an opportunity to transform economy · 8 issues and insights mumbai | friday 31 may 2019 > chinese...

8 ISSUES AND INSIGHTS>

MUMBAI | FRIDAY 31 MAY 2019

> CHINESE WHISPERS

The "Khan Market gang" is every-where in the past few days — innewspaper headlines, socialmedia and in everyday conversationsof just about every Indian. The so-called liberati is, of course, hardlyenjoying all the attention and wouldrather have a quiet corner where theycan drown their sorrows after the stun-ning election victory of Narendra Modi

threatens to make the self-appointedintelligentsia almost jobless. The ruling regime sees the gang as

a minority of powerful dynastic eliteswho sought to control all levers of pow-er and avenues of discourse, and werereluctant to allow any outsider intotheir cosy club.A variation of this gang is present in

India’s family-owned businesses aswell. A few members of the group havebeen running for cover for some time.But there are still many promoters whothink they have a divine right to controltheir companies with little skin in thegame. They think only they are the bestcustodians of long-term value creationin their companies. A few have allowedoutside professionals to take over aschief executive officers but microman-age them to death. Consider Jet Airways Founder and

former Chairman Naresh Goyal.Despite appointing CEOs, Goyal andhis wife ran Jet as a mom-and-popoperation where nothing happenedwithout the two of them. Goyal was

always involved in key decisions, theCEOs often had little executive powerand did not survive long, making amockery of the process. Jet has hadeight CEOs in 11 years.Goyal, for example, once

announced to the media at a Paris airshow that Jet would order 20 newwide-bodied aircraft and that thesewould be inducted into the airline’sfleet over the next 18 months to fulfilhis aspiration of going global. Theproblem was that Jet’s board and itsCEO got to know about the plan fromthe next morning’s papers.There are many Goyal clones across

India’s family-run companies who runtheir companies as a fiefdom. Theypack their boards with relatives and areoften control freaks. Obviously, mosttend to miss the opportunities becausethey don’t listen to others. Founders inthe West sack one CEO and get another.Indian promoters sack one CEO and getinto the CEO's role themselves. Most ofthese promoters are victims of theirown beliefs and are often trapped by

them. They find it difficult to trust peo-ple with something they have nurtured.There are also cases where difficul-

ties for the outsider CEOs arise in theform of entrenched coteries of long-serving employees, who short-circuitany proposal that can cause a radicalchange in the existing structure withinthe group. Research has also foundthat quite a few promoters love tothink and force others to think thatthey are simply indispensable. For,nothing — just nothing — gives themmore pleasure than the thought thatthe organisation would crash afterthey leave. After all, there can’t be anybetter evidence of your brilliance thanthe falling apart of the company afteryou’ve left. Some believe in their indis-pensability so much that they simplyrefuse to leave — even if that meansrepeatedly increasing the retirementage of the entire board.No doubt, quite a few family-owned

businesses have faded into oblivionsince the early 1990s. A recent studyby McKinsey said only 7 per cent of the

family-owned businesses in India havegone beyond the third generation.According to a white paper

brought out by global executivesearch firm Egon Zehnder, timing isan all-important question. The firststep is for the entrepreneur to realisethat a different leader is required forthe future journey. Symptomatically,this is often the stage when an organ-isation’s progress has visibly sloweddown by the lack of formal structures,systems and processes. The problem in India Inc is that

promoters appoint professionals with-out a clarity on their role. For example,it is important to have agreement onthe areas where the family will drivedecision making and the areas wherethey will support/endorse decisionsmade by the professional. It is impor-tant to have a formal structure andprocess — something that AnandMahindra and Harsh Mariwala haveput in place. Most leave enough ambi-guities in the system so that promoterscan move in any time. It’s time the Khan Market gang in

corporate India, too, woke up andsmelled the coffee. If genuflection isthe defining feature of your company’sculture, real talent will hit the exit but-ton sooner than you think.

India Inc’s ‘Khan Market gang’Powerful dynastic elites are reluctant to allow any outsider into their cosy club

HUMAN FACTORSHYAMAL MAJUMDAAR

Mixing cricket with politicsAs Prime MinisterNarendra Modi(pictured) pads upto form a newgovernment andthe ICC CricketWorld Cup 2019gets underway,Indian marketplayers are readyto cash in on the

excitement. A domestic brokerage onThursday came up with a list of 11 stocks,terming it the “dream team” for theWorld Cup. “The mood is upbeat in theIndian markets, with ‘captain’ PM Modiardently padded up for his secondinnings. And so, we take a shot atselecting a team of world beater stocks,not only for the month-longtournament but perhaps till the nextelections (read: World Cup)!” thebrokerage said in a note to its clients.

In a fixThe MadhyaPradeshgovernment, ledby the Congress, isbusy preparing itsBudget for 2019-20. The processhasn't turned outto be as smooth asit was expected tobe. Insiders say

the state government is tearing its hairout over organising resources to fundthe farm loan waiver scheme,announced before the Assemblyelections late last year. By someestimates, the government needsabout ~50,000 crore to put in motionthe promised waiver. On the otherhand, the Opposition is waiting withbated breath, hoping it would falter. Asan observer said, “Kamal [ChiefMinister Kamal Nath (pictured)] is stuckbetween a rock and a hard place”.

Mamata versus Mamata?The ruling party inWest Bengal,TrinamoolCongress, led byChief MinisterMamata Banerjee(pictured), sat ona dharna in frontof the Naihatimunicipalitybuilding near

Kolkata to protest the post-pollviolence in the state that had allegedlyleft several TMC workers "homeless".The Opposition in the state lapped upthe opportunity to take a dig atBanerjee, saying she was leading adharna against her ownadministration. Sujan Chakraborty,Communist Party of India (Marxist)member of the state Assembly, saidthere couldn't be anything "morefunny and absurd than this". TheOpposition also wondered if Banerjeewould next demand the resignation ofthe state home minister — a post heldby Banerjee herself.

> LETTERS

No shortcutsThis refers to the article, “It’s about highquality jobs” (May 30). The article is worthreading and has wonderful suggestions forcreating high quality jobs in the country.In a country like ours where there is anincreasing demand for quality jobs, it isessential to change the mindset of the peo-ple. Like the IT sector, tourism in Indiacould be a big supplier of quality jobs andcan meet the aspirations of the qualifiedyouth of our country. Take the example ofScandinavian and Nordic countries thatattract a lot of tourists specially during thesummer. The sector employs a large num-ber of young people and earns a huge rev-enue. It is also agreed that the manufac-turing sector could provide millions ofhigh quality jobs with labour reforms butsuffer due to the wrong policies of the gov-ernment. It is suggested that the youth betrained in sectors like tourism, food pro-cessing, garment and footwear manufac-turing that have a huge presence in theinternational markets. A limited numberof government and corporate jobs will notbe able to solve the unemployment prob-lem of India. What is needed is innovativethinking and proper planning.

Partha Sarathi MukhopadhyayNagpur

A test of qualityI refer to "An action plan to energisedefence" (May 28). The writer has made anexcellent case for capital allocation rise for

defence in the nextBudget, besidesmaking several oth-er suggestions. Ihope the new gov-ernment will seri-ously considerthese. I would liketo raise a few relat-ed issues relevant to the subject:n For meeting the requirement of scien-tists, we have to ensure that for engineer-ing and science students, a career inresearch and development is preferredby providing greater recognition andhigher remuneration.n The government organisations likeDefence Research and DevelopmentOrganisation may confine themselves toworking out overall concept and design,leaving the detailing and supply of sub-systems to the chosen competent privateorganisations.n Decision in urgent matters should be tak-en on a case to case basis without waitingfor years for an overall policy applicablefor such matters.n The defence systems so developedshould attract profitable export market.Export is a test of its quality.

N P Sinha Jamshedpur

Letters can be mailed, faxed or e-mailed to: The Editor, Business StandardNehru House, 4 Bahadur Shah Zafar Marg New Delhi 110 002 Fax: (011) 23720201 · E-mail: [email protected] letters must have a postal address and telephonenumber

> HAMBONE

Boeing says it has a fix for the B737MAX8 jet that is currentlygrounded worldwide. Thisrelates to a software fix for the MCAS(manoeuvring characteristics augmen-tation system), which is believed to havesent two planes into a fatal nosedive.This should be good news for travellers.Is it?Airlines that are haemorrhaging

money with aircraft idling on theground — and shall have to spend yetmore money on advertising and PR toreassure passengers their planes are safe— would be glad to get their birds in theair but not without solid evidence thatthe patch will work. The risks are toohigh. Three major Chinese carriers —Air China, China Southern and ChinaEastern — perhaps prodded by the frac-tious US-China trade impasse, fired thefirst salvo demanding compensation forthe grounded B737 MAX-8 jets. Otherswill follow.While bullish about its fix, Boeing

has failed to assume any clear responsi-bility for the crashes. CEO DennisMuilenburg, who finally appeared ontelevision half a year after the Lion Aircrash in an egregiously botched PR exer-cise, continued to deflect the discussiontowards pilot error — a tack the manu-facturer has consistently taken.Shareholders and questioning news-

men were offered waffle about a “chainof events” and “multiple contributingfactors”, none of which seemed toinvolve Boeing. It was a line of argumentthat incensed the American Airlinespilots’ union who described as “inex-cusable” Boeing’s tin-eared approacheven when they suggested fixes rightafter the Lion Air crash. There have beentesty and candid exchanges betweenpilots and Boeing. One commented,“These guys (the deceased pilots) didn’teven know the damn system (the MCAS)was on the airplane.” He is right.Muilenburg’s optimism that when

recertified the patched B737 MAX-8 air-craft will be among the “safest planesever to fly”, may not be shared by pas-sengers, many of whom opted out evenbefore the US grounding came intoforce. In early March Southwest allowedspooked passengers to switch planes ifthey did not wish to fly on a B737 MAX.A key problem is that the airline is

attempting a software patch for what isreally a design flaw (like sending a Sumowrestler to a psychotherapist to convincehim he can do ballet). The airframe withits larger engines and the increased fuse-lage length simply does not gel withflight dynamics. Initial performance was

less-than-optimal and this is what neces-sitated the first fix — the MCAS. How comfortable are you with your

smartphone software updates? The pro-cess of catching and neutering bugs isby nature incremental. They first needto be found. If your phone malfunctionsyou cannot make a call. If a plane mal-functions it can fall from the sky.The question of aircraft testing is

another important area for scrutiny.Boeing is confident the plane is now air-worthy. Flight safety is measured interms of incidents per million flightsand the aircraft manufacturer had byearly May 2019 flown a little over 100sorties. In statistical terms this strainsto be meaningful.It was later revealed that Boeing was

unable to even simulate the MCAS nose-down stall-prevention sequence of thedoomed aircraft. This has necessitatedanother critical software fix on B737MAX training simulators. The issue mayhave been spotted earlier but the aircraftmanufacturer did not believe simulatortime was necessary. An iPad would suf-fice.As the aircraft awaits flight certifica-

tion (not from 'FAA and Friends' this

time but just the FAA), frequent flyersmight ask themselves exactly how muchthey really know about aircraft andwhether they would fly on the MAX-8.How might they react if Boeing was tolater rebrand the plane and christen itanew?In January 2019 Toyota recalled

almost 2 million vehicles to fix defective“exploding” Takata airbags. It is far hard-er to recall a 66,000 kg aircraft and howairlines respond to the PR-perceptionchallenge remains to be seen.There is no doubt the original B737

is a workhorse that is absolutely safe. Ithas proven itself. The problem is withthe cosmetic and commercial exten-sions on the MAX-8 that have stretchedthings beyond the design’s capability.The 737 is a ubiquitous piece of equip-ment. As Muilenburg stated, “On aver-age 2,900 B-737 airplanes are in the airwith half a million passengers on-boardat any given time.” That’s half a millionreasons to get it right this time — start-ing with the airframe.

The author is a Hongkong-based journalistand the Editor of SmartTravelAsia.com andAsianConversations.com

A fix for Boeing

VIJAY VERGHESE

INSIGHT

India has resoundingly re-elected theNarendra Modi-led NationalDemocratic Alliance (NDA) for thenext five years. Given its majority inParliament, this will be a stable govern-ment with a clear mandate, and this pro-vides the new government a historicopportunity to transform India’s eco-nomic landscape. Clearly, the government has to con-

tinue with all the good work it has beendoing over the past five years — reform-ing the banking sector, sharpening theroll-out of GST and investing in buildingcore infrastructure. In addition, theeconomy has run into a bit of a soft patchwhich needs to be addressed immedi-ately. The automobile sector is goingthrough a slowdown, the aviation sectoris in a difficult spot, and many corpora-tions are clearly hesitant about makingfurther investments. This has to be dealtwith expeditiously. A few key actions bythe government can put us on a moresustainable economic trajectory so thatmore Indians are able to reap the bene-fits of “achhe din”. The first task is reforming the finan-

cial sector including the banking space.

Without robust banks, lending can’t berevived and without credit, investmentsin new projects will remain subdued.The government needs to quickly andmassively recapitalise public sectorbanks so that they are able to lend moreeasily. The sentiment in the NBFC space,which was hurt with the unravelling ofthe IL&FS issue, has to be quicklyaddressed, perhaps with some sort ofemergency line, notwithstanding theRBI’s likely reluctance in this regard. TheRBI for its part, can definitely help bylowering the benchmark rate further,and also pumping more liquidity intothe system similar to its two dollar-rupeeswaps. With inflation below 3 per cent,there is absolutely no reason for the reporate to be over 6 per cent, and for corpo-rates to be borrowing at rates in excessof 10 per cent, which implies real ratesof 7 per cent. No investment can happenat this rate of borrowing. It is an absoluteimperative that the cost of capital bebrought down quickly. Second, the indirect tax space saw the

biggest reform since independence withthe introduction of the GST. The nextlogical step will be to bring down themultiple tax slabs to, preferably, just one.This will not only make compliance eas-ier, but also its enforcement. Similar isthe case with the imposition of the longterm capital gains tax which depressescapital markets sentiment but is not fullycompensated for by an equivalent accre-tion in revenues.A third important task for the gov-

ernment is to privatise public sectorcompanies, including eventually thePSU banks. As the PM had said earlier,“the government has no business to bein business”. While it is good thinking toimprove their health before a possible

sell-off, today many are becoming a dragon the public exchequer. The govern-ment needs to sell many of these loss-making public sector units and use themoney to shore up critical infrastructurelike roads, power, railways, airports etc.This requires a philosophical change andit is imperative that this governmenttakes such bold steps. The fourth — and that brings me to a

sector which is close to my heart — arethe energy markets. In his previous term,Prime Minister Narendra Modi complet-ed the commendable task of electrifyingevery single village in India under theSaubhagya scheme. As all householdsget connected and the GDP growthratchets up, the hunger for electricitywill only grow. However, this cannot beachieved unless the distribution systemis reformed. Till discoms become finan-cially viable they will not be able to pay

for the power they buy nor will they beable to modernise their networks to han-dle increased loads.The government’s electrification

goals will also require a tremendouspush from another key sector — renew-ables. India is now one of the leaders inclean energy generation but to keep themomentum going NDA 2.0 will need toset new targets beyond the existing 2022targets of 175 GW, and bring in supportivepolicies. I would propose a renewableenergy target of 250 GW for 2025, and400 GW for 2030. This would imply thatat least half of the new electricity capac-ity we need over the next 10 years willcome from clean sources. This wouldbuttress the PM’s global leadership onclimate change, with India leading theway in tackling one of the most definingchallenges facing humanity today.Fifth, and finally, given the sluggish-

ness in the Indian economy, and globalheadwinds that are likely to persist, thebest course of action for the governmentmay be a fiscal stimulus to revive flag-ging animal spirits. The clouds hangingover the global economy due to the US–China trade war and the slowing Indianeconomy make it imperative for the gov-ernment to consider a sizeable stimulusin its first Budget. Fiscal deficit targetsmay be breached in the short term andpurists will surely protest, but the longer-term benefits will outweigh the short-term disruption. A quick stimulus mayalso help in continuing one of the mostimportant tasks before this government— the process of generating jobs for themillions of young Indians joining thework force.

The author is chairman and managingdirector, ReNew Power. Views are personal

An opportunity to transform economyThe clouds hanging over the global economy due to the US–China trade war and the slowing domestic economy make itimperative for the government to consider a sizeable stimulus in its first Budget

Questions multiply about flight testing for the B737MAX-8, MCAS software refinements, whistle-blowers and passenger confidence

SUMANT SINHA

There is no doubt the original B737 is a workhorse that is absolutely safe. It hasproven itself. The problem is with the cosmetic and commercial extensions onthe MAX-8 that have stretched things beyond the design's capability

ILLUSTRATION BY BINAY SINHA

In July 2014, a single sentence from Rahul Gandhithat the Modi government was a suit-boot ki Sarkar—a government of and for the rich — threw theprime minister completely off-balance. For the nextfive years, he focussed on ensuring that his governmentwould not be seen as a government of the rich. But now Mr Modi has delivered a handsome win

for the Bharatiya Janata Party. He is the unchallengedpolitical leader of India. There is, however, one challengethat still exists: His own mind, which is of a Left bent.This is sad. So just as he exposed

the fake secularism of the Congress,he must now banish its fake socialismwhich has affected him as well. Thatmeans he must free himself of beliefthat a government must not be seenfavouring capital. Everyone knows India needs

investment on a massive scale toremove poverty, And, by now, wealso know that private investment iswhat will make that happen becausein a capital-scarce country, it is theprivate sector — barring the crooks— that uses capital more efficiently. This is the main reason why, if he

wants to help the poor and get the credit for it as well,he must do what China does. He must openly adoptpro-capital policies. And — this is critical — he mustremember that pro-capital does not mean pro-capitalist.That was the Congress way, which suppressed privatecapital in favour of public investment while promotingfavoured capitalists at the expense of the public sector.

What is to be doneThe economic history of the world shows that gov-ernments which favoured private capital delivered the

highest rates of growth. That’s why we need lawsthat don’t discriminate against capital as this isessential for widening and deepening it. This isalso something that China has done. But since 1970 India has failed spectacularly in

this regard. It was doing quite well before that. After 1970, however, policy focus shifted to

politically motivated, Left inspired redistributivepolicies at the expense of investment and growth.The 1983 book by Isher Ahluwalia described this

perfectly.Mr Modi did not dismantle

these policies in his first termbecause he wanted to get re-elect-ed. He desperately wanted to avoidwhat had happened to Atal BihariVajpayee because of the IndiaShining campaign. But now that he has been

re-elected, he must take India backto the Nehruvian template ofdeterminedly raising the level ofinvestment, with one major differ-ence: Nehru was forced to turn tostate-led investment because theprivate sector threw up its hands.

But that is no longer the case and Mr Modi mustgo out of his way to assist it just as Nehru did withthe public sector. This should be Mr Modi’s landmark departure

from the Nehruvian model. All policies — tax,imports, interest rates and exchange rates — mustbe made private sector friendly. The public sectormust go, once and for all. It is an abhishaap, a curse.This is not to say there must be no public invest-

ment. There must. But it must be confined to build-

ing transport and social infrastructure as Chinahas done. Even the power sector, which theCongress thinks is infrastructure, must be priva-tised. It is deadweight on the exchequers of thestate governments.And, again, as China has done, the money for

this must come from a massive sale of governmentland to large private sector firms to build officeand residential real estate, the demand for which,despite the ups and downs, is insatiable. Moreover,it has a huge investment multiplier.

Turn right, SahibThe short point is this: Mr Modi must now stopimitating the Congress. Ab bahut ho gaya. He mustmake a huge break with that model and go all outto support private capital.He has already cleared the decks for that by

emerging as the dominant partner in his relation-ship with the Rashtriya Swayamsevak Sangh, whichis as statist as the Congress and the CPM. He shouldnow get on with the job of making India a trulyprivate enterprise-led economy.In 2014, he used development as his main

campaign appeal. Then, having failed to rid hismind of socialist cobwebs and used capital mostinefficiently, he had to use nationalism in his 2019campaign. But what will he do in 2024 if he fails to deliver

what his main support group wants, namely, bothjobs and work. He can’t fool the voter twice. Thatis why he needs to adopt the private sector politi-cally. He has the necessary marketing skills to sellthe idea to the country.Once he makes up his mind to do this, the rest

is a matter of detail. I am sure Mr Sam Pitroda willbe happy to help with them, saying kiya toh kiya.

The National Democratic Alliance’s decisiveelection victory has understandably buoyedmarkets and raised expectations of big-bangreforms (land, labour, capital) to drive the next burstof growth. It’s important, however, for policy-makersnot to get ahead of themselves. The first order ofbusiness must be to stabilise an economy that findsitself on a precarious wicket. Growth has slowed discernably in recent quarters.

To be sure, some of the pressures are transient: Sharpcuts in government spending to meet the 2018-19 fis-cal deficit target, election-related uncertainty, andregulatory-induced one-time price-increases in theauto sector. These pressures will reverse in the com-ing months. But, even adjusting for this, underlyinggrowth momentum has slowed meaningfully. Indiangrowth has largely been flying on one engine — con-sumption — which has progressively exhausted itself.Rural consumption is hurting because the terms-of-trade confronting agriculture continued to worsenin 2018-19. Slowing urban consump-tion reflects the disruptions in thenon-banking finance companies(NBFCs), auto and housing sectors,as well as the inevitable limits of dip-ping into savings to prop-up con-sumption when income growth hasslowed. Simultaneously, the outlookfor exports has worsened as globaltrade wars deepen. Slowing exportsand consumption together createthe worrying prospect of hysteresis.Therefore, even as the strong elec-tion result is likely to rekindle ani-mal-spirits, they must contend withformidable headwinds. The real challenge, however, is that counter-cyclical

policy space is either exhausted or currently ineffica-cious. Calls for a fiscal stimulus appear irresponsible,since India’s total public sector borrowing requirementis almost 9 per cent of GDP, consuming all housingfinancial savings, keeping market interest rates ele-vated and impeding monetary transmission. Any stim-ulus will likely be counter-productive, simply push-ing-up interest rates further, accentuatingcrowding-out risks and financial fragilities in the NBFCsector. Monetary policy has been eased but is not trans-mitting, with the yield curve still very steep, and banklending rates barely budging. What then can policy-makers do to arrest the slow-

down? While markets remain focused on the demandside, the optimal response, in our view, is to focus onthe supply side. Fixing the plumbing in three areasmust constitute the near-term policy agenda:

1. NBFCs: its solvency, not liquidity The relentless pressure that NBFCs have been undersince last year has translated into their credit offtakecollapsing , thereby compounding the consumption

slowdown. While bank credit has stepped-in, it cannotcompletely offset it, because these are very differentbusiness models that target different end-users.The NBFC slowdown shouldn’t be surprising.

Financial conditions have meaningfully tightened inthe sector with average spreads of NBFC bonds sig-nificantly above their pre-IL&FS levels. Importantly,this is despite liquidity conditions easing. Interbanksystem liquidity has eased, core-liquidity is now in asurplus, and several NBFCs are holding much highercash levels on their books. Despite that, spreads havenot softened, clearly suggesting these are reflectingcredit risk, and not liquidity, premia. Mutual fundflows have dried up and even bank lending to NBFCs— a key source of refinancing and disbursements —has slowed, suggesting banks, too, may be gettingwary of credit risk. Contrary to the market clamour,therefore, this is not a liquidity problem. It’s an under-lying solvency concern.

A missing middle?This, by itself, should not warrantany policy intervention. Lenders re-assessing risk and charging higherrisk premia is just the market mech-anism playing itself out. Any inter-vention will simply induce moralhazard. That said, there is a growingconcern that asymmetric informa-tion may be compromising alloca-tive efficiency. The best NBFCs areeasily able to attract funding andthose with the most well-knownvulnerabilities have understand-ably been rationed out. The prob-

lem is not at the extremes. It’s likely in the “missingmiddle”. It’s likely that a vast swathe of NBFC s inthe middle are unable to attract funding or raiseequity, because investors are unsure about theirunderlying asset quality. This is the classic asym-metric information problem. One can’t distinguishgood apples from the bad ones, and so stops lendingto all apples. In turn, this is forcing several NBFCsto demonstrably hoard cash — and thereby cut backon disbursements — to “signal” that are not amongstthe bad apples. But this is a very inefficient signalingmechanism. More generally, asymmetric informa-tion about underlying asset quality is leading toallocative inefficiency and weighing on financing,equity raising, credit off-take and therefore on GDPgrowth.

Needed: credible signaling What is therefore needed is a credible external sig-naling mechanism. This can best be provided bythe regulator undertaking an asset quality review(AQR) of the NBFC sector. Once concluded, thiswould credibly distinguish the good apples fromthe bad apples, eliminate the “trust deficit” that

looms over the sector, and allow the good apples toraise equity and funding. Operationally, an AQRwill need to be delicately handled and artfully man-aged. It may lead to temporary disruption. But doingnothing also has a very real cost — the risk of acci-dents and that of foregone growth, quarter afterquarter.

2. The fiscal-monetary tangoA credible Budget in July is critical. Actual revenuecollections in 2018-19 are likely to be much belowthe revised estimates, making the projected rev-enues for next year virtually unattainable. The gov-ernment must therefore (i) reiterate its fiscal deficittarget of 3.4 per cent of GDP; (ii) but do so by crediblybudgeting revenues and expenditures; (iii) andensuring that legitimate budgetary payments —like to Food Corporation of India — are not pushedoff-balance sheet. Barring this, bond markets arelikely to get nervous again, and build in more risk-premia into bond yields, thereby pushing up thecost of capital further. A credible Budget, however,rests squarely on GST revenues increasing marked-ly, which will necessitate further simplification ofthe GST and meaningfully-tighter compliancemechanisms. A credible Budget will also help in boosting mon-

etary transmission. First, it will balm bond yieldsand ease financial conditions. Second, if bond yieldsare lower, small savings rates — linked to bondyields — should also come down, making bankdeposits more attractive, boosting deposit growth,and helping monetary transmission in the bankingsystem. Third, rampant non-compliance of GSTpushed up currency-in-circulation (CIC) in 2018-19. If GST compliance is tightened, CIC growth willfall, deposit growth will rise and provide more fillipto monetary transmission. Fourth, how a fiscaldeficit is met matters for growth. Meeting the deficitby slashing public investment — where fiscal mul-tipliers are arguably higher — versus tighteningindirect tax collections — can have meaningfulimplications for growth. In contrast, if markets worry about fiscal credibility,

and monetary policy is simultaneously eased, the yieldcurve will steepen further, inducing the financial sectorto borrow short and lend long — as the margin oftemptation from maturity transformation increases –but accentuating financial fragility.

3. Reversing the terms of tradeTackling agrarian distress — by trying to correct theadverse terms of trade from low food prices —mustconstitute the third near-term priority. There is lim-ited space on the demand side. The PM Kisanscheme should boost food demand, but total spendis just 0.4 per cent of GDP, and there is no fiscalspace for more. Instead, the answer lies on the supply side. There

are early signs that some wholesale food prices havebegun to pick-up. Distortive policies — like the stock-holding limits, intermittent export bans, and theEssential Commodities Act — must be done awaywith, so that some normalisation of food prices isaccommodated. Simultaneously, the new govern-ment needs to ensure that surplus production isquickly exported to avoid domestic gluts. Markets are clamouring for stimulus and roman-

ticising about big-bang reforms. But the new admin-istration’s immediate priority must be to stabilisethe economic boat by first fixing the plumbing.

The writer is Chief India Economist at J P Morgan

OPINION 9> STAY INFORMED THROUGH THE DAY @ WWW.BUSINESS-STANDARD.COM

The data released by the Department for Promotion of Industry andInternal Trade (DPIIT) reveals some worrying news about foreigndirect investment (FDI) in India. According to the DPIIT, foreign directinvestment in equity has in fact declined in 2018-19, for the first time

in six years. The decline is not great — only 1 per cent or so, from $44.85 billionto $44.36 billion, but it is nevertheless significant. This data on FDI flows hasnot always been released on time, in spite of the Reserve Bank of India passingon the required figures to the DPIIT in a timely fashion. The government wasrelying on FDI inflows in order to demonstrate the strength and potential of theIndian economy. It was also hoped that FDI would fuel manufacturing invest-ment and jobs in an India that has otherwise, apparently, been plagued withjobless growth. The FDI performance of India over the last few years has alsonot been inspiring in terms of the destination of investment. In 2018, Indiadropped out of the top 10 destinations for FDI on the AT Kearney FDI ConfidenceIndex for the first time since 2015. This came at a time when other comparableeconomies were doing relatively well — Southeast Asian economies saw FDIincrease in 2018 by 11 per cent.

The nature of FDI even prior to the fall in 2018 was not entirely satisfactory.Too little of it was going into greenfield investment that increases productivecapacity and the potential for jobs, which is the sort of FDI India requires. Thegovernment, which had been taking credit for robust FDI flows as a sign of itsgood management of the Indian economy, must also now take responsibility forits failure to sustain this momentum. Some rethinking of recent poor policymoves is in order. In particular, it appears that India must address questionsabout sovereign risk. Too many recent moves affecting foreign investors havebeen arbitrary in appearance, or seem to favour domestic interests over those offoreign investors. Such policy changes serve as a serious disincentive for foreigninvestment, and can explain the weakness of the FDI data. One such error wasthe draft e-commerce policy. Those who had invested in this fast-growing sectorfrom abroad could justly complain that the rules of the game, which in any casegave them relatively harsh treatment, were then changed under their feet. PolicyU-turn and arbitrariness must be replaced by consistency and investor-friendlyinstitutions that work swiftly to redress such perceived unfairness. Inconsistenciesthat allow some companies — such as Apple and Ikea — more friendly treatmentmust also be addressed. Rules should be the same for all investors — and thoserules should be, in addition, clear and transparent.

India is in any case suffering from a drought in private investment. Part ofthe reason for this was stressed balance sheets of Indian corporates and overca-pacity in crucial sectors. There were hopes that this could be made up for byadequate foreign direct investment. If the FDI tap is also drying up, then it is anopen question where the capital to fuel Indian growth will come from. Unlessthe government changes its attitude to FDI, India will face even more severeheadwinds for growth.

Volume XXIII Number 206

MUMBAI | FRIDAY, 31 MAY 2019

One of India’s top pharmaceuticalcompanies, Ranbaxy, its promot-ers and management defraudedthe public, faked records, misrepresentedfacts, lied to authorities, forged scientificand safety records, cut corners aroundglobal regulatory regimes, all to know-ingly sell sub-standard medicines, threat-ening lives across countries and conti-nents. For years. The only reason we know of it today

is on account of a conscientious whistle-blower employee who blew the lid off

the scam, ultimately causing the com-pany to pay $500 million as penaltieswhile admitting to several crimes it hadcommitted in breaking the US food anddrug safety laws. It still didn’t pay a pen-ny in India. The company, as an entity, has been

legally extinguished now while its twopromoters and siblings, Malvinder andShivinder Singh continue to be in news,squabbling over the riches they earnedin the process. Indian journalism haswritten post-facto eulogies (as the com-pany grew) and obituaries (when itevaporated)Bottle of Lies is the story of how this

scam unraveled. A fantastic work ofinvestigative journalism, written insuch an eminently readable fashion thatthe book begs to be turned into a movie.It scripts the life, trials and tribulations(and ultimate victory) of the whistle-blower, Dinesh Thakur, and the deep

conspiracies that Ranbaxy managementengaged in for years to sell their spuri-ous drugs. The author, Katherine Eban, couples

sharp writing with meticulous research,etching out not just the twists and turnsthat the US Food and DrugAdministration (FDA) went through tobook Ranbaxy for its crimes but also thelives and characters of the key playersin the great game, including Mr Thakur.He is that rare whistleblower in contem-porary Indian history who not only gotaway with telling the truth but eventu-ally was also compensated for his trou-bles — and they were considerable. Forall the reverence that developing-coun-try regulators have towards their UScounterparts, the US FDA does not comeout looking too great either. Yet, it’s useful to remember that Mr

Thakur, while telling the dirty truthabout Ranbaxy, did not have to deal

with Indian authorities. It certainlywould not have made for a story with apositive ending. India’s meek whistle-blower law continues to be in limbo andthe state’s response to the occasionalbrave whistleblowers (from within thegovernment or the private sector)remains shameful if not downright vin-dictive. Recollect the whistleblower for-est officer Sanjiv Chaturvedi’s continu-ing struggles. The book rarely slows down with the

weight of Ms Eban’s detailed research.When it does, it soaks the reader in theessential complexity involved in unrav-elling any deep-seated trans-continentalcorporate frauds. Ranbaxy’s frauds, committed years

ago, continue to damage the reputationof India’s booming generic drugs indus-try which has provided affordablemedicine to millions. There is no doubtthat Big Pharma has made the most ofthis controversy to sow doubts about theefficacy of cheaper generic drugs in abid to recover their market shares. But as an Indian citizen one wonders:

Didn’t Ranbaxy sell the same spurious

medicines in India as well? What actionwas taken, or even contemplated againstthe company? How did the companynever face a legal challenge on similargrounds in India? What have the Indianregulators and government done to curbspurious and sub-quality drugs in Indiaby companies such as Ranbaxy that givethe entire industry a bad name? MsEban, in closing the book provides someanswers. She gives a whiff of what regu-latory capture by private sector in Indiasmells like — rotten. There are larger questions that linger

for the reader. Does the book capturethe atypical story of how emerging econ-omy industries emerge against thewealth, resources and asymmetric influ-ence of the global North’s industries overinternational and other trade regula-tions? Does the first wave ofentrepreneurs inevitably build business-es on bending environmental, publichealth safety and labour standards tocut costs till they perish and new onesemerge that can better the record of theirpredecessors? Another question that popped up

intermittently reading the book: HaveIndia’s regulatory mechanisms andcapacities failed to keep up with theexpansion of its economy? Reading MsEban’s description of raids againstRanbaxy by the armed, trained and well-equipped forces of US FDA, I was leftunsure how to remember the decrepitstate of food, health and medicine reg-ulatory authorities in India. Which brings me to the question of

journalist envy that Ms Eban’s wonder-ful work evoked. I scanned through theacknowledgements of the book to seehow she found the resources to investi-gate so deep and so long into one story.Will India’s political-economy evermature, progress and improve to permit,in the first place, and support, in thenext, such public-service journalism?

Modiji, ab ki baar, suit-boot ki sarkar

Generic corruption

BOOK REVIEWNITIN SETHI

BOTTLE OF LIES: The Inside Story ofThe Generic Drug Boom Katherine EbanHarperCollins482 pages, price not stated

PM’s signal to ministers: Perform or perish

Modi govt 2.0

The FDI problemShrinkage reveals questions about future of Indian growth

Narendra Modi was sworn in on Thursday as prime minister of Indiafor the second time amid extraordinary expectations from his gov-ernment. With a 303-seat haul for the Bharatiya Janata Party (BJP),and with a commanding 353 seats for the National Democratic

Alliance, high expectations from the government are only to be expected. Thougha majority of the names in the second cabinet of Mr Modi are familiar as theywere part of the earlier Council of Ministers, the prime minister has sent a strongsignal of “perform or perish” by dropping around 30 ministers. Only a primeminister as much in charge of his party and parliamentary contingent as MrModi could have done such a cleaning-up exercise. However, two of those whodo not find place in the new team are Sushma Swaraj and Arun Jaitley becauseof their ill health. The prime minister would surely miss Mr Jaitley, his long-timefriend and colleague who served as finance minister in the first Modi government,was the BJP’s chief trouble-shooter and steered the economy reasonably well.The absence of any representative from the Janata Dal (United), one of the BJP’sclose allies, is surprising and signals a simmering tension between the two parties.

Mr Modi has done well to bring in some new names, many of whom haveproven themselves at the state level. In another welcome development, he hasgiven a ministry slot to S Jaishankar, an outstanding ex-bureaucrat, and HardeepPuri, a former career diplomat and minister, even though he lost the election.Induction of more such people who can marry good ideas with efficient executionis the need of the hour.

The biggest entry in the Cabinet obviously is Amit Shah, the master strategistin the BJP’s spectacular win in the Lok Sabha election. The ability to deliver thegoods for his party, along with his strong equation with Mr Modi, clearly makeshim the second-most powerful member of the Union Cabinet. While the portfoliohe would manage is not officially known, the buzz is that he may be given charge ofthe finance ministry. Though not much is known about Mr Shah’s economic think-ing, his political heft could come in handy in taking tough reforms decisions incase he moves into North Block. That is required at a time when deep-rooted eco-nomic challenges such as reviving India’s growth momentum, both on the invest-ment and consumption side, await the new government. Consumption, whichmakes up over 60 per cent of gross domestic product, has weakened sharply. Fixedinvestments have been almost stagnant at about 30 per cent of GDP in the past fouryears, and foreign direct investment has declined for the first time in six years.

One of Mr Modi’s oft-repeated slogans has been “minimum government,maximum governance” — something that got pride of place in this year’s BJPmanifesto as well. By the yardstick of that slogan alone, the signals are not veryencouraging. In 2014, the first phase of the swearing-in saw a 45-member Council,raising hopes that the prime minister would walk his talk. But that hope wasdashed as the second phase — within two years — saw the cabinet size swell to 78members, the largest in years. This time round, as many as 59 ministers havetaken oath in the first phase, and it is to be hoped that Mr Modi would stick to hisslogan and go in for a broad downsizing of the Council of Ministers.

SAJJID CHINOY

A near-term policyagenda for the new govtMarkets are clamouring for stimulus and romanticising aboutbig-bang reforms. But the new administration’s first job mustbe to fix the plumbing

LINE AND LENGTHTCA SRINIVASA RAGHAVAN

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an opportunity to transform economy · 8 issues and insights mumbai | friday 31 may 2019 > chinese...

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