CHAKRAVARTHY RANGARAJAN GETS TOUGH

FROM BUSINESS WORLD OF 17 APRIL 2007

Rangarajan is innocent

Reserve Bank’s progressive tightening of monetary policy is drawing blood; many businesses are feeling the pinch, and economists are beginning to fear that Venugopal Reddy is aspiring to follow in the footsteps of his distinguished predecessor, Dr C Rangarajan. When faced with rising inflation in 1995, Rangarajan had clamped down on bank credit. Many companies that had ordered equipment could not get credit to buy it, many that had expanded capacity could not sell their goods because they could not give distributors credit, and many found their clients canceling orders because they did not have money. Businessmen are wondering if they are going to see a repetition of the bloodbath of 11 years ago.

In a speech to Bombay Chamber of Commerce on 9 April, Rangarajan defended his action. He said that the recession that following monetary tightening was due to the meltdown in East Asia – and implicitly declared himself innocent. His defence is wrong on timing. He began to tighten credit in late 1995; there was no sign of the East Asian crisis till 1997. The troubles of Indian borrowers started in 1996, on account of credit shortage, not lack of demand; the demand slowdown spreading out from East Asia did not strike Indian shores till 1998.

Reserve Bank’s handling of the East Asian crisis was also mistaken. It maintained the Dollar-Rupee exchange rate at a time when East Asian currencies had been devalued 30-70 per cent; thereby it gravely hurt Indian exports, and exposed Indian industry to lower prices of competing imports than it would have been if the Rupee had been devalued. Rangarajan very properly avoided this mistake, for it was not his; it was that of his successor, Bimal Jalan. They were responsible – though certainly not solely so – for the crisis of 1996 and the ensuing slow-down, which ended only in 2003. The average growth rate in those 7 years half of the 9 per cent that we have recently achieved. If we had not lost all that growth, we would have been 35 per cent richer today. Of course, it would be wrong to assume that the path would have been smooth but for the roadblocks introduced by Reserve Bank, or that other policy-makers would not have made other mistakes. So 35 per cent is the upper limit. But 20 per cent would be a reasonable estimate of the loss they caused.

The errors would no longer matter since Rangarajan and Jalan long ago left their governorships. But Rangarajan continues to be the Prime Minister’s most trusted economic adviser; the errors he now makes have the potential to be magnified manifold. This is why his spirited defence of the current tight monetary policy is important. According to him, rising inflation, widening deficit on current account and 21%-plus growth in money supply were indicators of an overheated economy. He thought it important not to turn what is now a cyclical problem into a structural one; to put it in simpler English, he meant that if inflation continues to be high, people will get used to high inflation, and we will have permanently high inflation – which would require perpetually high interest rates, depreciating exchange rate and periodic payments crises.

Certainly, if the choice were so put to them, most people would choose the yet unknown effects of monetary tightening in preference to the frightening prospect Rangarajan laid out. But his question was a rhetorical one; it already implied its own answer. People should ask another question: is tight monetary policy the only instrument available to the government against inflation? The answer is no; there is also fiscal policy, and it is superior under present circumstances. For one thing, tight monetary policy acts only against investment and inventories, whereas fiscal policy can work against all components of demand, including consumption. For another, monetary policy has the strongest impact on banks and their borrowers, which are mostly small businesses; taxation can impact the incentive of all investors – big companies, small businesses, and personal borrowers. There is something Rangarajan has missed out in his policy prescription; and he is too good an economist to have missed it out inadvertently.

POLITICS OF WHEAT AND SUGAR CANE

FROM BUSINESS WORLD OF 10 APRIL 2007

The crisis in procurement

Wheat as well as sugar are commodities of concern to the government. Both are given out in the public distribution system; hence the government has to procure enough of them to last through the year. Sugar is obtained from a levy on sugar mills. But a levy on wheat farmers would be not just unpopular but unenforceable. So the government relies on less severe tactics to procure it.

In the north, wheat and sugar are substitute crops. Sugar is subject to a four-year cycle of gluts and shortages, which causes ripples in wheat production. The sugar cycle has been distorted by the ongoing boom. As people got more money in their pockets, they have been eating more sweets. Sugar output has responded to the demand. From 13 million tons in 2004-05, it increased to 19.3 million tons in 2005-06. But it could not keep up with demand. Sugar price, which was in the range of Rs 17-21 a kg in January 2005, had risen to Rs 21-23 by the middle of 2006. So in July, the government allowed unlimited imports of sugar without duty.

The high prices lured farmers to grow cane. As the current cane year has progressed, estimates of sugar output have been rising; now they are touching 25 million tons for the year to June. Indians would have no difficulty in eating all that sugar if the price was right. But the industry’s ideas of the right price are different. So it approached the government to allow sugar exports. Exports would have been more profitable for sugar mills in the south, which are closer to ports. That made northern mills jealous, and their owners went to complain to Sharad Pawar, minister of agriculture. They found the minister receptive, for the UP elections are looming, and the government sees an advantage in making the millers there happy. So he has announced a combination of favours for the industry, which includes an export subsidy as well as a large buffer stock to be financed by the government.

But the rising sugar prices have made wheat growing less attractive; wheat production refuses to rise above 73 million tons, which was reached in 2001-02. Wheat procurement fell from 20.6 million tons in 2001-02 to under 10 million tons in the current year – so inadequate that the government had to import wheat. In desperation, the government raised the procurement price of wheat from Rs 650 to Rs 750 a quintal this year. But it had not reckoned on the outcome of the Punjab elections. Shiromani Akali Dal has no interest at heart other than that of the Punjab farmer; Parkash Singh Badal, the new chief minister, is asking for a procurement price of Rs 900. Meanwhile, rumours are afloat that the government will give its own Food Corporation a monopoly of procurement and will not allow private parties to buy wheat in Punjab and Haryana. They are inflaming farmers and they are talking of boycotting FCI.

The government would like to reward sugar millowners with high prices, and procure wheat at low prices. But its two aims are inconsistent: if it keeps sugar prices high and wheat procurement prices low, it will not be able to procure enough wheat for the PDS. Pawar, who sees this contradiction, thought of getting rid of one half of the problem by decontrolling sugar. If he did not have to collect sugar levy for the PDS, sugar producers would get a higher price. They would still have the problem of excess production; but Pawar would help them out to export and to stock sugar. But he has not been able to persuade the Prime Minister’s office, which loves the PDS.

So it is likely that the government will not be able to procure enough of wheat, and will import 8-10 million tons this year as well. That is the easy part. But before it gets there, it will have Punjab and Haryana farmers up in arms. The farmers of Bengal have given the lead: they have stopped forced acquisition of their land. The north Indian farmers may well say: no forced acquisition of their wheat. Till now, the revolt against arbitrary, overbearing governments was largely confined to the middle class. Now it is spreading; unless the government returns to liberal policies, it has a hot summer ahead of it.

WELL DONE, NITISH KUMAR!

FROM BUSINESS WORLD OF 3 APRIL 2007

Railways in competition

One of the facets of the railway budget that attracted little interest is the freight policy that was issued with it. Normally, the railway budget is an even more boring document than the central budget; being its little brother, it is presented a couple of days before, and is forgotten as long as the finance minister gives his budget speech. And so it was this year as well. Everyone admits that Lalu Prasad Yadav has done wonders with the railways; but in view of his previous career as an acquisitive politician, his achievement is taken to be miraculous rather than the result of sweat and tears.

Skeptics would find the freight policy especially surprising. It is not the usual mindless official document; it reflects serious deliberation on the changed fortunes of the railways and what they need to do to survive in the new competitive world.

A succession of railway ministers has given concessions to passengers; as a result, passenger services make a loss. The railways try to make up for the loss by charging exorbitant fares on the higher classes. As a result, better-off passengers have forsaken the railways in hordes. The danger has greatly increased in the past five years with the coming of cut-price airlines. Their fares are generally lower than higher-class railway fares. This is the first front on which the railways face competition, and Lalu responded this year by cutting higher fares – not much, not enough, but at least there was recognition of competition.

Since passenger services lose money, the railways have to make up by making a profit on freight traffic. Normally they should have no difficulty in doing so, because their carriage costs are a fraction of those of road transport. But since the nationalizations of the 1950s and 1970s, the central government has substantially owned industries that originate bulk traffic, especially coal, oil and steel; and the state governments owned the electric power industry which is the principal consumer of coal. So it forced the railways to charge these industries low freight. They were compelled to raise freight charges for higher-value non-bulk traffic from the private sector; all this traffic was lured away by the road transport industry, which was one of the fastest growing industries well into the 1990s.

So when Nitish Kumar took over, he found the railways in dire straits. He was the first minister to bring intelligence to bear on the railways’ problems. Principally, he impressed upon the railways the necessity to match the freight charges of road transport, and to be sensitive to the convenience of customers. He, for instance, pointed out the folly of refusing wagons to a customer because he could not provide return traffic for empty wagons; it was the railways’ job to find return traffic.

The ideas he put forward have now been developed into a number of principles. The railways used originally to charge the same freight per kilometer irrespective of location, and to vary it according to the value of the cargo. They modified this rule in various ways to gain traffic, and now they are trying to systematize the modifications.

The first major modification is capacity-based variation. If wagons are traveling empty in any direction, freight on them will be charged less; and conversely, if a certain route is congested, charges on it will be raised. Concessional rates will be charged in the lean season.

The second and more important change is building long-term relationships with bulk clients, especially those who propose to set up new industrial plants. Finding the railways unreliable, factory owners had opted wholesale for trucks. Now the railways will be prepared to take a line to the factory and enter into a long-term contract to carry its production.

The third change is to offer freight rates that are independent of the railways’ commodity classification to attract high-value traffic. The railways are still too obsessed with commodities, so this initiative did not work; but they plan to ‘tweak’ it.

The freight policy still carries a baggage of old practices, for example in the punitive demurrage and wharfage charges, levied if wagons are not emptied within a few hours. Despite this, it displays a very encouraging bit of fresh thinking; it is far in advance of general government practice. It is to be hoped that those who initiated freight reforms will stay in harness long enough to turn railways into an entirely customer-oriented enterprise.

START A PUBLIC SCHOOL FOR PILOTS

FROM BUSINESS WORLD OF 26 MARCH 2007

Good business for the nation

It is ironic that as competition in the airline industry has intensified in the past four years, passengers have got more fed up. Competition is supposed to lower prices and raise quality. Fares have declined. But if we exclude Kingfisher Airlines with their cuddly, all-embracing seats, flying is less comfortable today than some years ago. The nadir was reached when Deccan Airlines bumped off booked passengers and, adding insult to injury, refused to refund their fares to them. But even Jet Airways, which brought international service standards to India and for long gave other airlines a model to match, are looking somewhat jaded today.

Part of the reason is that their staff are pinched so often by newer airlines that they find it difficult to retain experienced staff despite all their investment in training. The proliferation of airlines has caused a huge shortage of personnel, and a new airline finds it enormously easier and quicker to lure away staff from existing airlines than to train its own. This is not true for new airlines only; as worker turnover increases, returns on investment in training decline; it becomes ever less profitable for any airline to train its own staff.

The answer to the dilemma would seem to lie in training institutions that are not attached to airlines. And it has begun to happen; by now, there are a large number of institutions that train airhostesses. But a readymade airhostess would not give an airline a competitive edge; and a number of airlines complain that the quality of mass-produced staff is not good enough. At a time when there is such a shortage of staff and jobs are so easy to come by, there is a great temptation for training institutions to pinch on training, shorten courses and dump half-trained people on the market.

The solution may lie somewhere in between. If the industry continues its rapid growth and new airlines continue to spring up, unattached training institutions are a must. And there enough synergy between airlines and other service industries, such as the hospitality industry, for broader institutions to cater to all such industries together. At the same time, airlines that aim for the upper end of the market will want premium staff which they must train themselves. One way for them is to take staff trained elsewhere and upgrade them; but there is another way. A few of them could get together and set up a training institute that would train more staff than they require. Some of them may find jobs outside the sponsoring airlines, some may join them and leave soon; but if the throughput of the institute is large enough, such losses can be borne.

The above observations apply to the cabin and ground staff, but they cannot apply to cockpit staff. Pilots are different in three ways. First, safety considerations require that pilots are trained to perfection. Since the cost of training is high, this means that the initial screening of the intake has to be rigorous. Second, the rigours of the training require that it should be intense and long. Unlike the training of the service staff which may last a few months, pilot training takes years. Third, pilots cannot be trained without flying machines. This means an array of airplanes and the supporting infrastructure – hangars, servicing bays, mechanics etc. And finally, the primary qualification of a pilot is that he and his passengers survive; and the final proof of this quality is experience. Hence experience is bound to carry a premium.

This is why the traditional source of pilots has been the air force: it has to train pilots, and most air forces place a high value on fitness and hence retire pilots at an early age. However, the pilot requirements of air forces in peacetime are limited; the needs of airlines far outrun them. Those countries that make airplanes also generally have training facilities for pilots to fly those planes. Others, however, lag behind. The market for pilots is international, and hence poaching is more universal. Hence Indian airlines have invested even less in pilot training. Naturally they have run into huge shortages, and made them up by importing them. Announcements during flights in Slavic or Hispanic accents are no longer uncommon in India.

Although training may not be profitable for a single airline, it can be highly so for the country. We have relatively low-cost, well educated, highly motivated young people, and costs of training in India are low. Airline training can be a profitable business, if organized on a national scale. Here is a perfect opportunity for public-private partnership.

DEVILS IN OUR GOVERNMENT

FROM BUSINESS WORLD OF 15 MARCH 2007 [The income tax department assessed Khan's income at Rs 1.1 trillion between 2000-01 and 2007-08 and asked for Rs 340 billion in tax. After being comprehensively defeated in courts, it brought down the claim in 2016 to Rs 100 million.]

The case of Hassan Ali Khan

The past week has seen a media event – the bursting upon press pages of the spectacular case of Hassan Ali Khan. It has all the elements of a first-class thriller: a suspect of noble descent, the involvement of racehorses and a crime of monumental proportions. It is the press equivalent of pyrotechnics – a story that a thoroughbred presswoman would give an arm and a leg to get.  If the journalist sleuths are to be believed, this man stole the Nizam’s jewels, and has stashed away somewhere between Rs 20,000 and Rs 35,000 crore in Swiss accounts, whose details he keeps casually on his laptop.  He is a punter, but he could not have made his money on the race tracks because no one does. He is connected with rich industrialists and prominent politicians, all nameless. The police looked for him in January, and promptly he snuggled into a bed in a hospital. They cleared him, and he came out. Two months later they resumed their interest in him, and as if on cue, he disappeared. But while hiding, he met a policeman in a secret location. His is such a spectacular story that some journalist has surely made sure of winning India’s biggest media prizes.

There is but one fly in the ointment: no journo has discovered any of this. Every little bit of this convoluted story comes from one or other government source. Three of them have been vying to feed the press – the income tax department, Poona police and Hyderabad police. And if all three think the man is guilty, then he must be. Just as guilty as the men that soldiers and policemen kill in encounters.

That word rings alarm bells, for it nowadays comes with a mandatory adjective, ‘fake’. Is it possible that the official pursuers have framed this man? That surely is not possible; if he had been, he would have said so. Those killed in fake encounters tell no story, but surely a man framed of the biggest crime in Indian history is still free, and tell his to any journalist.

But he may hesitate. Will he be believed? Of course a hawala operator will protest his innocence; no one expects him to confess his crimes publicly. His protestations would only confirm his guilt. And suppose he is innocent. Even then he may hesitate to confront the government investigators, for such lack of cooperation may earn him some extracurricular punishment, varying from more fake stories to a fake encounter. This is why a trial by the press brings far quicker and more certain conviction than a trial by a judge – and the verdict is more predictably one of guilt. And why government officials prefer this kind of trial to a judicial one. Judicial trials take ages; and judges often let criminals free because of insufficient evidence – or sufficient quid pro quo, as the case may be.

Such reasoning is not confined to a few taxmen and policemen; it permeates the finance ministry today.  Last year, the finance minister brought in an ordinance to nullify four Supreme Court judgments, and made a ‘voluntary’ agreement with ITC wherein it paid most of the money that, according to those judgments, the government had no right to. this year’s budget is littered with provisions intended to nullify various judgments of the Supreme Court.

For instance, royalties and fees for technology paid by a resident to a nonresident for services entirely rendered abroad are proposed to be made taxable with retrospective effect from 1976.  Searching for such income will enable the income tax department to go on some pretty vexatious fishing expeditions. The ten-year tax benefit for infrastructure development has been denied to contractors with effect from 2000. The government often collects customs duty wrongly and is later – generally many years later - made to refund it by a court judgment. The just course would be to refund the duty together with interest from the day it was initially paid; the finance act now decrees that it would be paid within six months after the judgment. But in the reverse case, if a drawback has been paid to an assessee and is later reclaimed by the government, it proposes to collect interest for the period from the payment of the drawback to its recovery.

Nullification of redress given to citizens against the government by courts is bad enough; nullifying it with effect from a long-past date is double injustice. Lawyers are supposed to be officers of the law. The finance minister, an eminent lawyer himself, should observe better legal morality than witnessed in this budget.