Tuesday, February 27, 2007

Lalu Yadav is no "liberaliser"

The Indian Railways (IR), declared to be on the verge of bankruptcy, only a few years ago has produced a suprlus of Rs 200 bn this year. The turnaround in the railways is one of the more striking aspects of the India growth story and Railway minister Lalu Prasad Yadav is the toast of the country.

Yesterday on news channel NDTV, anchor Prannoy Roy asked Tarun Das, Chief Mentor of the Confederation of Indian Industry, whether he thought Lalu was a "future liberaliser" To which Das replied, "He's not a future liberaliser, he is a current liberaliser". Grins all round.

I guess it all depends on what you mean by "liberaliser". If you mean anybody who produces results, I have nothing to say. But if you mean, somebody who has pursued the liberalisation or reformist agenda, I couldn't disagree more.

The reformist agenda for IR was set by an expert committee headed by Rakesh Mohan, currently Deputy Governor of India's central bank and then Executive Vice Chairman of Infrastructure Development Finance Company Ltd. It is interesting to go through that report now (submitted in July 2001) and compare what IR have done under Lalu's leadership with what the "liberalisers" had suggested.

The Rakesh Mohan committee starts off by observing, "Today IR is on the verge of a financial crisis... the rate of growth in revenues has been outstripped by the rate of increase in costs...Clearly, continuing the current system of Railway operations into the future is not a feasible option".

The committee noted the reasons for the alarming state of IR finances: high investments made in unremunerative projects out of political complusion; incorrect pricing, notably heavy subsidies for passengers, and uncompetitive prices for freight (which resulted in IR losing market share to road transport); rising employee costs and poor productivity; inadequate investments both for expansion and modernisation and for maintenance. Given low volumes and wrong prices, IR could not generate surplus for growth; and the government's own finances were strained which meant that budgetary support for IR could not increase. IR was caught in a vicious spiral of rising costs, low revenues, low surplus and low investment.

The committee then went on to argue that IR needed to be reinvented:".. to modernise the railway system in India will require more than running it better. It will demand that it is run differently".

What would reinvention mean? Some of the key recommendations were as follows:

  • Separate the policy, regulatory and management functions in the Railways. Policy would be set by a corporate entity, Indian Railway Corporation (IRC), under the guidance of the government. The corporation's activities would be regulated by the Indian Rail Regulatory Authority, an independent regulator that would keep a watchful eye particularly on tariffs and subsidies. The IRC would be governed by a reconstituted Indian Railways Executive Board (IREB) which would include executives drawn from the private sector.
  • Focus on "core" transportation business and spin off "non-core" activities such as catering, hotels, research, schools, etc.
  • Rebalance pricing, that is, increase passenger fares (which were heavily subsidised).
Without restructuring along the above lines, the committee warned, "the withering of IR is a clear and present danger".

We know better now. IR did not wither way. Barely five years later, in 2005-06, IR produced a surplus of Rs 130 bn.

How did this happen? First, like most observers of the economy, the committee did not anticipate the sharp rise in GDP that started in 2003-04.- it assumed that the economy would grow at 7%. Faster growth created the potential for larger volumes. But, how did IR cope with large increase in large volumes without making huge investments? Answer: better capacity utilisation.

  • Wagon overload was permitted. There was always overloading of wagons but the excess revenue was being pocketed by corrupt IR officials. Legalising the overload meant that the revenues would accrue to IR. This was not some brain-wave of Lalu's- the IR top brass had researched the issue and concluded that, on select routes, such overload was consistent with safety. It's a tribute to IR's technical depth that this approach has worked.
  • Better wagon turnaround: idle time at yards was minimised through careful monitoring of turnaround times.
  • Using wagons with higher capacity.
  • Adding more coaches to passenger trains- and increasing the length of rail stations as required. This enabled better utilisation of capacity on passenger routes as well.
  • Less time lost due to accidents- in this IR benefited from the Rs 170 bn investment in state of the art safety devices made by Yadav's predecessor, Nitish Kumar.
Now that volumes have expanded and the surplus has burgeoned, IR can confidently make investments in new capacity- its showpiece will be the dedicated freight corridor for which the cost is conservatively estimated at Rs 300 bn. But this will take six to seven years to fructify. Better capacity utilisation is exhausted can help the IR meet demand for two or three years. Thereafter, IR will be stretched to accommodate growing volumes.

We are seeing this reflected in the numbers: the revenue growth projected for 2007-08, 12.8%, is lower than the 16% growth achieved this year and the 15% growth of 2005-06. But, the turnaround is there: IR is no longer in the red. When your revenues boom, cost control becomes secondary.

Lalu has not increased passenger fares; on the contrary, he has lowered them; private parties are being invited into select areas (hotels, railway stations, shopping malls) but IR has not withdrawn from any of its current areas; the governance structure is unchanged and the same political authority and the same IR bureaucracy has brought about the transformation. Last, but not the least, there is no regulator to monitor tariffs. Yet, a state-owned entity with a monopoly over its services generates a return on capital that would be the envy of the private sector: 20%!

So, yes, IR under Lalu has indeed reinvented itself but not along the lines suggested by the "liberalisers". IR used its technical ingenuity and commonsense, always a scarce commodity. Lalu has proved to be an effective leader, a man who backed ideas put up to him by IR's technocrats. But "liberaliser''? No way.

The war drums get louder....

Iran's president declares that Iran's nuclear programme is like a car with no brakes and no reverse gear....The neocons' clamour for an attack of Iran is rising to fever pitch. What they are saying is an exact repeat of what they said in the build-up to the invsaion of Iraq. Gideon Richman writes in the Financial Times:

The country is developing weapons of mass destruction; its leader is a new Hitler; he has connections with terrorists; time is running out; containment has failed; we must strike before it is too late.

If you think you have heard it all before, you have. The arguments for an attack on Iran are almost exactly the same as the arguments that were made for an attack on Iraq. The people making the case have not changed either.

Here is James Woolsey, a former director of the CIA, speaking at a conference last month about Mahmoud Ahmadi-Nejad, president of Iran, and his talk of wiping Israel off the map: “Hitler meant it when he said he wanted to exterminate the Jews. It was spelt out in Mein Kampf. We need to take seriously what people like Ahmadi-Nejad and others say to their own followers. They are not lying; they are stating their true objectives.” And here is Mr Woolsey, speaking on American television in January 2003: “Saddam sounds very much, with respect to the 250m people or so in the Arab world, as Hitler sounded before world war two, with respect to Europe. The Ba’athist parties really are fascist parties . . . they’re anti-Semitic like them; they’re fascist.”

And here is the official summary of comments made at the same conference in Israel last month by Richard Perle, a former Pentagon official: “In possession of nuclear weapons, Iran is capable of using their terrorist networks to enable damage . . . The issue is one of timing and intelligence. You can’t afford to wait for all the evidence.” Once again, this is a reprise of a favourite tune. Appearing on American television in February 2003, Mr Perle argued: “Let us just agree that Saddam Hussein had those weapons and he is perfectly capable of transferring them to al-Qaeda.” Mr Perle emphasised the urgency of the problem: “There is a threat and I believe it is imminent.”

Newt Gingrich, a likely candidate for the Republican nomination for the presidency next year and a member of the Pentagon’s Defense Policy Board, argued only last month that “the US should have as an explicit goal, regime change in Iran” because Iran is “the leading supporter of terrorism in the world”. In 2002, Mr Gingrich wrote: “The question is not should we replace Saddam? The question is should we wait until Saddam gives biological, chemical and nuclear weapons to terrorists.”

The people arguing for an attack on Iran allege that containment is failing. They said the same thing about Iraq. As early as 1997, William Kristol, the editor of The Weekly Standard, was arguing that: “Rather than try to contain Saddam, a strategy that has failed, our policy should now aim to remove him from power.” Nine years later, Mr Kristol was urging a military strike against Iranian facilities and demanding: “Does anyone think a nuclear Iran can be contained?”.....

The fact that the neo-conservatives and their allies are unabashed by their failure in Iraq does not mean that the rest of the world should be so forgiving. After all, these people positively begged to be judged by the results of the Iraq war.

Alas, the world may not be forgiving but that is not going to stop the neocons. I would dearly like to be proved wrong but each day brings us closer to an all-out American attack on Iran.

Monday, February 26, 2007

Make land acquisition more transparent

Rediff.com has two terrific interviews on SEZs, one with G K Pillai, Commerce Secretary and the other with Kashiram Rana, BJP MP and convenor of a parliamentary sub-committee on SEZs. Pillai offers a spirited defence of SEZs; Rana suggests the present policy if flawed. Put together, the two interviews enable you to judge what is right about SEZs - and also what is wrong. (Also see my earlier posts, Singur and Nandigram , Reliance and rehabilitation and Reliance clarifies.)

Pillai makes a number of interesting points:
  • All the 235 SEZs that have been approved so far will be on land that was acquired before the SEZ Act came into force in February 2006. All states have been acquiring land for years; some of the acquired land has been given to SEZs. So he can't figure out what the fuss is all about.
I am not sure this addresses one of the issues,namely, profiteering by a few businessmen at the expense of the farmer. The government acquires land at an arbitrarily determined price; it sells the land to private developers at a price that is below the market price. The fact that the land given to the SEZs was acquired much earlier does not alter this fact.

  • For another 162 SEZs, land remains to be acquired.
How is this acquisition to be done? Pillai says he favours direct bargaining between businessmen and farmers except where small bits of land need to be intergrated with a larger area- in the latter, state intervention cannot be avoided.

Well, the trouble is that a big company always has the upper hand in negotiations with the small farmer or with members of a community of farmers. It can offer a price that appears attractive to the farmer but does not reflect the present or potential value of the land. So, government intervention may still be required but this must be to ensure that the farmer gets a better deal than through direct negotiations with businessmen. At present, the government gives the farmer a worse deal.

Secondly, in order to be fair, compensation must have two elements: a down payment in cash and an upside in the form of a call option on the value of the land a few years down the road.

  • In many cases, farmers are being offered a price that is attractive considering their meagre earnings from their small holdings. Besides, owners of land in the surrounding areas benefit from a sharp escalation in land prices down the road. He gives the example of Sriperambadur near Chennai where 750 acres of land were acquired from 1500 farmers at Rs 500,000 per acre. The price has now shot up to Rs 8 million per acre and 15,000 farmers in the vicinity stand to benefit.
This is fine but how does it address the issue of others who are displaced in the rural economy: sharecroppers and landless labourers?

  • Acquisition of agricultural land for SEZs, a controversial issue, is okay because, more often than not, what we have is subsistence farming. This cannot take care of 65% of the Indian population that depends on agriculture today. Only job creation in industries spawned by SEZs can.
Well, part of the reason why we have subsistence farming is that not enough has been done to make the land more productive- through better irrigation, diversification into cash crops, etc. You can't have public policy impoverishing farmers and then cite that impoverishment as justification for uprooting the farmer!

As Rana points out, we need a land acquisition policy that gives adequate importance to the farmer's attachment to his land. We also need to proceed cautiously with SEZs- start with a few, watch the results and take it from there.

Above all, we need much greater transparency in land acquisition and a sense among people that transactions are fair. Here is a suggestion: let the government create a Land Acquisition Corporation (LAC). The LAC might function as follows:

  • It will acquire land from farmers and sell it to developers.
  • In addition to cash payment upfront, farmers will be given shares in the LAC; the LAC, in turn, will have an equity stake in SEZs. This ensures that farmers gain from any prospective appreciation in land value.
  • The LAC will have a board with independent directors and all transactions must be approved by the board. The LAC will published an annual report that will document all transactions.
  • In due course, the LAC could become a listed company, with its share being traded on the exchanges. This will provide farmers with a ready exit route for their shareholdings.

Friday, February 23, 2007

Reliance clarifies

In my post Reliance and Rehabilitation, I quoted the Economic Times as saying that Reliance was not offering a formal guarantee of job offers to those displaced and it was not providing for sharecroppers and landless labourers. A Reliance spokesman has written to ET today clarifying the position:

For record, let me reiterate that the job guarantee applies to all eligible cases in the project area. It is a formal guarantee. About the reference to the land labourers our statement on R&R package states: “For landless PAPs (project-affected persons), minimum agricultural wage (Rs 60 per day at present) would be paid for two years to every family. Vocational training, too, would be provided to one nominee of each such family.”

JM- Morgan Stanley split

I suppose it was only a matter of time. The parting of ways between Nimesh Kampani's JM Financial and Morgan Stanley does not come as a surprise. Merrill gained control of DSP in December 2005, buying up 50% of promoter Hemendra Kothari's stake. (Kothari continues as Chairman, though). Kotak Mahindra and Goldman Sachs broke up in March 2006, with Kotak buying out Goldman's equity stakes in two JVs. And now this.

Morgan Stanley will gain control of the institutional broking joint venture by buying JM's equity holding for $445 mn. JM Financial will have the investment banking arm to itself by buying Morgan's equity stake for a nominal sum of $20 mn.

Why have the big international firms decided to go their own way? Because the Indian market is big enough now to get their full attention. When Merrill, Goldman and Morgan first entered the market, investment banking and institutional broking were still quite small. Investment banking was mainly about placement of equities for Indian firms. That required distribution capability. The market volumes did not quite justify investment in distribution by the international majors. Besides, local firms had the relationships, they could open doors.

Now India has happened. Institutional broking is booming. It is dominated by the international customers- FIIs- with whom the big investment banks have long-standing relationships. They don't need Indian firms to hold their hands.

Investment banking is also taking off and it too has a big international component- overseas acquisitions, ADR/GDR issues, advisory services to foreign firms wanting to enter India. The international firms have by now established relationships with Indian firms. They don't need a local partner.

For foreign firms entering an emerging market, there is a mismatch between the business potential and top management time. The market is often too small to justify top management time. When a firm enters on its own, time is required because regulatory problems can seriously harm a firm's reputation. It is better, therefore, to come in as a junior partner to a trustworthy local firm. You get to know the market and you establish relationships without having to spend too much effort.Once the market reaches a certain size, the business potential justifies an independent venture. Clearly, the Indian market has reached that point.

Is this finis for Indian firms? Not at all. They will not be big in institutional broking but they are well positioned to capture the burgeoning retail market. Not just for broking but for wealth management and distribution of financial products. So, we will see the market segment itself. Institutional broking and international investment banking mandates will be dominated by international firms. Local firms will loom large in domestic investment banking and retail broking. There is room for both as India grows and grows.

Priorities for the coming budget

Monetary policy is now in a contractionary mode. The monetary authorities have little choice in the face of an inflation rate of around 6.7%. True, the price rise is fuelled mainly by primary articles. But, prices of manufactured products too are trending upwards. The monetary authorities can't afford to take chances. So what stance should the FM take in his forthcoming budget?

If fiscal policy is excessively contractionary, it would end up derailing growth. The fiscal deficit is declining. While the target under the Fiscal Responsibility and Management Act for 2006-07 was 3.5%, we are likely to end up lower- say, 3.2%. The temptation would be lower it further for 2007-08 and reach the target of 3% a year ahead of schedule.

That would be inadvisable. As it is, a declining fiscal deficit implies a contractionary fiscal policy. It would be wise not to overdo it. So, let the fiscal deficit for 2007-07 stay above 3%- maybe at the same level as in 2006-07. That gives room for spending on infrastructure and the social sector. This is required if supply bottlenecks are not to hobble growth in the years ahead. In sum, finance minister P Chidambaram must ensure that the budget is sufficiently expansionary to offset the effects of the ongoing monetary contraction. When I say 'expansionary', I mean: no more fiscal contraction than is mandated by the FRBM time-table.

See the full article in ET here.

Thursday, February 22, 2007

Will the US attack Iran ?

I mentioned earlier in the year that an American attack on Iran was a key risk to the world economy. What are the chances now of such an attack?

Well, the signs are not good. Iran has just missed the deadline for suspension of uranium enrichment set by the UN Security Council last December. Washington is steadily ratcheting up the rhetoric on Iran's going down the nuclear route. Two aircraft carriers have been despatched to the Gulf.

Last week, the British journal, New Statesman, carried an article by Dan Plesch, a leading defence and security expert at the School of Oriental and African Studies, that warned that American preparations for an all-out attack on Iran were "complete". The article, which received wide publicity, quoted British military sources as saying that the U.S. has been preparing for an armed confrontation with Iran for four years.

The idea is to decimate Iran's political, economic and military infrastructure through an attack of some 10,000 sites all over Iran.Other reports that have appeared earlier have spoken of a willingness to use tactical nuclear weapons. Plesch believes that the war will involve only conventional weapons. Huge funding has helped improved the accuracy and effectiveness of these weapons over the past few years.

The article does not mention any prolonged occupation of Iran following an attack. Maybe key oil sites will be secured and the principal cities left to themselves. The government may remain but it will preside over a ghost country bombed back to the Stone Age. Iran as it exists today will be disemembered. Plesch talks of a "federal Iran" that will be allowed to rise from the ashes.

The Economist (February 10) has an article, "A countdown to confrontation" that analyses the chances of an American attack on Iran.There is, as usual, a two-pronged strategy: a toughening of sanctions accompanied by the threat of war. Iran is said to be two to three years away from acquiring nuclear weapons. The Economist cites a study by the Centre for Strategic and International Studies in Washington that suggests that an attack on nuclear sites alone would only delay Iran's progress towards nuclear weapons. It would not eliminate that capability. That would imply that only an all-out assault can achieve American objectives.

I am not a strategic affairs expert. I will say this: there is a disconcerting similarity to the way the ground was prepared for the invasion if Iraq. There is the pretence of giving diplomacy a chance; the demonisation of the regime in Teheran and assertion of its links to global terrorism; calculated leaks about Iran's growing nuclear capability. It is all eerily familiar.

President Bush spoke long ago of the 'axis of evil'- Iraq, Korea and Iran. Iraq has been taken out. There is some progress towards the objective of neutering Korea after the recent pact with the Korean regime on freezing its programme. Iran remains. The neocons in the US will not sleep peacefully until they have a puppet regime in Iran. They just can't stomach the idea of a hostile regime sitting on the world's second largest reserves of oil.

Will the Americans succeed? Sceptics point to the bungled operation in Iraq. Note, however, that it is bungled only in humanitarian or nation-building terms. There is suffering in Iraq. But who cares? A dismembered Iraq perfectly suits the US and Israel. Lives will be lost in Iran; the country may end up as a seething cauldron of sectarian strife. But that will be Iran's problem, not America's.

As for the chances of a successful military operation in Iran, it is wise not to under-estimate the US. America's military might, honed over a decade of some of the most spectacular innovations in military history, is today unquenchable in its potency. There were many who sceptical about America's attack on Afghanistan and Iraq. They were proved emphatically wrong. Unpleasant as it is, I can't shrug off the feeling that an attack is highly likely and it will succeed - in military terms. If UK's Tony Blair is looking to go out in a blaze of glory, the attack could happen sooner rather than later.

What’s in a name?

Why blame politicians for being obsessed with name changes? When the mighty Hindustan Lever Limited (HLL) thinks it makes sense to change its change to Hindustan Unilever Limited (HUL), you have to concede that politicians too may have a point.

There was a big fuss when Madras was changed to Chennai, Calcutta to Kolkata and Bombay to Mumbai. When Bangalore was changed to Bengalooru, some people thought that was the beginning of the end for India’s Silicon Valley. It’s a different matter that these name changes have by themselves done little to diminish the attractiveness of any of these cities as an investment destination. No surprise, either. Did foreigners worry when Peking was changed to Beijing? Or Ceylon to Sri Lanka?

HLL was thought up at a time when xenophobic sentiments were strong and MNCs were viewed with suspicion in the developing world- they were seen as colonialists under private, instead of government, auspices. The proposed name change suggests that Unilever no longer believes that a strong foreign association is politically incorrect in post-reform India. Only a year or two ago, HLL made bold to bring in a foreigner as CEO after a long time (although the chairman is still Indian).

HLL says the change of name will help it leverage the brand of its international parent. Many will be sceptical. HLL is a terrific brand and it has already has the right mix of desi and videsi appeal. To go from HLL to HUL may not make things worse but there’s little reason to believe that it will make things better. HLL no longer sits on the high pedestal it once enjoyed; it has made mistakes in recent years. Investors must hope this is not another.

Wednesday, February 21, 2007

Inspite of the Gods

I've just finished reading Edward Luce's Inspite of the Gods: the strange rise of modern India.

Luce was correspondent in New Delhi for the Financial Times of London.He is married to Priya, the daughter of former bureaucrat, P K Basu. Basu incidentally heads (or headed) the committee set up by the UPA government to restructure PSUs. If I am not mistaken, Priya Basu is a financial sector specialist at the World Bank in Washington (where Luce is currently based).

Luce's book is meant to introduce contemporary India to a western audience. The book has little to offer the Indian reader by way of insights or understanding. The themes it covers- the co-existence of modern and primitive sectors in the Indian economy, the nature of the bureacracy, the caste and communal problems, assertive Hindu nationalism, the growing closeness to the US- are only too familiar; the events quite fresh in one's memory. Luce's prescriptions for India to continue to grow and develop are the standard ones: persist with reform, preserve democracy, eschew communalism.

Where Luce scores is in his accounts of the people he has met while trying to understand the rise of India. We meet Mirian Ram, editor of Hindu editor N Ram, who runs a firm to which leading publishers outsource their work; James Paul, an Infosys employee, one of many software engineers whose lives have been transformed by the IT revolution; guru Sri Sri Ravishankar, who, it turns out, has close links with the RSS (after Luce's write-up on him appears, an RSS official calls to convey the guru's displeasure); a Gujarati lady who chose to divorce her husband rather than abort her girl child(Gujarat has among the lowest ratio of females to males in the country, thanks to pressure on women not to have girl children); and a precocious 10-year old Sikh boy Luce encounters on a train who fields just about any question under the sun. It is these human interest stories that bring the narration to life and help us put faces to the transformation that India is witnessing.

What is 'strange' about India's rise? Luce tells us in his introduction. First, India is emerging as a force on the world stage while still being steeped in religion and superstition. Second, it remains wedded to democracy while having a sizable proportion of illiterates in its population. Third, economic growth has accelerated without a broad-based industrial revolution. Fourth, India's divisive politics and pervasive corruption have not come in the way surging growth. Last, India's rise is welcomed and desired by other countries, notably the US.

The book is by no means uncritical but it is written with a degree of affection unusual for a western writer- no doubt Luce's marriage into an Indian family has made a difference. There are authors one respects and admires. Rare is the author who can engender affection in the reader. Luce is one such. You end up liking the man.

Reliance and rehabilitation

I wrote yesterday about Singur and Nandigram and the enormous issues involved in rehabilitation.

Today's ET editorial (February 21) mentions Reliance's offer to those who would displaced by its SEZ.

At Singur, the government offered Rs 9 lakh/acre for monocropped and Rs 13.5 lakh/acre for multi-cropped land. Sharecroppers were offered 25% of the sum offered to landowners. No homesteads were affected: only cropped land was acquired.

The Tatas offered vocational and technical training for members of affected families and up to 3,000 have registered for training. Despite this, violent demonstrations were held by unregistered sharecroppers who got nothing and by landless labourers who fear they will have no work. The package is seen to be so inadequate farmers at Nandigram are on the warpath, and have killed a policeman.

Reliance has offered Rs 10 lakh/acre for paddy land and Rs 5 lakh/acre for unproductive land, which it says is ten times higher than the prescribed acquisition rates. Every affected family will have the option to send a member for vocational or technical training, or else accept an additional lump sum of Rs 3 lakh.

A stipend of Rs 60/day, equal to the minimum wage, will be paid during training, and this is an idea worth following elsewhere. On completion of training, Reliance says the trainees will get jobs at Rs 4,000/month. This may not be a formal guarantee, but the SEZs will create jobs aplenty for these trainees, an outcome likely at Singur too.

Reliance has made no provisions for sharecroppers or landless labourers. However, after developing the SEZ, Reliance will return to each family 12.5% of land acquired. This will be really valuable land: developed land in a top industrial zone can fetch Rs 5 crore an acre.

Reliance will also leave untouched the homestead land of villagers within the SEZ. So, each family will end up with homestead and additional land worth

As the edit notes, Reliance's offer does not cover sharecroppers and landless labourers. These form the larger chunk of those displaced. Still, it is an improvement on what we have had so far. Better rehabilitation packages have been opposed on the past on the ground that these would render projects unviable. The fact that companies are now coming forward to improve their offers does undermine this claim.

None of this would have happened without the violent protests in Singur and Nandigram and the government's decision to put the SEZ issue in cold storage. So, for the nth time I say: Thank God for Indian democracy!

Tuesday, February 20, 2007

Singur and Nandigram

If the protests in Singur over the Tata Motors factory seemed like a storm, Nandigram is witnessing a hurricane. We should not be surprised. Prime Minister Manmohan Singh said that we need a more 'humane' land acquisition policy. That is an understatement. What goes on now in the name of land acquisition - and job creation- is nothing short of a war waged by the state on the downtrodden- mostly dalits and tribals.

If you think this is an exaggeration, read Walter Fernandes' well- researched article on the subject in the Economic and Political Weekly of January 10. Fernandes makes a number of points:

  • West Bengal's development projects have uprooted 7 million people of whom only 9% have been resettled. Among other states, the highest level of resettlement is around one-third
  • Some states have introduced a Rehabilitation Law, often under pressure from the World Bank which itself is under pressure from human rights activists in the west. West Bengal, despite being Left-ruled, is not one of these states.
  • Land acquisition, including for SEZs, is justified on the promise of job creation. But because of high mechanisation, not many jobs are created. Moreover, only a small proportion of the displaced get these jobs. Those displaced lack the skills to get the jobs that are created. The answer would be to invest in training. But who wants to take the trouble?
  • The state tries to compensate land owners. Sharecroppers are covered if they are registered (they get 25% of the compensation paid to the landowner). But many are not registered and lose out. The biggest losers are those who are sustained by the rural economy- those who provide services to landowners. They are simply ignored and it is they who constitute the biggest chunk of those deprived of a livelihood as a result of land acquisition.
  • The land acquired is far in excess of the needs of the project in question. Fernandes asks: does a car factory need close to a 1000 acres? The question is worth asking because past experience shows that huge amounts of land acquired remain unutilised. This amounts to nothing but a land grab by the influential.
  • Compensation is paid on the basis of the average registered price for the last three years. If the price is not registered, you had it. The worst part is that the government-determined compensation is a fraction of the market price. In one instance that Fernandes cites, farmers were paid Rs 3 lakh per acre when the market price was Rs 20 lakh! This is for the owner. Others dependent on the rural economy suffer even more. Why should farm land be acquired for IT companies at below market price so that they can go on to create golf courses and five -star lodging? Former PM Deve Gowda brought up this issue but was mauled by a section of the intelligentsia.

What would be a more humane policy? Well, as some have suggested, the price must be determined through direct bargaining between corporates and the community. The price would include payment to owners of land plus a component that would compensate others who depend on the rural economy.

It's not just that such a solution is fair and humane. The alternative, if the proposed SEZs go through, would result in a mass uprising and more areas passing into the hands of Naxalites. The UPA government is wise to have put SEZs on hold until land acquisition has been thought through.

Wednesday, February 14, 2007

India Inc's acquisition spree- are the analysts wrong?

Tata Steel, Hindalco, Suzlon- the analysts have uniformly given the thumbs down to big overseas acquisitions, done or proposed. Are they right or wrong?

First, analysts can be wrong quite often. When it comes to earnings forecasts, for instance, analysts have had a poor record. There are empirical studies that show that forecasts that used past earnings or sales growth or even GDP growth tended to be more accurate than the labourious forecasts of analysts.

There is, of course, no dearth of anecdotal evidence of analysts' fallibility. When Tata Motors (at the time, Telco) ventured into cars, they predicted that the car venture would sink the profitable truck operation- among other things, the Tatas did not have it in them to service the retail customer. They were proved wrong- and how!

The analysts were also telling Infosys management for long that their business model was not sustainable. Beyond a point, the company could sustain earnings growth only by moving into products. Well, Infosys has gone on to become a $2 bn company by scaling up IT services.

And don't forget that, until a few weeks ago, S&P had rated India as below investment grade. It took four years of growth of 8% for S&P to recognise India as investment grade. Through all the years that we were growing at more than 6%, S&P continued to insist we had a serious fiscal problem. We will now be meeting the FRBM target for the centre well ahead of 2008-09, the scheduled date for the centre to reach a fiscal deficit/GDP target of 3%.

My second point: the analysts could be right in the sense that the companies that Tata Steel and Hindalco will underperform over the relatively short time horizons that funds look at while making allocations- say, three to four years. For this period, yes, these companies will not deliver returns to shareholders.

But the point about these acquisitions is precisely that management has taken the long view. And it has had the courage to take the long view because the industrial houses concerned have substantial stakes in the companies concerned, unlike professional managers. I argue in my recent column that this is one of the strengths of family-managed businesses vis-a-vis businesses run by managers.

Read my column in ET.