applied to all cases rather than be somehow limited to some
'deserving set'.If they are defective, then they should not be used at all. Witnessing the
debates, one cannot escape from the feeling that attempts to limit faster procedures stem
from the need to protect turf .
The principle of 'sovereign immunity' protects civil servants, and hence doctors in public
service, municipal authorities and just about all other functionaries operating in our
expanded concept of 'instrumentality of state'.This argument is flawed for two reasons.
First, the principle of sovereign immunity is itself a contradiction. It arises in English
Common Law from the notion of divine rights of the King: since the King was like God,
he could do no wrong.Over the years we have abandoned kings, and also divinity as a
source of law, but elected representatives are loath to surrender this royal privilege.In
fact, it is legitimate to question the rationale for the application of such an archaic
principle in a democracy. Notice that the standard I outlined above was one of
'negligence'.Thus a public servant committing harm in the course of his duty is protected
from liability in any case. It is important to realise that the object of immunity should be
to protect from liability, not prosecution.
We have, however, sought to extend the concept to protection even from the process of
investigation. Second, even if we accept the principle of immunity for sovereign function,
the mindless expansion of the definition of 'State' has meant that in a wide sphere of
public activity, officials are exempted from civil liability.It is perverse to argue that for
the same function, a private individual is liable but not a state functionary. The principle
of liability should depend on the nature of responsibility and care expected in the action
and should be unrelated to the commercial basis of the transaction. Finally my friends in
public service say they need protection because otherwise they will be targeted by
frivolous law-suits. The two problems with this argument are that it leaves open the
question of how we are to protect ourselves from their abdication of duty, and applies to
individuals in other walks of life as well.The remedy for prevention of frivolous or
vexatious cases is to speed up the process and impose realistic costs on such petitioners.
Moral hazard or abdication of duty is an inevitable aspect of human behaviour. The only
effective remedy is imposing costs on such behaviour, proportionate to the harm done.
Recognition of this basic principle, rather than dodging it, is essential.
T C A ANANT Economic Times TUESDAY, JUNE 04, 2002

Trade can help the poor

If South Asia, Africa, East Asia, and Latin America increased their share of world
exports by 1 per cent each, the resulting gains in income could lift 128 million people out
of poverty, says a report by development agency Oxfam. Barbara Stocking, director,
Oxfam, was in India recently to promote its 'Make Trade Fair' campaign. She explained
to Vikas Singh and Rahul Shivshankar why it is vital that developing countries continue
to seek greater market access:
Why has an agency better known for humanitarian work taken up the issue of fair trade?
Oxfam has a long history of campaigning and advocacy. Remember, it was set up during
World War II to ensure that ordinary people did not suffer from famine in a war situation.
We're also a development agency. Almost half our funding goes into tackling
development issues in 80 poor countries. The reason for this trade campaign is that you
can't just work on the ground, you also have to change policy at the national and
international level, to really make a difference to the lives of poor people.
Aren't you worried that your report may end up encouraging anti-trade campaigners?
Let me make it clear, we believe trade can help poor people. Unfair trading rules may be
hindering that right now, but that doesn't mean there's anything wrong with trade.
Equally, globalisation is a reality. There may be some people who talk about opting out,
but that's unrealistic. You really have to see how to make the system work better.It would
be nice if everything was open and fair, but it's not like that in the real world. There are
imbalances in all sorts of power relations and rules and regulations, and we have to try
and switch those a bit.
What kind of reforms would you like to see at the World Trade Organisation?
We are really concerned that the processes at the WTO become much more transparent.
Developing countries are working on capacity-building, but we are not sure they
understand the implications of everything they are signing up for. We will work right
through the next round of negotiations to ensure that it lives up to its billing of being a
'development round'. For example, we will be pushing for scrapping - or at least
reduction - of agricultural subsidies in the north, and the issue of compulsory licensing in
countries where people can't produce their own generic drugs.Activists favour labour
standards; developing countries see them as a trade barrier.
Where does Oxfam stand?
We are pressing companies to do the right thing. A number of big companies say they
don't allow poor working conditions or sexual harassment at their own workplaces, but
can't check what's happening down the supply chain. We tell them that if corporates press
down very hard on the prices they pay suppliers, the local factory owners in turn will
squeeze their employees, making it worse for the workers. So, it's really up to corporates
to pay a fair price for what they are getting. It's in their own interest to do so. Because
internationally, it's not considered very respectable to be associated with such practices.
Above all else, consumer pressure works. More and more consumers across the world
don't want to be associated with firms that use sweatshops, and we're going to keep
adding to that pressure.
Aren't you preaching to the converted in India about fair trade? What is Oxfam doing in
the United States, where steel import curbs have been imposed?
I agree we've really got to get some movement in the US and the European Union, and
we need to work on them to change their position. But we can only get change if, around
the world, a lot of people show that they are really concerned about the way trade rules
work. We've got to get people mobilised, which is why we've put the campaign on the
Web. We have some confidence that we can actually achieve change, because we saw it
in the case of the campaign to reduce debt for developing countries. We saw mass
mobilisation, and governments recognised that their people didn't like what was going on.
Of course, it doesn't happen overnight. We have to keep pushing.This particular
campaign is aimed for the next three years, and we'll be focusing on specific issues like
commodity prices and labour rights, particularly female labour rights. But that doesn't
mean we haven't been campaigning on such issues before. For example, our campaign on
the cost of drugs was obviously linked up to the patents issue, and came well before the
free trade campaign. You're urging governments to embrace free trade.
But how about also telling them to simultaneously create social safety nets and improve
Certainly, trade on its own will not get rid of poverty completely. You have to work on
education and basic infrastructure like electricity, water and roads. One of the problems
I've been hearing about during my visit here is the high amount of taxation at state
borders. If you're trying to encourage producers, then you could at least open your own
markets a little more.One of my reasons for coming here was to talk with some ministers.
I had a very good dialogue with your commerce minister, Murasoli Maran, and health
minister C P Thakur. From my perspective, it was very helpful to talk about the WTO
processes as the Indian government saw them. We didn't have deep conversations about
internal Indian policies, because I don't know enough, and it would be very arrogant of
me to come in for a few days and get into this area. But it could be something we could
take up with our staff in India, and they can discuss some of the areas we might like to
focus on.
What's Oxfam's reaction to Gujarat?
Oxfam stands for all people being equal and having basic human, economic and social
rights. It's dreadfully sad to see a country that has historically had a good experience over
thousands of years, of different communities and religions living together, starting to
come apart. Did you raise the issue with the Indian government?No, I don't feel I know
enough details. We are doing relief work in the refugee camps in Gujarat. But we are not
going to get into who is right or wrong. What we are looking at is how ordinary people
are affected. As I understand it, the UK government is very concerned about the situation.
But we are not going to get into the middle of a debate between two governments. That is
really not our business. We will do humanitarian work on the ground in Gujarat, and we
will look at long-term peace-building there.
Economic Times, MAY 07, 2002
War rhetoric is misplaced in a country like India which is trying to globalise
its economy
Competition in the global market-place is fierce. Every tiny cost disadvantage can mean a
loss of big orders. This is why jingoism can be rather costly.A small example: Indian
exporters and importers have to pay war risk premiums for ships visiting India. Shipping
companies having been hard hit by the global recession offer rock-bottom freight rates
and are in no position to absorb the war charges.So these are passed on to Indian traders.
Indian shippers to the US have to pay an additional $35 for every container loaded or
unloaded at most major ports.
The war premium ranges from $25 to $50 per container for various destinations. In a
seller's market, this might have been a negligible burden.In today's buyer's market, it is a
significant disadvantage. Even if the Indian exporter absorbs the additional cost, he will
still be at a disadvantage compared with exporters in other Asian countries with no risk of
war or force majeure. Add the impact of war risk on foreign investment, the cost of
jingoism becomes high. Some will argue that the problem is not BJP jingoism, but the
continued infiltration of militants into Kashmir from Pakistan. Not so.
The government claims that keeping troops on full alert on the border is necessary to
check attempts by jehadis to sabotage the coming Kashmir election.Perhaps this
represents a case for deployment in Kashmir itself, but how does it justify deployment in
Punjab and Rajasthan? The BJP's problem is that it wants to play to the domestic gallery
by threatening war. Simultaneously, it wants to upbraid the US and other countries for
putting travel advisories against visiting India and war risk insurance premiums.Alas, you
cannot threaten war to satisfy the domestic audience and expostulate when a foreign
audience takes your rhetoric seriously. In any case, bombing a few training camps in
Pakistan can have absolutely no significant impact on militant infiltration.Threats to do
so impose rising costs on the economy, with no tangible benefit at all in security. We
created the problem in Kashmir by alienating local people.The solution lies not in
jingoism, but in ending that alienation internally, without expecting any help from
Pakistan towards that end.
Economic Times editorials AUGUST 01, 2002
What we need to reduce scams is better regulatory bodies

Is the Finance Minister serious about setting up a Serious Fraud Office? We sincerely
hope so. But since it's an idea that has been mooted in the past as well and nothing much
has come of it, we will have to wait and see. We would urge him to get to work on the
proposal in right earnest. One need look no further than to the series of financial frauds
that have come to light in the past few months to understand why we need a complete
overhaul of our present system.
Whether it is the stock market scam where all we have, after close to eighteen months, is
a half-baked JPC report, or the investigations launched by the DCA, the end result is
known.Costly, long-winded litigation, at the end of which the prime accused are either let
off scot-free or are handed trifling punishments. The 1992 scam is a classic example.In
the ten years since the scam came to light, only one of the major accused has been
sentenced - Hiten Dalal.
Harshad himself was also convicted for misappropriating around Rs 39 crore from Maruti
Udyog Ltd, but he was in appeal against that conviction when he died. What explains this
dismal record? Sloppy investigation, incompetent prosecution and, of course, a judicial
system where it can be years before cases are finally disposed of. In addition, we have
regulators who are none too competent, are relatively toothless and suffer from an
appalling lack of independence.Contrast the distressingly low rate of conviction secured
by the CBI with the 71% conviction rate secured by the UK's Serious Fraud Office and it
is apparent why we have had so little success in tackling financial fraud.
There can be no more powerful deterrent to fraud than the sight of a fraudster being
handcuffed and led to jail. Imagine the powerful impact that the picture of the once
powerful head of Adlephia Communications, John Rigas, being treated like a common
criminal would have had on anyone contemplating tweaking the system for his own ends.
This is the sort of thing we need to see in India as well. The proposed SFO must deliver
on that and for that to happen, it must go in tandem with a complete reform of the judicial
system as well. We have enough toothless tigers. We don't need another.