ECONOMISTS, TALK WITH ONE VOICE!

[I sat on the Prime Minister's Economic Advisory Council for a couple of years and advised Atal Bihari Vajpayee; then I resigned when I went to Stanford. After coming back, I used my freedom to criticize the government's economic policy. This column was published in Business Standard of 14 November 2000.]

The Premier’s dilemma

Early this month the government transferred 14 secretaries. It was thoroughly and deservedly excoriated by the press. In the damage control exercise, a Deep Throat put out the story that the Prime Minister is concerned over the poor performance of the economy and perplexed by disagreements amongst government economists, and that he decided to replace the team in the finance ministry to get some cohesiveness in policy.

It is a pretty lame story; and for that reason it is substantially true. The Prime Minister’s Economic Council is now two years old. Every once in a while the PM calls it together, its members give him sage advice, in return for which he gives them cashew nuts and tea. Much has been said, much paper has been expended; but at the end of it, the PM remains as bemused as ever. Now he has asked the members of the Council to speak to him with one voice, and give him the consensus of their advice. The story of the meeting between finance ministry officials and the Governor of Reserve Bank in his presence has also been leaked to the press; apparently there were sharp differences between them and the Governor on policy, and the PM was even more deeply bemused.

Since I am no longer in the Prime Minister’s Economic Council, I have no knowledge of the precise points of difference. But the cause of the dispute between Bimal Jalan and the sacked finance ministry officials is pretty easy to imagine. It relates to four issues:

1.    Balance of payments: Reserve Bank makes projections of the balance of payments; they are apparently alarming. Just why would not be clear to mere mortals, but the reserve bureaucrats know something that we do not. For one thing, they know how much military hardware from Russia and France is going to cost; apparently it runs into billions. For another, Resurgent India Bonds come up for repayment in 2003. But there is apparently something more. It probably has something to do with foreign capital inflows. The defaults of Essar and Spic have turned foreign lenders off Indian companies; and if Indians themselves are not buying into Indian companies, other than software companies, foreigners are hardly likely to do so. If they join Bajoria and Dalmia and take over cheap Indian companies, the xenophobes will raise a racket. Both the government’s swadeshi connections and the industrial slowdown are bad for foreign investment. Whatever their precise elements, the forecasts look bad.

What can be done about it? The only thing RBI and finance ministry could agree on is borrowing – in the form of India Millennium Deposits. These borrowings are a racket. They are only for NRIs, so others have to pay NRIs a commission for getting in (which is why the US has banned us from collecting the deposits there). They are at an appreciably higher interest rate than the rate at which NRIs can borrow, so NRIs can earn a nice little margin. Some of that margin can be given back to those who conceive and collect these Deposits. So they are popular amongst politicians and state bankers too. And RBI gets an accretion to its reserves. Everyone is happy. But this is not enough in RBI’s view; more needs to be done.

2.    Exchange rate: What could be done? Devaluation? That would raise the price of oil. The government could not even pass on the price increase that has occurred; it made a messy compromise. A further price increase would mean a bigger deficit on Oil Price Equalization Account, more trouble with more Mamtas.

3.    Interest rates: After dipping briefly in 1997 and 1998, interest rates on government borrowings are pretty close to what they were in the early 1990s. Their cost pinches more because in the meanwhile, the government has added a couple of trillion Rupees to its debt. Government’s borrowing rates push up the rates at which banks and FIs lend to industry, so industry is complaining. The finance ministry would like RBI to reduce interest rates. Now that the central government does not borrow on the SLR, the banks cannot be forced to take its loans. RBI finds it difficult to place the increasing volume of loans even at the current interest rates; how can it force the banks to take the bonds at even lower rates? The finance ministry thinks it can; the governor thinks it cannot. Besides, he is aware that although he has strangled the foreign exchange market, leads and lags in payments for exports and imports can cause a run on his exchange reserves; he needs to keep domestic interest rates high to persuade traders to keep their money in India.

4.    The budget: The Governor must have told the finance ministry that the solution lay in its lap: it must borrow less. Then he could bring down interest rates. He would have pointed out that revenues had been buoyant this year despite the slowdown, but that the government had managed to blow them up by spending on arms and what else. In the circumstances, it should reduce expenditure, raise taxes or both in the next budget.

These are the controversies to settle which the Prime Minister sacked the top brass in the finance ministry. Will he have settled them thereby? Will the next lot agree with the Governor and bite the bullet? I doubt it. What I am sure of is that it will fully display its inexperience and opportunism in the next budget. It will not touch government expenditure, whence politicians derive their sustenance. It will raise import duties; from the Swadeshi xenophobes to the FICCI-CII types, every lobby loves this, whatever its effect on exports. It will raid the cash reserves of public enterprises to fill its borrowing requirements. But to cure the economic slowdown that the PM brought it in to do? It would not even know where to start.

A GAMBLER IN A JUTE SUIT

[Arun Bajoria owned one-sixth of the jute industries in the 1990s, and was making obscene profits; then he lost his way. He tried to wrest control of Bombay Dyeing from Nasli Wadia and failed. After his only son died, he too died at the relatively early age of 63 in 2008. This columns was written in Business Standard of 24 December 2000.]

Who is afraid of Bajoria?

Arun Bajoria has been making news. He has taken substantial positions in the share capital of Bombay Dyeing and Ballarpur Industries, and is wondering what to do with them. The promoters of the two companies are not prepared to take him on the board of directors. He could sell his holdings to the promoters’ ill-wishers. But unless the holdings were large enough to help in unseating the promoters, their value would not much exceed their market value; and if they were unloaded in the market their value would be much less. Bombay Dyeing has also apparently referred Bajoria’s acquisition of its shares to SEBI, for it is large enough to attract SEBI’s requirement of an open offer.

An open offer would cost Bajoria much more money; and it would not be worth making unless he had a good chance of taking over the companies. Which he does not have seeing the holdings of the promoters and the financial institutions. So why has he been playing this futile game?

It is unwise to try and look inside a rich man’s mind. But an obvious reason is that he had money. It seems that he made it running jute mills in Calcutta. He has run them with great profit, and used his earnings to buy up 15 per cent of jute capacity. Here is a declining industry. The government keeps it alive by forcing various producers to pack their goods in gunny. Carpet backing seemed to be the hope twenty years ago; but its stimulus proved short-lived. Travel goods, curtains and such offbeat items offer niche markets but absorb very little volume. But the fact is, that there is a market, and money can be made in it if someone knows how to cut costs. It is difficult in Calcutta, since the CPM government would beat up anyone who threw his workers out of job. But Bajoria somehow did it. He also tightened up management. And he made money.

He is not the first one who has more money than he knows what to do with. In the early 1990s, the Jains of Jain Irrigation were making a lot of it. They were pioneers in drip irrigation equipment, and money was pouring out of their ears. They looked well set for the next 20 years. I recommended their shares to a friend, and she lost almost all her money. The Jains issued a public apology, but it did not earn my friend anything. They had used their profits unwisely and lost it.

There are other Indians who have made a lot of money. Look at all the infant millionaires in Silicon Valley – Kanwal Rekhi, Sabeer Bhatia, Chandra Shekhar and others. They got rich before they got old enough to need massage. What did they do with their wealth? Of them, I know only Kanwal Rekhi well. He decided that he had made enough to last his lifetime, and so gave up making money. He spends his time teaching other Indians how to succeed, collecting money for Indian Institutes of Technology, funding a libertarian institute, and so on. He is playing venture capitalist to both entrepreneurs and ideologically fired people. I know less about the others, but a number of them are known to be setting up new businesses in information technology. In other words, they are doing more of what they have been proved to be good at.

What would that be for Bajoria? More jute mills are an obvious answer. There is still another 85 per cent of capacity to buy. There is all of Bangladeshi industry. There are possibilities downstream – fashion garments, for instance. But then Bajoria would have thought of these things first, and rejected them for some good reason. Maybe there are no more jute mills on sale; maybe he, like the rest of the world, has come to regard this industry as a hopeless one.

In which case I would have thought first of similar industries: polythene and polystyrene packing, cardboard, wood. That is where his specialist knowledge of jute might be useful. I would have thought of cotton weaving: that is where his knowledge of weaving might help. Or of jute cultivation and preparation. Jute accounts for three-quarters of the cost of gunny; a one per cent fall in its cost is worth three times a one per cent fall in the downstream costs.

Or I would have thought of other half-dead Calcutta industries. Printing, for instance. Calcutta at one time had the best printers in India: their work was clean, accurate, and if properly supervised, beautiful. Right into the 1990s, the Oxford University Press was using certain Calcutta printers for high-value printing. Today that industry is in its death throes; computers and related printers have made typesetting redundant.

In these circumstances, the communists try to halt historical forces: they try to protect the jobs of letterpress printers. That is silly. They will still be competed out of existence by computer operators elsewhere in India. Jyoti Basu well realizes this, and after thirty years of bleeding, his CPM rank and file in West Bengal too must find it impossible to miss reality. The 1990s have been particularly sobering for West Bengal; despite its best efforts to adapt itself to liberalization and open up to outside investment, it has fallen behind.

Meanwhile, Calcutta’s work force, although it is aging, still retains its old skills; and its wages have fallen far behind wages in the west or the north. It has potential as low-cost producer of things that require its old skills. So why do not Bajorias spring up to use the opportunity? Because it is much easier to invest your money in the stock market than in physical production. The latter is for the young and hungry. But once you’ve made your millions out of jute, life is much easier twisting the tail of Nusli Wadia.