The Elephant, The Dragon and the Beehive Theory

 

Rahul Gandhi at CII : India is a beehive

 

Which is stronger – a dragon, a beehive or an elephant?

Answer – they are not comparable.

Congress leader and possible prime ministerial candidate Rahul Gandhi in his first address to captains of Indian industry, stressed the need to decentralise the Indian power structure in the manner of a `beehive’ to cut through red tape to make `doing business’ easier.

His favourite description of India, of course, is the beehive and not the usual lumbering elephant that most writers and thinkers associate with India. No would he like to think of it as the dragon which symbolises India's northern neighbour China, and Gandhi does believe the three symbols can’t be compared.

Wisecracks about India being a beehive with his mother as Queen bee and everyone else as drones apart, Rahul may have a point. India is teeming with a creative if chaotic society, which encourages thought cross currents and does not shut out dissent, the way regimented societies like China does.

Elephant Vs the Dragon

The India-China debate is old, almost as old as the emergence of the two nations as independent countries in the late 1940s. And much of what he said at a meeting organised by the business chamber – Confederation of Indian Industry – has been heard before. However, he is a young leader, who should be heard, if only to find out whether he is different.

The difference between the two rising Asian economies, according to Gandhi, lies in how the two view power. "China applies power by hand - they are a manufacturing behemoth. India on the other hand applies people's power - the power of the mind."

Gandhi emphasised India needs to continue developing the infrastructure needed to unleash India’s “soft power” – both in terms of roads, ports, electricity, etc., as well as in terms of revolutionising education and linking academic research with industry.

Now that’s a good and popular way of putting it across, even if it’s slightly clichéd. But the fact remains that China has become a super-power and India is still a wannabe power. And the transformation has happened during the last three decades. Nine years of that period, saw India being ruled by his father and grandmother. Five years by another Congress leader trained by his grandmother. Another nine years by a man handpicked by his mother for the job. Someone needs to do some more explaining than the play-acting Rahul did with industrialist Ajay Shriram to explain why India’s `soft power' has not been able to keep pace with China’s `hard power'.
 

The Beehive Theory

On the other hand,  Gandhi’s  complaint that unlike a "beehive which gives every member a voice", the system in India is "clogged" and voices of many at the bottom of the pyramid are not heard, is partially true. Despite boasting of a free press and the longest running democracy in Asia, marginalisation of the poor and unheard, were and are certainly the causes for the small and large rebellions India has witnessed over the decades.

That the ‘unclogging’ of the system is happening is apparent - the number of rebellions has come down – but the few remaining ones ( and they are big ones – a Maoist rebellion in central India and an ongoing disturbance in Kashmir)  are signs  that much more needs to be done.

Gandhi of course, led his `beehive’ allegory onto a subject which was a favourite with his late father prime minister Rajiv Gandhi – decentralisation to the district and village level. The desire to decentralise may not be purely altruistic.

The Congress rule in the centre in Rajiv’s time and now, was and is being increasingly challenged at every stage by states ruled by different ideologies. This is why the Congress party wants to cut past state governments and link up straight with district level governments.

In Jawaharlal Nehru’s time, dealing with provinces was not a problem. Ideologically they were one with him. They were all ruled by Congress party bosses. The chief ministers were strong men – Dr B.C.Roy in West Bengal, K Kamaraj in Madras, Govind Bhallab Pant in Uttar Pradesh – but they were all Congressmen and consultations that the prime minister used to carry out with them on economy, polity or foreign policy were more in a closeted club-like culture.

Mrs Gandhi solved the consultation problem, by simply ignoring state governments. Her force of personality and the fact that she picked up issues which were popular with the masses, meant the states squirmed when their rights were trampled on but did not have the ability to oppose her policies.

Take the example of coal and steel freight equalisation – it hurt Eastern states the most – West Bengal, Bihar and Orissa saw de-industrialisation as a result of this mis-thought policy. But no chief minister dared oppose it as the entire deal came shrink wrapped in Socialist rhetoric which talked about bringing the benefits of industrialisation to backward regions.

In reality, nothing of that sort happened. The policy which had the central government subsidising freight cars carrying steel and coal so that they could be sold at the same price anywhere in the country, helped some moneybags in Bombay make a killing at the expense of mineral rich Eastern India. The poor states remained poor.  

Mrs G got away with it. However, that kind of a deal is no longer possible. When the Dr Manmohan Singh wanted to play down the Sri Lankan Tamil issue at the UN, his DMK `friends’ and his AIADMK `former friends’ just didn’t let him have his way.  When he wanted to gift industrialists like the Ambanis, Adanis and Tatas with a subsidy on  costly imported coal to fire their new electricity plants, by raising the price of locally mined coal which feed ageing state electricity board run electricity plants, states raised a stink, forcing the `good doctor' to backtrack.

No wonder, Rahul called for decentralisation of the beehive, and described that as the panacea for India. The Queen Bee needs to connect with the drones minus the doubting chief ministers in between.

Reforms & Dismal GDP Forecasts



Amul ad poking fun at the Sensex

India’s dismal early forecast for 2012-2013 financial year’s economic growth, at a decade low of 5 per cent, should have meant glum faces at North Block, home to the country’s finance ministry.

However, strangely, not too many of the Mandarins who work in that cavernous red stand-stone Raj-era building seem too worried, rather they seemed perversely pleased. Probably, because the figures could actually come in handy for finance minister P.Chidambaram and his economist boss, Dr Manmohan Singh, when the duo argue for tough reform measures with cabinet colleagues and Congress party leaders, who ahead of crucial general elections early next year, want to see more populist measures and less of belt-tightening reforms.

Data released by the Central Statistical Organisation places growth forecasts far below an earlier 5.5 per cent prediction by the Reserve Bank and an optimistic 5.7-5.9 per cent target set by the finance minister P.Chidambaram and far average growth rate of 8-9 per cent, achieved through the last decade.

Singh-Chidambaram duo

The Singh-Chidambaram duo will have the advantage of this gloomy picture to force reluctant colleagues into agreeing to slash oil subsidies and fat defence budgets as well as steering opening up of the economy to more foreign investment and cutting red tape in doing business. 

The schism within the cabinet had often spilled out in the open in the last few months, with tough decisions like subsidy cuts being pushed on the backburner several times at cabinet meets, before being finally accepted. Spats over auctioning gas blocks between petroleum and defence ministries and opening up coal mines between steel and environment ministries still remain unresolved despite the Prime Minister chairing meets to sort out such rows.

No wonder Indian industry has been talking of policy paralysis.

To make things tougher for the Congress leadership, BJP’s poster boy and almost certain prime ministerial nominee Narendra Modi, has begun selling the `Gujarat development model’ with slogans like “minimum government and maximum governance” and "inculcate skill, scale and speed to compete with China”.  

Singh and Chidambaram desperately need now to show that they do have a `Delhi  development model’ up their sleeves and that too speedily!

Narendra Modi sells Gujarat Model

Yesterday’s data forecast said farm sector could grow by just 1.8 per cent in 2012-2013, compared with 3.86 per cent in the previous year, while manufacturing could slow down to 1.9 per cent from 2.7. This is the slowest pace of growth for the manufacturing in the past 14 years. Even the services sector which for the better part of the last decade grew in double digits, could grow by 8.6 per cent.

In the first half (April to September) of the financial year, the economy grew at 5.4 per cent, today’s data indicates that the economy may have grown by just 4.2 per cent in the quarter ending December 31, 2012 and may grow by 5 per cent in the current January to march quarter.

This data points to the desperate need to bring in reforms to boost infrastructure and manufacturing growth. Industry chamber Ficci has already flagged: “Quicker implementation of the National Manufacturing Policy, speedier decision making under the aegis of the Cabinet Committee on Investments, ushering in the Goods and Services Tax regime, passage of the insurance and pension bills in the next session of the Parliament and bringing greater competition in the coal mining sector” as ways to get ahead.

The industry wish-list more or less tallies with Chidambaram’s reforms-to-be-taken-up list, with additions like less largesse on populist subsidies and tax reforms which help Indian firms stand up better to foreign competition.

Finance Ministry officials want to redraw duty structure so that domestic capital goods, electrical gear, telecom industries and even steel which have been facing import pressure can again revive.

Proposals in the offing would place higher duties on imports in these sectors, while reducing duties on raw materials such as iron ore, coal as well as components which go into making electrical or telecom gear and having a tax structure which encourages domestic telecom and electric equipment.

India had drawn up a tax structure which imposed high duties on finished cars imported into the country, less taxes on semi-finished cars and far lower taxes on cars which were at least 70 per cent indigenous. A similar structure is being looked at for the telecom equipment industry.

However, what industry captains really want is ground level reforms such as setting up a coal regulator. India has long been debating setting up an independent coal regulator as besides the single monopoly coal producer – Coal India – a large number of firms have been given captive coal blocks and some have been allowed to trade surplus production.

Amul ad on Coal scam

The government is also expected to step up the gas and put up some 54 coal mines up for auction to a limited field of buyers –iron and steel factories and cement and electricity plants - over the next four months. The auctions, speeded up by allegations of scams in earlier allotment of mines, are expected to yield precious revenues to state government coffers and much needed coal to fire coal-burning furnaces and power plants.  

The Government has cut base prices for another round of telecom auctions, which should bring in some more money into government coffers and at the same time give telecom firms more radio-waves to base future mobile connection sales. India has about 935 million mobile connections for 1.2 billion people, and unless better connectivity and services can be ushered in, growth may soon flatten-out after slowing down to just 2.25 per cent on a year-on-year basis.

Officials say Prime Minister Singh is also pushing them to clean up a Direct Tax Code, which could jiggle tax rates, while enlarging the tax base. The DTC is expected to simplify tax laws, lead to less legal disputes over taxes and ultimately bring better compliance. Industry says any tax reform measure always helps business grow and bring more of the `parallel’ economy over-ground, with more businesses declaring their tax liability. 

However, two reform measures promised to industry at large and foreign investors in particular could remain in doldrums unless the government does a better job at floor management inside the parliament.

In the last parliament session, the government was unable to go ahead with voting on the insurance bill as no agreement could be reached in back-room parleys with opposition and supporting parties on a clause which seeks to raise FDI to 49 per cent.

Officially the debate will be shifted to the next session of Parliament. The BJP had earlier agreed to help pass the insurance bill, provided the foreign investment cap was retained at the current level of 26 per cent.

Linked to this is the fate of the pension regulator bill, which gives teeth to the regulator and allows foreign investments into pension funds. The FDI limit in pensions is linked to the limit in insurance firms. It could be taken up separate from the insurance bill and passed, allowing foreign pension funds to buy up to 26 per cent stake in Indian pensions for starters, but a final call on this could depend on how the voting numbers stack up in the coming Parliament session.

Shrinking growth, weakening Rupee and RBI's plans

 

Indian industry contracted 5.1 per cent in the month of October, the first time industry contracted since June 2009, with rain-hit mines reporting production losses and a sharp over 25 per cent contraction in capital goods production.
October figures however, could well have been an aberration partly because capital goods had grown by a high of 21.1 per cent last October against which the figures are being calculated, and partly because October is a month with many holidays, which firms often use to produce less to bring down inventories.
Production of all kinds of goods – basic, intermediate (which go into making other goods), consumer durables like cars and television sets and consumer non durables like soap and tomato ketchup – contracted slightly varying from 0.1 per cent to 1.3 per cent. Mining which remained hit by heavy rains which held up production in August through October, also reported a 7.2 per cent contraction. 
However, as a number of economists with whom I spoke today pointed out, “the rate of moderation may be explained as an aberration but the fact that there is a moderation in the rate of growth of Indian industry cannot be denied.”
The seven month period from April to October 2011 told a story of marked slowdown – compared to a 8.7 per cent growth in industrial output last year, this year’s first half posted a 3.5 per cent growth in industry.  Consumer goods grew just 0.6 per cent during this period compared to a 8.6 per cent growth during the same period last year. Durables like TV and cars had grown 15.7 per cent April-October, last year, but this year  growth was a mere 4.5 per cent. 
To make things worse, the poor industry data, sparked off heavy sales on the Mumbai stock market. The Bombay Stock Exchange's Sensitive Index fell 343.11 points in one single day when the data was announced- December 12, 2011. A fall of some 2.1% .
This in turn saw the Indian rupee falling to a record low against the U.S. dollar as foreign institutional investors who were the biggest sellers on the stock market, converted their rupees into dollars to take out of the country.
India Inc., naturally hit panic buttons with a flurry of statements about `The Crisis' (no more looming crisis). The Congress-led government of course kept trying to cool down nerves by pointing out that the India growth story still remained valid, but few seemed to buy it.
ICICI Securities in a note said : “Industrial sector has suffered a series of supply side issues this year, which has seen the output decline sequentially in six out of the first seven months of the financial year. Over and above the supply factors, demand moderation which was sporadic at the beginning of the financial year has gathered momentum as the months passed.”
What that means in plain-speak is that industry has slowed down and that demand too is slowing down. The reason, many especially business leaders, say is the Reserve Bank of India policy of ratcheting up interest rates which has made it tough for buyers of cars, homes, other big ticket items like plasma TVs, refrigerators, air contioning etc., to borrow and buy. Just as it has made it tough for businessmen to borrow to set up factories or expand existing ones.
RBI has increased interest rates some 13 times since  March 2010 by the Reserve Bank of India in a bid to batter down rising prices. This in turn translated to actual lending rates to consumers and businesses of between 12-18 per cent.
However, the government does not seem for the time being inclined to reduce interest rates as its worried that speculators in the food market could borrow cheap and use the money to raise food prices, a politically sensitive issue ahead of key polls to states which include Uttar Pradesh. One way out could be for the RBI to cut Cash Reserve Ratio or the amount of money banks have to compulsorily keep with the central banker,  in order to release fresh money into the economy.
Despite the tight money policy followed by the RBI, the headline inflation stood at 9.73 percent in October, remaining above 9 percent for nearly one year. So many reason, that while interest rates can be kept high to sap up inflationary tendencies, at the same time more money can be released to industry which seems to be demanding finance or refinance. However, how wise this would be is something only time will tell. Much of that demand is coming from sick firms like Kingfisher who may or may not be able to pay back banks the money borrowed plus the accumulated interests.