India @ 65: Rumours and Rent-seeking complete the cycle

Never in the recent years has the week before and immediately after an independence day been as insightful and never has it drawn such forceful attention to the socio-economic contradictions of the times we live in - provided we wanted to heed those warnings. In normal circumstances, it should have drawn attention to the delusions that we have allowed ourselves to be carried away. Unfortunately, the nation does not even seems to have realised these are problems. If only, as a nation we have a slightly more respectful view of history, we would have realised that we have reach an inflection point in our history.  There is never a dearth of people who claim that India is at the cusp of recognition as a 'Great Power'. As a figure of speech, a great power could also be understood to mean a 'great power' just like the Hapsburg empire at the turn of last century.

The week was insightful from a social and economic angle. In the realm of economy, a number of companies declared their results. The results drew attention (at least mine) to their debts. There are very clear indications that growth is rapidly declining. At last we have policy makers being less economic with the truth in this respect. Socially, it drew attention to the problem that we have faced for at least 100  years in different forms: ethnic tensions. Economic-geography wise (which may have been missed), it drew attention to the precarious nature of our cities - or those that aspire to become 'Global cities'.

When was the last time in India we had riots, rumour induced panics, high levels of inflation, high indebtedness, banks in cover-up mode because of bad debts and, people feeling brilliant because of a bull market? The short-answer is not far back in time in the period from 1989-1998! The bull market part was only till early 1995. How did we reach this point? Quite simple - actually. We deluded ourselves that we about to embark on a 'great transformation' of the country from a poverty stricken, third-world country to a 'developed' super-power in the making in the not too distant future. Historically, this is always the turning point when the bubbles and euphoria's are pricked but, we do not realise that for a long time after that. We forgot that, it never is dramatically different. The point of departure for the 1989-1998 period to the present is that riots then were a consequence of tepid and stagnant economic conditions that had accumulated over the decades. Now, ironically, they are a consequence of the economic growth.

It is pertinent to recollect that the boom of the last decade was built on debt (and I suspect the return of money that was carted away in the past and hidden in the once tax havens through foreign institutional investor route). The boom was also aided by the massive increase in money supply (not only in India but also elsewhere in different parts of world) as well as the rise in asset values (real estate, stocks and commodities). Price rigging of equity values contributed their part magnanimously. The house that debt built in India is extremely large - probably as large as the debt stricken countries of the word. Debt per capita seems small due to our teeming population. Private sector debt is especially interesting: despite various creative accounting strategies, recycling and ever-greening of debt. The banks in turn postpone the problem through debt restructuring or (CDR in banking parlance). Interestingly, one wonders why the regulator allows such ever-greening when there seems to be sufficient evidence that indicates this restructured debt is likely to lead to a default in the near future. It has been pointed out that since the process of CDR was inaugurated in 2001, only 57 cases worth Rs.43,000 crores have repaid the loans - a large component was due to the global economic boom. I always thought that the first lesson of prudential financial planning and investing was to place a stop loss. Indian banks obviously think differently. The following table provides an overview of the total debt of the more indebted of a few listed companies. Some of these companies were also mentioned in a previous post, but  thought it would be interesting to understand how the indebted companies were behaving and therefore the updation in the original list.

Name of Company	Total Estimated Net Debt	Accounting Period
Reliance Communications	Rs.35,650 Crores	June 2012
Lanco Group	Rs.31,968 Crores	June 2012
GMR	Rs.33,600 Crores	June 2012
DLF	Rs.22,600 Crores	June 2012
Suzlon Limited	Rs.13,800 Crores	June 2012
Essar Oil	Rs.9,500 Crores  (after CDR +6000 crores sales tax dues)	June 2012
Kingfisher Airlines	Rs.7,500 Crores	June 2012
Bharti Shipyard	Rs.5,800 Crores (after CDR)	June 2012
Deccan Chronicle	Rs.3,500 Crores	June 2012
Bharti Airtel (consolidated - including Subsidiaries)	Rs.68,000 Crores	June 2012
Tata Steel (consolidated - including Subsidiaries)	Rs.54,020 Crores	June 2012
Tata Motors	Rs.47,149 Crores	June 2012
Hindalco (consolidated including Foreign Subsidiaries)	US$8.9 Billion	June 2012

Interestingly, debts seem to have increased for a few of the companies that were mentioned in the previous post. We never seem to remember that we cannot borrow our way to prosperity. The above list, compiled from different newspaper reports and the recently announced quarterly results, excludes most of the companies listed on the stock exchanges. It also excludes the debts of government owned utilities and the power sector. The debts of the power sector are reported to be about Rs.300 billion. The list is not representative of the larger problem because it contains only that information which could be found easily.

According to RBI report, the total borrowings from banks in India (at the end of 10August 2012) are more than Rs. 27.6 lakh crores (Rs.276 Billion). Total bank credit is more than Rs.470 lakh crores (Rs.47,000 Billion). Hence, the list provided above is a tiny part of the total borrowings. In September 1998 it was Rs.7,549 crores. (Disclosure: I am not sure if I have tabulated the zeroes correctly, and on the lighter side, I blame any discrepancy to increase in money supply and the way RBI states it: in 1998 it was announced in thousands of crores and now it is announced as rupees billions). The list is clearly indicative of the exponential increase in debts.

Will these debts ever be repaid and are these highly indebted companies intrinsically valuable? A more difficult question to answer is will they survive the present problems, which are likely to last a long time? The easy part of the question is the first part. A lot of companies in India are unlikely to ever repay their debts. The period from 1991 to 1995 was not very different (as we have pointed out in the past). Companies raised debt and equity in large quantities from overseas lenders and investors to expand capacities, which never proved profitable till at least another decade after their completion. A number of companies never completed their expansion because they did not survive. This time is not likely to be different.

The problem for some of the companies is that just as beauty is always in the eyes of the beholder, these companies were thought to be valuable because of the larger 'India growth story'. It was because of the perception at that point of time, that they could raise such large debts in the first place. That sort of 'symbolic capital' (in Pierre Bourdieu's terminology) is a rarity in the present circumstances. But, some of the companies hoped to able to establish themselves are gatekeepers to rent-extraction (like the roads business) and consequently, confused bull market related buoyancy with the inherent strength of the Indian economy. An example best illustrates this: the calculation for a number infrastructure projects, for which billions of rupees and dollar loans were accessed are based on impractical revenue streams. The reality is that instead of a booming economy we are likely to have a low-growth, high inflation economy - just like the 1970s to 1990s period. Most of these companies were thought to be 'valuable' based on those impractical revenue streams. It is pertinent to note that 'value' is always relative and based on perceptions of fickle minded investing hordes. In other words, they were all bull market stories or those in which a bull market was confused for brilliance. But, some of the businesses will invariably survive. The roads and port businesses will do well but they will be like the railway boom of the 1850s. The business itself will do well, but those who reap the benefits will be substantially different. Remember Keynes' observation: markets may remain irrational for longer than you can remain solvent!

A major structural deficiency of the Indian companies is that our companies are essentially rent seeking in nature. Innovation remains elusive for most of the companies, even those which like to think they are innovative. One need to look no further than the manner in which they bid for contracts. There are innumerable instances in the past decade where companies have bid for less than 1% margin to undertake some government contracts. One wonder how public, listed companies can survive on such low margins. On close scrutiny, it emerges that there is a clear patten: the reason is that their wrong reading of history is responsible for such fallacies and the desperation to place themselves are gatekeepers to the possibility of perceived outsized future profits. They often look at the history of the railways and believe that infrastructure makes great sense. Otherwise what explains a telecom company running up billions in debt, when they should have understood that voice would have to remain an important stream for their revenues considering the profile of India - most of those who own mobiles have insufficient literacy or own very basic models which means their ability to consume data related services is severely curtailed. We often forget that the markets have been around for a couple of centuries in different forms and are likely to be around for a couple of centuries more. The question that companies do not ask is if they will be around if they follow such unstable business models?

The foreign companies (and investors) have been extremely savvy and have realised early on that the only opportunities in India are in rent-seeking behaviour. Therefore, they have invested, essentially in companies that have the potential to maximise this rent seeking behaviour or in segments where oligopolies can be easily created - cement, moneylending, mining to cite a few. Thus, even the most innovative companies at the cutting edge of capitalism in the western world have invested in moneylending companies - see the list of successful technology companies from USA and Europe that have invested in micro-finance companies in India. Investors are keen in investing in warehousing which will be extremely profitable in a country like India, where information asymmetry and institutional protection is very weak. Imagine the kind of information that a large investor in warehouses will have about the inventory - especially food grains? This would contrast with that of the government, which either does not have information or even if it exists a large number of custodians of the information can be easily bought - if the price is right. It is pertinent to note that, the willingness to behave in a rent-seeking manner is all pervading. Harvester owners in a Mahabubnagar district were keen on fixing prices so that they could make outsized profits. Rice mill owners routinely fix prices for various by-products that they produce (like barn oil cake used as cattle feed). Cement and Steel cartel is probably as old as liberalization - irrespective of the category of owners.

The more we gloat about our great power status, the more quixotic that its proponents become with each passing month. We have never ceased to convinced ourselves that the whole world is lining up to invest in India. This has resulted in wages spiraling upwards, and productivity spiraling downwards - exactly at a time when the reverse is happening in the major consuming nations. This inversion removes the single most important factor that underscored the whole process of globalisation. Some of the western companies became truly transnational corporations producing and consuming on a global scale and serving markets in a very regional manner. A large part of the logic - if not all of it may be coming to an end.

Each passing issue highlights the problematic manner and the shaky foundations on which we have built our economic superstructures. Recent events in Bangalore and Hyderabad have underscored the frailty of India's economic foundations. The aftershocks of riots in distant Assam are felt more than 1000 miles away: Bangalore and Hyderabad. Thousands have fled in the after of rumours - not even actual incidents. The cost of nearly 15,000 fleeing Bangalore will only add to the economic woes. The costs have of such immediate removal of labour from the market is difficult to quantify immediately. End of the day, nothing has changed from the 1990s era. Ironically, both of these cities were ceaselessly marketing their "Global City" status and, along with Mumbai and Chennai are always competing for recognition at the high table along with New York, London, Hong Kong and Tokyo.

The answer to those riots: top government officials' response is on the lines of "situation is tense, but under control". Generally, speaking that is the standard government response which essentially means 'that the we are groping the dark and you should fend for yourselves till we know what is happening'. Remember the Punjab problem in the 1980s and early 1990s - even 200 deaths a days was followed by the same response.

Hopefully, at after an insightful fortnight, we will prepare ourselves for the future. The sooner we wake up to the problems at our hand, the better.