On the extreme right side of logic

Reserve Bank of India (RBI) is all set to increase the interest rates to curtail the fiscal deficit. Despite the criticism, this decision is actually quite welcome in context of the economy. 

Headlines over the last few months made it quite evident that the Reserve Bank of India (RBI) governor D. Subbarao faced a lot of criticism and was under a lot of pressure over his decision to increase the interest rates in the recent monetary policy. A brief recall will clarify that in past, from the end of 2008 to middle of 2009, the governor slashed the interest rates to counter the global downturn. This was done precisely to induce liquidity into the market and to counter the financial crisis. This discount or tax-cut (interest rate) not just allowed increased spending but also hit the fiscal deficit, which registered negative growth.

Actually, his decision is based on solid ground. The Indian economy is now getting back on track with a projection of around 7.75% growth; as estimated by the Finance Minister Pranab Mukherjee in his budget speech. With the economic situation of the country (and across the globe) moving towards relative stability and the growth rate moving northwards; it was time for the government to roll-back the loose monetary policy laid out last year.

The growth in Index of Industrial Production or IIP improved to 16.8% by the end of year 2009, as compared to a negative figure in 2008; thus an increase in lending rates by a few basis points would not have substantial impact on credit demand. Moreover, the bond yields are also showing encouraging signs. Going by latest numbers, the yield on a 10-year government paper is at 7.8%, as of Feb ruary 2010, which is an increase by 21 basis points (bps).

But then, the steep rise in inflation, since last few months, made the myopic analyst go hullabaloo against the whole decision. For starters, there was (is?) a fear of this double digit inflation getting further enhanced, if the interest rate is increased further. A closer scrutiny of this issue makes it crystal clear that the whole issue of inflation is largely because of increase in food prices or in simple terms, is dominated by food inflation. A simple ground research and observation would be enough to understand the real reasons behind the rising food prices. The rise of food prices is primarily because of the problems in transportation of agricultural produce; namely fruits, vegetables and cereals. Due to dilapidated infrastructure and transportation problems (all thanks to bad roads and poor transport system), the food produce does not reach the market on time. Being perishable products, they find no takers later on due to the lack of adequate storage facilities. Thus, the whole food inflation regime is/was because of supply side problems from agriculture and not due to demand factors at any given time. For the month of November 2009, food inflation stood at 17%, fuel inflation was negative and manufactured product inflation was 4% only.

Furthermore, the rise in interest rates by RBI would not effect on food products, precisely for three broad reasons. Firstly, even today, the Indian consumer largely relies on non-processed food products which from nearly three-fourth of the total food volume consumed in India. Secondly, packaged food in India has a high price elasticity of demand which compels packaged food producers to keep the prices at the same level. Thirdly, the food processing sector comes under priority sector lending; which entitles food processors to borrow cheaper interest rates from public sector banks.

Moreover, rise in interest rate and CRR would not hamper the borrowings to a very large extent. As per official estimates, the Indian banking system presently is left with more than Rs.75,000 crores of excess liquidity, (after the recent rise in CRR). Thus, despite the hike in the CRR and interest rates, the banks should not face any major turbulence and would at any given point of time have adequate liquidity. Moreover, funds in forms of advance tax would come back into the system and top-up the liquidity. This will also allow surplus liquidity (that banks currently have) to flow into the market, which will serve the people. Moreover, the money obtained will reap future returns & make the financial market stronger.

If the government refrains itself from increasing the interest rates in a moment of populism, then it would be next to impossible for government to tackle fiscal problems in the near future. For starters, the FM announced his plans to bring the fiscal deficit from 6.5% of GDP to 4.8% and then further down to 4.1% in the Union Budget. In line with that noble thought, RBI should go by its own calculations and increase interest rates, despite huge outcry by myopic leaders and oppositions. It would in, short run, offend their vote banks, but then in long run the benefits would be quite evident. Sounds more rational, isn’t it? 

Affordable Housing

...Back to Bad habits

All of a sudden, the realty sector seems to be singing a totally new tune. Affordable housing or low-cost housing is gradually occupying the centre stage of this industry. Just about 2 years ago, it was as unreachable to the Indian middle class as mobile phones were in 1995. Now, things seem to be changing pretty fast.

Nearly all real estate developers, who got hit badly by the global real estate meltdown, are planning to get into this new segment – that offers affordable houses for the masses. It seems quite logical for an industry that promised huge returns to investors and state-of-the-art housing facilities for customers not so long ago. Currently, most of these companies are either under huge debts or are fast losing their clients, or both. Numerous projects of these developers are on a halt due to dearth of money and stagnant cash flow.

Builders depend heavily on booking amount for their projects to get off the ground – the initial payment of 20-30% – and they use the same amount to get their loans sanctioned from their bankers. With booking of these premium properties touching rock-bottom, the developers are finding it tough to continue with their projects.

The situation is so dire that those clients who have had the misfortune of having made full or partial payment of their flats will have to wait for a few more years for possession of their property and this is all thanks to real estate slowdown. According to various surveys, around 53% (of the 930 million sq. ft) of available realty stock is still lying idle and unsold in the Indian metros.

Most of the realtors have a high debt to equity ratio of 1:4, as a result of bad cash flow. Many of the realty players are in no position to pay back their bank loans. Real estate companies have been asked by banks to repay loans via Qualified Institutional Placement (QIP) of securities. Recently, Unitech raised around $325 million through the QIP route. HDIL, Parsvnath, Puravankara, Sobha Developers, HCC and GMR, are planning to follow the same path. DLF’s promoters recently sold 9.9% of their shareholding in the open market.

Undoubtedly, this is the best time for the concept of low cost housing to take birth. Developers, regardless of their size, previous reputation and aura, are now turning towards this new business model of affordable homes. With urban housing shortage being predicted to be around 24.71 million, this is unquestionably a huge untapped market. For instance, Puravankara Projects and DLF housing projects, whose forte has been high end apartments, have recently launched low-cost housing subsidiaries, promising homes in the Rs.20-40 lakh range.

But then, is it really the transformation we have been waiting for? Going by NSSO survey and various other studies, even these flats worth Rs.20-40 lakh do not fall into the budget bracket of middle class Indians. It is therefore no surprise that this segment has also seen sluggish demand. A study of the housing market conducted by the Monitor Group for the World Bank showed that despite the high demand, builders did not find it attractive to enter the home segment in the price range below Rs.10 lakh. Talking about affordability, a back of envelope calculation shows that even if a middle class customer earning Rs.11000-15000 per month takes a bank loan, which is three times his annual salary, he/she will not be able to afford that dream home. 

Moreover, in the garb of getting into the affordable segment, most of the developers are apparently  straightening their own numbers. They are taking booking amounts from the middle class and are using the same amount to fund their pending projects instead of using it to develop property for these mid-income group customers. The reason is quite simple: In a high range property, developers can churn out a margin of more than 30%, while in the case of low cost apartments, the margin is below 10%. Furthermore, they find it easy to get bank loans (even at cheaper interest rates) in the name of low cost housing. Thus, after getting funds from various sources (from consumers to banks) they are channelising these funds towards their pending projects. Even if the developers pay late delivery or cancellation penalty to mid segment consumers, it would be very less compared to the penalty they would have to pay to high segment consumers – simply because the penalties correspond with the cost of flats. One can draw a parallel with the Tatas funding their short term debt requirements that came up due to the JLR acquisition, with the booking amounts they received for the Nano.

Moreover, this strategy  is not reflected in their balance sheets, as the companies have to file only a single consolidated balance sheet. They find it easier to club all their investments under one head and thus leave the consumer as well as the authorities guessing. There is still no provision to give details of their development and file a separate balance sheet or even mention them separately in their accounts.  Except for a few developers, who are solely into low cost housing, like Tatas, most developers are using the low cost housing system to fund their own pending projects. Moreover, as seen in recent budget, there seems to be lack of political will towards affordable housing. Neither is the government initiating projects of their own in this league nor are they interested in providing easy loans to these real estate sharks.

So these homes are nowhere near the affordable definition; in fact, hapless consumers may later find to their horror that they were taken for a ride. It thus becomes necessary for the authorities to direct the developers to file a separate balance sheet for both the businesses. We should not let a scam of such magnitude continue for long.

NBFCs

Big bucks for small players

Proper mechanisms need to be set up to ensure long term survival of NBFCs

With the global financial meltdown intensifying, Non-Banking Financial Companies (NBFCs) are facing a dilemma with respect to the sheer viability of their business model. These firms are finding it difficult to operate in an environment where money is scarce and defaults are more the norm than the exception. The golden period for NBFCs in India was during the 1990s when the country was experiencing a rapid industrial growth, thanks to the liberalisation policies of the early 1990s. But then, as it’s said, greed spares none! In their effort to grow at any cost, many smaller NBFCs ended up too weak to pay the then prevalent high interest rate, especially during the industrial slowdown of the late 1990s, thus marking the beginning of the end of the golden period. But then in 1998, the RBI came to their rescue and thanks to the stringent regulations for registration; many ‘fly-by-night’ NBFC firms got dismantled from the market.

The forte of these financial institutions is to serve the consumer not covered by traditional banks and financial institutions. Due to their unique business model, these firms were able to retain their customers for longer periods. In simple terms, they gave loans to people who were denied by other banks and thus made them their loyal customers.  

The current period, however, is seeing these NBFCs face a mammoth challenge yet again. In this Darwinian (survival of fittest) economy, it literally gets tough for small NBFCs to survive and challenge the big financial institutions when hostile winds start flowing. Many small NBFCs are opting for consolidation by mergers to address this problem and inverse the Darwin concept. However, many NBFCs are also trying to diversify their portfolio in order to tap new markets and give steep competition to traditional banking and financial institutions. They are extending their product portfolio and are entering into areas like asset management, housing finance and the insurance sector as well. Take, for instance, the case of Sundaram Finance, which has plunged into the housing loans market, challenging honchos like LIC Housing Finance. Even Kotak Mahindra Finance Limited and Lakshmi General Finance are considering the insurance business. Ashok Leyland Finance has gone one step ahead and is planning to sell products of other financial intermediaries as well and thus help in the diversification of the company’s revenue model.

Since NBFCs have low operating cost (compared to banks and other financial institutions) because of their small size, they do have an upper hand and thus can divert the benefits of the same to their customers. But in order to command the market and ensure a sustainable business model, NBFCs have to improve their service levels in terms of convenience and duration for loan disbursal.

As per a report published by Wharton   in 2007, there are 436 deposit-taking NBFCs in India, of which 16 have asset sizes of over Rs.5 billion and 2,615 non-deposit taking NBFCs, of which 104 have assets worth at least Rs.1 billion each. Most of the non-corporate sectors like retail, hotels and restaurants abhor the prospect of taking finance from private lenders where they end up paying higher interest rate. Most of new start-ups, immature businesspeople, transport companies and small service providers rely heavily on these small NBFCs. Since funds from NBFCs are available to these players without much paperwork unlike traditional banks, these non-corporate sectors readily opt for these lenders. This is where the role of NBFCs gets enhanced. These companies act as hassle free units/service providers for all those who are not able to meet stringent criteria and paper work of traditional financial institutions. Sometimes, these NBFCs come to the rescue of small village industries as Micro-Finance Institutions (MFIs). No doubt, if the domestic financial markets are integrated with NBFCs by making them channel partners, it would, to a large extent, solve the credit delivery problem of our economy. This would not be a one of its kind model. Presently, many countries including India are using NBFCs as channel partners.

This sector is highly fragmented and regulatory approvals in the case of NBFCs arrive faster compared to the time taken for receiving an approval for new banks. Moreover, as the banking sector is still not open, foreign banks are trying to come into the country via the NBFC route – after they get clearance from the Foreign Investment Promotion Board (which is much simpler than getting a nod from the RBI). Stringent compliance and regulations by RBI for NBFCs (especially domestic players) do not allow small players to come up with this service.

In fact, mostly big players are operating in the arena at the moment and they are serving the big honchos of the market (to reduce risk and to increase bottom line). Now, this is exactly contrarian to the fundamentals for which NBFCs (or MFIs) were opened. RBI should ensure that it makes a clear-cut demarcation so that NBFCs do not target customers of big banks and primarily serve their target audience only. Otherwise, SMEs will be left in the lurch.

It’s beyond any apprehension that NBFCs are playing an increasingly important role for the macro economic situation (providing finance to one and all) of India and for reforming the financial market. However, while letting NBFCs grow and take up the market, the regulators must ensure that only those institutions survive that are serious about being in the finance business and not some small chit-fund companies who end up being liabilities.

The concept of opting for NBFCs as channel partners by the traditional commercial financial institutions on a large scale would assist the sector in this extremely competitive market and allow them to fortify their presence among global players in the emerging financial market. Also, it would ensure that SMEs, which are so crucial to the Indian economy, are not deprived of much needed funds for growth.

logistic industry

Be there on time, honey!

Third Party logistics business is still in its infancy in the country, plagued by many issues.

“Be there at the right time!” This is perhaps what wives across the world shout out to their beloved husbands... to be there at the right time! Moving away from all domestic affairs, you’d hear the same in corporate boardrooms too. More so, even consumers shout out the same to corporate brands, wanting the products and services at the right place and at the right time. We call it logistics, which gives a successful business that shining sustainable competitive edge to achieve excellence in their respective fields.

Today, all MNCs rely on world-class supply chain, in order to both serve the market in time and make their bottom-lines stronger by eliminating unnecessary cost elements through highly efficient supply lines. With globalisation and cost-cutting becoming the buzz-word amongst MNCs, the demand of Third Party Logistics (3PL) business, is increasing in India. And to give you an idea of the growing accountability and presence of 3PL players in India, here are some numbers – the total revenue generated by 3PL players crossed a handsome mark of $1.5 billion in 2008, representing a jump of  68.54% from the 2004 revenue.

Even in India, the consumer markets are growing in dimension, enveloping almost one-too-many corners of the nation. As a result, companies are relying too heavily on product distribution and logistics outsourcing, all pointing out to what we previously termed 3PL. So what really is the functional model of 3PL?

3PL is the outsourcing of a company’s logistics operations to a specialised and professional firm that provides multiple tactical logistics services. This automatically implies a strong focus on overseas production lines for cheap manufacturing, which then also helps in expansion of businesses in other emerging economies like South East Asian nations.

Currently, logistics costs on an average constitute around 14% of the total value of goods produced in India (as per an ASSOCHAM study). Because of such a high cost contributing factor, ‘Made in India’ goods lose out on price competition as compared to ‘Made in China’ or ‘Made in Bangladesh’ commodities. Adding to the problem are policies and procedures in this industry, which are very complex and cumbersome that it becomes virtually impossible for any corporate house to cut cost and save time through logistics. Surveys reveal that cargo trucks commuting from Kolkata to Mumbai waste around 32 hours at various check posts, which breaks down to a 1.5 hour delay every 100 km! “Sick!” is the word, but then that is the truth... the sick truth!

This industry, for long, has faced hurdles in the form of central and state taxation policies, local levies, licenses and registration processes. But the biggest hurdle that this industry faces today is the inter-state tax regime. The procedural delays in getting approval for MTO (Multimodal Transport Operators) licences curbs efficiency and adds to the cost of the companies, both Indian and global. Cost cutting measures demand more sophisticated methods of transport, like  the hub-and-spoke model, build-to-order model and lot-size-of-one shipment model. But with the Indian 3PL industry being still primitive (compared to the western nations) the whole motive of outsourcing logistics to Indian 3PL players gets lost in the delays caused by policy tangles. The Indian 3PL industry is indeed disorganised and one can find many small players with a fleet of just 3-5 trucks operating in the market. Going by various researches, these small truck companies (with less than 5 trucks) account for over 65% of the total trucks owned and constitute 80% of the Indian 3PL industry (truck transport only) revenues. Beat that for small numbers!

The next set of hurdles beside policy issues is the existing lamentable state of infrastructure in the country. The industry is currently facing huge roadblocks due to unimaginably pathetic state of roads and traffic conditions. The national highway that acts as a lifeline for transport companies (40% of the national road traffic) constitutes just 2% of total road network, thus making the delivery time painfully longer. Moreover, lower speed limits of 20-30 miles per hour (speed limit in developed countries is over 60 mph) also plays the devil when it comes to making delivery faster. Additionally, tolls charged on these expressways and duties on state bodies also act as a deterrent to making 3PL business more cost efficient. Club this with high interest rate that NBFCs and private financiers charge (as banks rarely provides these small transport companies with low-interest loans), bribes taken at check posts and volatility in price of fuel, and we have the perfect reason to believe why one should not invest in this business called 3PL!

So, is there some hope? Well, quick progress of the Golden Quadrilateral project (which is 97% complete, NHAI report), airports (6 new airports are
being planned), terminal expansion, east & west rail corridors, port expansion (20 new seaports are being developed), the Indian 3PL may soon see some bright ray of hope. The existing multi-modal licence norms should be scrapped and Electronic Trade Documentation System (ETDS) should be implemented if we are to realise the ‘$385 billion dream by 2015’ for this industry. Logistics is serious business, and if you’re serious about it, you better be on time, honey!

Liquor industry

Why let happy hours turn Deathours?

Jurassic age policies are breeding a dangerously illegal liquor industry

Sample this: April 05, 2009 – 14 people died in Assam after drinking tainted liquor; March 19, 2009 – 4 people died after consuming local liquor in Delhi; March 21, 2009 – 7 died due to consumption of illicit liquor; Jan 31, 2009 – illicit liquor kills 16 in Maharashtra; January 05, 2009 – 19 slum dwellers died in Kolkata after drinking poisonous alcohol. In separate incidents on May 18, 2008, illicit liquor claimed 115 lives in Karnataka, 83 in Bangaluru city and 32 in Kolar.

While these are nothing more than just side strip news in the newspapers or at best a day’s coverage in the television media, the stark reality is the widespread prevalence of illicit liquor in rural India. In a country where the quantum of consumption of alcohol and the incidence of violence in society, somehow seems to positively correlate, all kinds of prohibitive actions to restrict the consumption of alcohol have often proved to be counterproductive. India’s liquor industry is one of those unfortunate industries where regulation and controls are still levied on the output and selling price. The state Excise department largely controls the final selling price. Ironically, all that India has ended up doing is to jack up the prices of quality liquor without stringent enforcement measures in place to prevent the growth of illicit liquor producers. Since the liquor sector is a highly sensitive market, even a small rise in price alters not just the consumption decision but also the consumption pattern, and for the worse. With rise in price, consumers, instead of consuming less liquor, switch to sub-standard alternatives; thus keeping their consumption rate intact but not the quality. It is this basic economics that governs the clandestine liquor industry. Let’s face one reality. People in any case would drink no matter how much the government would try against it. Against the populist notion, prohibition and ban on liquor will never serve the purpose of a society that intends to insure itself from the ill effects of alcohol. Gujarat, along with a few other south Indian states, is experiencing a huge influx of black marketed alcohol. It actually encourages tragic deaths as people turn to illicit drinks produced clandestinely without maintaining proper standards. Moreover, it leads to more crime. In 1920, before the US Government enforced prohibition, money earned from illegal liquor sales was also being directed to other illegal activities. The same is said to be happening in India. And since it’s impossible to control the consumption, what best can be done is to ensure the quality of what is essentially consumed by people in the lower rungs of the social hierarchy. Ironically, in countries like France or Russia, their local drinks, i.e. wine and vodka respectively, are available at a price lower than or comparable to the price of a litre of packaged drinking water. India need not do something like that, but allowing small time brewers to get organised and allowing big players to get into the production of  local drinks and thus improving  their quality would certainly help in reducing the casualties from illicit liquor. India has for long ignored the potential market for its indigenously produced liquor. Russia is famous for its Vodka, France for its Wine and Scotland for Scotch. Then why can’t Feni of Goa, Taadi of Maharashtra, Yu of Manipur, Tongba of Sikkim and many local liquor of Rajasthan be India’s answer to these world famous drinks? For, these drinks are not just famous among locals but are also hot favourites among the foreign tourists. This will not only bridge the existing demand-supply gap but will also help in reaping huge revenues while ensuring quality.

In spite of the insatiable demand for liquor, the irony is that the entry barriers are too high for new and small players from coming into this Rs.280 billion industry. Besides a few names like United Breweries (UB) Group, Shaw Wallace, Mohan Meakins, Radico Khaitan and Associated Breweries & Distilleries, many names in the organised market are not even worth mentioning. The main reason for the industry not luring more investors is precisely the exorbitant duties. This clearly shows that there is enough latent demand for growth in genuine liquor consumption once the duties are reduced and brought at par with international levels. Currently, in the beer industry, import duty is a whopping 100% (excise duty is equal to the manufacturing cost) with additional surcharge of 10% and other state duties of 4%. Each bottle of beer also has to bear 45% sales tax and 5% cess with some kind of additional excise duties. On an average, the duty is around 500% in some states, after taking into account all the central and state taxes. Excise duty for other Indian Made Foreign Liquor aka IMFL can be as high as Rs.500 per litre. Maharashtra imposes the highest duty of 200% of the declared cost of a bottle. On wine too, it can be as high as 200% of the base price, which, considering the price of wine, is quite exorbitant. Due to this, the Indian wine industry is yet to flourish. Even the European Commission has objected to the sheer lack of compatibility of the current tax regime with the WTO framework, which affects top guns in the industry as well. As they are only allowed to produce grain-based liquor, with a few exceptions, their market gets confined to a very niche segment. With India gradually getting into the league of  top alcohol-consuming nations, a weird kind of liquor apartheid continues to linger. With increase in duty-free shops and state-approved outlets, consumption level is experiencing new heights in the upper class. While at the lower strata of the society the saga of innumerable deaths, kickbacks and deliberate allowing of the illicit liquor business to thrive continues.

The All India Distillers Association states that the demand for country liquor was 863 million litres in 2007-08, as against 454 million litres for Indian Made Foreign Liquor. Therefore the next time you open the newspaper and witness news of many such deaths, rest assured of one thing – there is a direct correlation between such deaths and the collection of excise revenues by the governments, both by the states and by the centre. Measures like reduction in excise duties and sales tax on liquor, as well as allowing organised industry to venture in the brewing of indigenous liquor would  surely have saved a few more lives but at the cost of revenue to exchequer, which, for obvious reasons, is perhaps more dear to the government than a few wretched lives. So why not let the draconian, yet lucrative laws continue?

SEBI

Fed-up with Satyam?  Be ready for more!

Radical restructuring of SEBI is extremely imperative

Is it becoming a unique Indian trend to first shower companies with all kinds of fancy awards only to be egged in the face in a few years’ time after all the wrong doings, malpractices and manipulation that went unheard and unseen in those companies? While the Satyam fiasco suddenly awakened the investors’ community about the intriguing aspect of how lectures on corporate governance & best practices and fudging of accounts can go hand in hand, the matter of the fact is that Satyam is not a one-time case. In1999, two sister software companies namely, Pentasoft Technologies Ltd and Pentamedia Graphics Ltd. had a phoenix like rise and a subsequent fall faster than nine-pins thanks to a mindless expansion spree and  attempts of diversifying into real-estates and multiplexes while the core business of software development got compromised. Their promoter V. Chandrasekaran was reported to be associated with broker Ketan Parekh in artificially raising the share prices.

So, does the model sound familiar? If not, then next in the line is the Dinesh Dalmia who promoted DSQ Software Limited. In the year 2000, CBI arrested him for his involvement in a stocks scam of Rs. 5.95 billion and for his attempts to make quick money through unallotted shares worth Rs. 13 million (which were not listed on any stock exchange). He also cooked his books in the typical Ramlinga Raju style. Sadly, corporate India is littered with cases of similar frauds. Just like Satyam, the South India-based IT Company Silverline Technologies was also vested upon with lots of awards and Ravi Subramanian, Chairman of Silverline Technologies was even tagged as the next Narayana Murthy in the making. It was ranked among the top five IT companies in India. Akin to Satyam, Silverline took-over Seranova, but didn’t have money to pay up for the deal. And remember all these were happening just under the nose of SEBI. While Dalmia is still fighting it out to get his bail approved, Silverline is back in business and has been re-listed on BSE.

Incidentally, most of the seemingly disparate frauds that plagued India have been on similar lines. The IT industry, unlike the rest, deals largely with non-tangible commodities like services and data transactions. Tangible assets, at best, are minimal. And here lies the catch. Since there is no tangible asset and commodities transaction, it virtually becomes impossible to implement any checks and balances on transactions. For that matter, there exists no concept of custom duties or excise checks that otherwise can make sure that the transaction is as per the stipulated regulations. Eventually it makes the statutory auditors incapable and incompetent to verify the asset/liability position, thanks to the complexities and criticalities involved. Thus creative accounting viz. phantom entries, manipulating revenues, shifting of the revenue expenditures to capital, falsifying liabilities, et al become child’s play.

The second biggest irony is the literal blanket protection given to IT sector, given the size and contribution of the sector to the economy (accounts for one-fourth of the country’s total exports and 12% of India’s total employment). Protection in forms of tax rebates (tax holiday for 10 years and exemption from excise and customs) should be for those industries that are weak and small and need temporary crutches for growth and not for mammoth IT companies. What’s more surprising is that this nexus succeeded in influencing regulators to indefinitely postpone implementing stringent rules on the sector.  Even after back-to-back scams, SEBI never tightened the noose; unlike it did for the share market after the Harshad Mehta and Ketan Parekh scams (remember introduction of the Demat account, ECS, to name a few). When the same hypothesis was put forward in front of IT analyst P. Phani Sekhar of Angel Trade, he replied, “Regulators (like SEBI) have never been stringent. None of the promoters has even been punished.” He further suggests that, “IT being an intangible business, whatever checks and balance we talk about; it is important for investors to do a channel check, talk to clients, understand the working of the off shore development centre and thus the viability of the company.” Companies often alter the rules of the game to facilitate their bidders; so eventually small share holders suffer. 

SEBI might be the Indian counterpart of Security Exchange Commission or SEC of the US, yet SEBI rather has a long way to go to even become a shade of SEC in terms of stringency. SEBI at best is a watchdog which doesn’t know how to bite. SEC, on the other hand, doesn’t even care two hoots as to who has what political contacts or lobby when it comes to crushing fraudulent companies. Remember what SEC did to Enron and Arthur Anderson? The problem with SEBI is that it acts more as a prosecuting agency rather than an enforcing one. Whenever a scam happens, fingers are pointed at auditing companies and not at stock market regulators. Ironically all these manipulations do happen to take advantage of the lacunae in the legal systems that govern stock trading in India. Take for instance Satyam, where the blame went to PwC that had little role to play as it was bound by Non-Disclosure Agreement. However, the role of auditor can be enhanced if it is allowed to report to the regulatory body directly, which is now confined to just the company’s board. Alternatively, one can think of replicating France and Denmark’s model of ‘dual auditing pattern’ or a system of joint auditing. On this Sudhir Gupta, Consultant, Planman Group suggests, “SEBI should have some kind of moral responsibility. Whenever there is a scam or fraud, SEBI’s top brass should voluntarily go ahead and resign. The authorities in charge should do so taking a hint from our ministers and leaders who do the same whenever they are alleged with criminal or corruption charges”. At the least, SEBI should copy the way SEC functions & have power to raid, search and seize, if it senses any abnormal activities. Presently, SEBI does not have any such powers. But until the government endeavours to structurally change SEBI, it’s only a matter of time before the next Satyam happens.

 

Power trading exchange

Don’t trade in power

If power is traded, it could be the next big bubble to burst

One of the most critical shortcomings of Indian economy has been its inability to push through drastic reforms in some of the key sectors that have severe ramifications on its long term well being. And it’s needless to say that such a list would always have the power sector way up in the ranks. Come this time of the year, with the rising mercury, it’s only a matter of time before power cuts would again become more of a norm than an exception and inverter manufacturers would again make a fortune out of it.

With an installed capacity of around 1,50,000 MW, India is in no way a minnow in terms of power production, but the real problem, as has always been, is the distribution of the power produced. With the distribution of electricity still being a near monopoly of the State Electricity Boards (SEB), inefficiency in the distribution of the same continues till date, in spite of the substantial efforts being made to unbundle the SEBs into separate companies involved in production, distribution and transmission of electricity. Not only does a substantial part of rural India remain unlit, but even in some of the better cities of India, including manufacturing hubs, it is considered a naivety not to have power backups. To counter and address all these shortcomings, regulators have suggested the introduction of competitive wholesale electricity markets.

In order to materialise the concept of competitive market, the Central Electricity Regulatory Authority (CERC) is embarking on the task of initiating a Power Trading Exchange (PTE), which many believe is long overdue. For the uninitiated, it will be in the pattern of other exchanges viz. stock exchanges or multi-commodity exchanges. The whole aim of this model is to provide electricity to the consumer at the cheapest rate, without revealing the source of power generation. In retrospect, there’s nothing wrong per se in putting electricity into a perishable commodity category and then trading it accordingly. Since power produced cannot be stored, it becomes all the more important for the power producers to instantly transmit it to the end consumer, albeit through the transmission & distribution companies.

For an economy as big as India’s, a certain place would always have a high demand and shortage of supply at any point of time, while another place might have less demand and more supply of power. An efficient power trading exchange might just help in bridging the gap efficiently with the aid of technology. Every time there is a supply and demand gap in the power sector, the SEBs do indulge in irrational power transactions. The hourly rates fetch states an average price of Rs.7.50 per KW. Contrast this with the amount they receive from domestic electricity consumption, which is just Rs.2.10 per KW. Even when the state is not self-sufficient in power, they do not hesitate in back-door sale of power. SEBs get huge subsides from the government in order to bridge their cash deficit and update their set up. Subsidies are fundamentally given to SEBs so that it can eventually flow down to the end consumer, but then it takes an altogether different route and reaches back to SEBs. Even then, most of them are ironically bankrupt with assets totally wiped out.

Yet, trading in power nationally is no child’s play and would require a grid capable of handling all kinds of fluctuations. Take for instance a national power grid (with a capacity of 30,000 mw of power), which requires nothing less than a whopping Rs.800 billion. This amount is obviously beyond the ability of the state or central power distribution companies to garner. Therefore, call it by default or by design, the private sector has to intervene. Power subsidies, most of the time, are extended and revised in spite of being revoked. This is luring many private companies to enter this sector. Out of a Rs.6.34 trillion of total corporate announcements (of investment) made in the first six months of 2008, power sector attracted the maximum number of investments totalling Rs.1.96 trillion. Videocon, TVS, NBCC, Ansals, Jindal and Logica and even companies like Reliance Energy, Essar Power, Tata Power and Adani Export, are trying to tap the advantage of this to-be power exchange in the next couple of years. In hindsight, the PTE may seem to be very rational and balanced initiative. But as the saying goes - the devil is in the details. Talking about PTE, since the trader in the PTE will have bilateral contracts i.e. with the power generator (SEBs) and with the distributors (BSES and Yamuna in case of Delhi), it will lead to huge price speculation – as it happens in traditional stock exchanges. With the help of speculation and lobbying, the market can superficially alter the price as it is happening in real estate. There is no clear-cut framework, which forces the regulators or SEBs to reduce and eliminate cross-subsidies. Being bilateral, trading in power at present leaves virtually no scope for fair trade. Commenting on the same, Subir Gokarn, Chief Economist, Standard & Poor’s Asia Pacific said, “In order to make the whole system more effective, open access needs to be provided. Presently, national grids are open but state grids are not. There is a possibility of speculation.” The physical power supply system in India is still influenced largely by the British legacy and has many complex aspects viz. delivery, non-storability, and severe price instability. This complexity leads to lack price transparency.

If the potential chaos of the power trading exchanges and the bankruptcy of the SEBs were not enough, the incredible leverage that most of the power producers and especially the Independent Power Producers (IPP) in the private sector have been resorting to is also a matter of big concern. The debt to equity ratio (DER) of most IPPs is nothing less than 3:1, while conventional business models generally presume that it should never be more than 1:2. Most of the funding is done through the bank and equity intervention is at its minimum. So it should not be surprising if it turns out to be the next big bubble and the reason for a recession in India; given the apocalyptic exposure that Indian banks have in this sector. The leverage rate is following the footsteps of the realty sector.

Coming back to the PTEs, there are no specific frameworks to set up any monitoring body that will be made responsible for PTEs. So eventually, price will be controlled by market forces rather than by the marginal costs of production, which may again lead to superficial price hike.

The power sector does need several doses of reforms but the power trading exchange should ideally be the last bead in the string. To presume that the malaise of unavailability of power can be sorted this way would be a little far fetched. A far better option would always be to allow at least the industrial consumers to directly purchase power from the producers. This would take care of much of the inefficiencies in the sector due to state run distribution companies. Moreover, until power remains a poll sop and an indispensable carrot for freebies during election times, no amount of trading of the same would help. The real change would start with bringing it out of the holy cow tag.

India on various lists

And India burns like this...

Social imbalances, clubbed with extreme poverty and pathetic lifestyles are weakening India’s foundation

The historical words of “tryst with destiny” as elucidated by our first Prime Minister Pt. Jawaharlal Nehru are yet to be materialised in India. Today, the concert of social sector assumes the centre-stage, but then the track record of this sector – health, education, food and shelter et al – declare the sad state of affairs loudly... It therefore comes as no surprise that India scores pathetically in almost all social sector indicators, be it the Human Development Index (HDI) or the Global Hunger Index (GHI) or the Global Gender Gap Index (GGG), where India ranks 128th (out of 177 countries), 66th (out of 88 countries) and 98th (out of 115 countries) respectively. The most noteworthy point is that unlike India, countries like Sri Lanka, Bolivia, Namibia, Guinea with considerably lower calibre of human demography and lesser spending on social improvements are climbing up the ranks with every new report. It requires no strong argument that India is a land ‘full of paradoxes’: there lies two nation in one, in the first one, more and more students are opting for foreign degrees, people are opting for better and higher lifestyle and ease, and on the other hand, another part of this country experiences a literacy rate of just 76.4%, death of 2 million children due to hunger and with millions still below the poverty line. And the paradox continues to linger on: while a fraction of rich Indians are engaged in preparations to join the information society, there are still millions who are illiterate. To elaborate on the difference further, the Gross Enrolment Ratio for age groups 6-11 years is found to be above 95%. This figure falls to 70% for age groups 11-14 years, and further hits the bottom at 40% as we consider age groups above 18 years. Beyond that, when we talk about the higher education category, the dismal figure gets worse and goes underground at a melancholic 10%! Only 10-25% of general college graduates are suitable for employment. Even in the report called ‘State of the World’s Mothers’, India rank 66th out of 71 countries, a low rank and a very poor image again. This ranking scores countries after analysing all social parameters, namely, health, education, and economic status of mothers.  It is interesting, but disappointing at the same time, especially considering that despite having 20% of world’s total children, 40% of its young population is malnourished. This puts India at 3rd on malnourished kids chart but from the bottom!!!
In 2006-07, India’s mortality rate under five (per 1,000) was 76, a figure high and dangerous. And why not if a country spends merely 3-4% of its GDP on education and just 1-2% on healthcare (which is far less than pubic spending by even countries like Namibia, Bolivia, Sri Lanka et al). While talking to B&E, International Food Policy Research Institute said that,  “India has very high levels of malnutrition among preschoolers (47%)... and it ranks at the bottom of the world on child malnutrition, right before Bangladesh and Nepal, and after countries such as Sudan, Cambodia, and Ethiopia!”
To sum up the social performance, one can just glimpse through India’s position in World Prosperity Index 2008 where we rank 70th amongst 104 nations. In India, a female on an average earns $1,500/year while a male earns $4,000/year. The GGG report further divulges that the female-to-male ratio for literacy rate is just 0.65! If statistics are to be trusted, an increase in India’s female labour force participation by 86% could easily push our GDP growth  up by 1.08% per year! But the most hard-hitting truth is poverty. As per the World Bank, 41.6% of Indians are currently living below poverty line (BPL). The truth is that even today many Indians are deprived of an acceptable life standard. It is the society that makes the economy and not vice-versa, have we forgotten this? 

 

Don’t worry; just 350 years to solve your case! It’ll be quick!!!

There’s corruption and fragility galore in the quagmire of the Indian administrative & judicial system...

Corruption - which has spread its roots across all pillars across India and has now become an oft-discussed subject in India, surprisingly never fails to stir up resentment. Democracy, judiciary and governance today are at crossroads, from where every path to development seems vague and dusty.
In the Global Integrity Report, that analyses almost all ranking and indices developed world wide, India’s overall ranking is moderate, but its performance on judicial and political parameters are truly unacceptable. Even Transparency International in its Corruption Perception Index (CPI) has given India the 85th slot out of 180 countries. This ranking seems to be of first-class after one finds out that around 30% of Indians, officially, below the poverty line (BPL) have to splurge Rs.9,000 million as bribes to public servants in order to get their basic work done. And the work is nothing but getting services from the Public Distribution System, health-care, school education, police, electricity, water supply, and not to forget the flagship programme of UPA government – the National Rural Employment Guarantee Scheme (NREGS). Almost 50% of BPL household paid Rs.2,150 million to policemen alone for getting their work done.
What else can you expect from a country where the leaders are involved in bribery scandals and planning, even when it is aired live on almost all national TV channels. For all those who aren’t able to comprehend this, we are talking about the recent incident where a politician was bribed to support UPA government (and  also the cash for votes scandal on July 22). This is just not one of its type, but India has had a series of similar incidences, be it the Bofors arms deal, the Bihar fodder scam or the High Court judge bribery case. This we guess justifies the score of 17.8 that India received on Political stability parameter from the World Bank on governance indicators. In the 2007 Transparency International’s Global Corruption Perception Index, India’s rank was 72nd amongst 179 countries and like in the past, this ranking keeps telling the tale of increasing corruption activities in India. But the final blow came from transparency international, which – like in all its previous years – fortified that India is still a very corrupt country (India’s position fell by 13 positions). Even the Bertelsmann Foundation 2008 (which ranked India 25th out of 125 countries) proves the fact that corruption has already strengthened its roots in the Indian society and can be felt across all political and bureaucratic divisions. On analysing the Freedom House 2008 report, it becomes clear that it is due to criminalisation of politics that almost all efforts by the government to eradicate corruption falls flat. The International Herald Tribune once stated that, “according to the political watchdog Social Watch India, 125 out of the 538 members of Parliament have criminal cases pending against them”. Even Global Integrity 2007 supports the above argument and goes one step ahead and states that government initiatives towards anti-corruption measures faces hurdles in veil of implementation gap and even Transparency International, since years, has been highlighting negative political will to enforce anti-corruption measures. Moreover, it got negative scores in three parameters – Control of Corruption (-0.21), Political Stability (-0.84) and Government Effectiveness (-0.04) in Global Integrity Report 2008.
And to make the scenario more bleak, The Wall Street Journal and the Heritage Foundation declared India to be 55.6% free, that made  it the 104th freest economy! Even The Economist mentioned India in its list of 54 countries that have flawed democracies. India, the so-called largest democracy is ranked 35th in Global Democracy Index, scoring its lowest marks on political participation and political culture and receiving a rank of 107th out of 140 countries in Global Peace Index. Theses indices measured the state of political freedoms and civil liberties. India even scored a low score of 2 and 3 out of ten in Political Rights and Civil Liberty parameters accessed by Freedom house respectively. To make matter worse and to make the future bleaker, a survey by Transparency International, the Global Corruption Barometer 2007 stated that 90% of their sample size felt that corruption levels would surely increase over the next three years to come.
Prof. Dr. Johann Graf Lambsdorff from University of Passau and Transparency International says, “The inevitable fragmentation of a society as huge as that of India always made the fight against corruption particularly challenging. Also the economic transition of the last two decades imposed major challenges.” As per the Global Corruption Report, 77% of Indians feel that courts in India are corrupt. The Indian judicial system is, just like governance and politics, in a state of utter disaster, as at the current rate of disposal, it would take another 350 years to deal with pending court cases even if none were added in the future. There are around 30 million cases pending in India at any given time. This time frame seems justified after one lays his eyes on court cases figures: The number of cases assigned to judges’ averaged 1,294 cases per a Supreme Court judge, 4,987 per a high court judge, and 1,916 cases per a judge in the lower courts. The system should urgently frame 24x7 courts and also should close files of those cases which have no economical and social implications. Bhanoji Rao in his column wrote, “The multiple regression of growth rates on several independent variables revealed that the investment rate and the CPI were the two most significant variables impacting on growth. CPI had a coefficient of 0.33 with the following plausible implication. If India’s CPI of 2.8 in 2007 were to move up to the Singapore level of 9.3, the country will log in an extra 2.1 percentage points to the rate of economic growth. Then and perhaps then only, a 10% growth rate will be a reality”.
Well, its now the turn of godfather of all corrupt activities – politics. In 2008, government decided to pass 29 Bills, but out of their so-called busy schedule (busy in disturbing parliament) they were able to take out time to just pass 9 bills. In 2007, the Lok Sabha worked for about 281 hours of 492 scheduled hours. The tiger is under grave threat, yes, it is, and especially so when our rulers bunk parliamentary their classes! Someone, tell them! 

Internet & India begin with an ‘I’...

... and that’s where it will end – ‘I’. Will policy makers ever take technology to the ‘We’? Good question!

 What’s the buzz word amongst the tech-savy in India (beside the internet and the iPhone) – it’s mobiles, and not to forget the long awaited 3G technology. Ten years ago, and not in the ice age  (mind you), getting a black ugly monster landline dialer would have called for a wait of several years! But who could have imagined that just a decade later, one could surf the internet on high-speed broad band from inside a running train, or use a PDA, carrying all the informations relating to your business in one smalle hand-held device. Stranger thought, India becoming one of the IT hubs was unimaginable. But, it happened! In this era of information, India’s sustained growth depends on its ability to integrate skills into the production processes and everyday lives. Information and Communication Technology (ICT) is more than an essential tool to make sure that the continued level of opulence is present across societies. But the sad fact is that this progress has been highly lop-sided. As per the 2008 World Economic Forum report, and also well accepted by India’s intellect, the concept of digital divide today is one of the biggest impediments to development of India. This is reflected in the fact that India’s ICT environment and readiness rank has slipped by 4 positions during 2008 (we ranked 50th amongst 127 countries this year compared to 44th out of 122 countries last year). Really, the deteriorating quality amongst the regulatory milieu and the low level of India’s readiness to change in this regard is widely visible. Even in 2008, when the world is going from the Wi-Fi to WiMax, India is still fighting with its rural-urban divide. Imagine, even with numerous broadband service providers at one’s door-step, just a mere 4 million users gain access to it, out of which, the majority live in urban areas. To make matters worse, Computer Industry Almanac Inc.’s report revealed that Internet usage has actually dropped down by 1% since 2005. We repeatedly fail to understand, why the Information & Broadcasting Ministry is not focussing on pan-India technology development and is only perennially focussed on urban parts. On analysing the Global Economic Prospects 2008 report, it becomes clear that if domestic skills were available to efficiently use the technologies employed, then the Indian GDP could be 4.8 times the current GDP. It’s very obvious that rural telephony and Internet penetration could phenomenally improve the reach of market initiatives and generate further employment in multi-variate sectors. The top performers were able to spread the advantages of IT across their respective countries. But in case of India, the impact of the regional progress of IT was not equally distributed amongst the masses. In spite of campaigns focussing on RTI and e-Governance, the digital-divide can be still felt between the subjects and the government. India stands at 113th position with its e-government readiness dropping by a rattling 26 positions during the last three years. And again, economies like Iran, Maldives and Sri Lanka overtook us. What’s more, India succeeded to find the 54th place out of 69 slots available in The Economist Intelligence Unit e-readiness ranking 2007 – pathetic again! Dr. Mark Dutz, Sr. Economist, The World Bank, while talking to B&E suggests that India should promote all the exciting innovations by grassroots entrepreneurs that are bubbling up from bottom of the pyramid. “A specific suggestion is to build on the National Innovation Foundation repository of more than 70,000 innovations and traditional knowledge practices from many districts across India by encouraging private entrepreneurs to commercialise the most promising ideas,” says Dutz.
Imagine the outcome of an IT united India. If all Kendriya Vidhyalayas have IT education and almost all SSIs and SMEs are linked to a central digital portal which allows online international business, India will not longer remain digitally disconnected. One must understand that technology is just not about Internet and satellites, but encompasses every sector, be it health, society, education, corruption, governance et al. Why ITC’s e-choupal model can’t be replicated to help the farmers or why can’t mobile technology be taken to the length and breadth of the country are questions that the policy makers can answer...
Technology means progressiveness, and we’re not even talking of the Asimo robot yet! Will India be ready for it?!

  

Mirror Mirror on the wall, why’re we the worst amongst them all?

Why discrete development of just a few sectors will prove futile. And why collective is the way to go...

 After analysing every sector, we decide to write about one that is really pulling India down. And after hours of heated discussion and analysis of myriad reports, the editorial board came to a very interesting conclusion – we found that each sector had an impact on the other, something which is more grave than it sounds... ‘negative synergy’ for India is what we called it. In spite of such growth and development, the country is yet to initiate some basic transformations or changes.
A nation is generally considered successful when it achieves three significant milestones – free politics (which implies freedom of peoples’ choices), economic freedom (bringing prosperity and equality coupled-with social freedom) and finally, achieving peace and social cohesiveness. The world, during the last sixty years has fought to achieve these three ingredients of a healthy nation. Even when we speak about the Western countries, they have  all achieved democracy and prosperity, but whether they’ve successfully been able to bring about ‘social cohesiveness and integration’ is really a question. Though India scored high in both political freedom and social integration, it is yet to witness that dream economic growth (that of 10%). Fortunately, with the initiation of economic liberalisation during the 1990s, India has brought revolution which Gurcharan Das in his book, The Elephant Paradigm, has explained vividly. The world can easily remember 1789 for French revolution and/or 1917 for the Russian revolution because of their pro-active nature. But the revolution in India has been like silent water flowing peacefully downhill... it’s happening but the rate of flow and change cannot be imagined or justified, or even quantified!
While expressing his view Parag Khanna, Director, Global Governance Initiative, New America Foundation comments, “I am impressed with the sustained growth in the economy and taken by surprise at how quickly and broadly manufacturing has boomed. This will be the secret to employment-generating-growth which can tackle one of the largest social deficiencies of the economy to date. There are still worrying signs at the top level like slow investment in infrastructure, and also deregulation. Many investors from America complain ceaselessly of the still opaque business environment in India...”
One horrific implication of India-type growth is inequality. Ironically, 3-5% of richest Indians’ welath is growing so fast that the disparity between them and the bottom 80% is increasing by the hour, creating an even more imbalanced India. According to the UN report, India’s Gini coefficient is (statistical tool to measure economic inequality where 0 being perfect in-equal and 100 being the perfectly equal) is 36.8, certainly clarifying the social imbalance scenario. Here, we would like to present what the renowned journalist and author Akash Kapur said to B&E on the mother of all indicators, “India’s low HDI rank is indeed a cause for concern. It is a particular cause for concern given the rapid economic progress that has been made. When a poor country ranks low on the HDI, we are not surprised. But when a country with among the world’s highest growth rates ranks low – indeed, when its ranking declines despite rapid economic growth – we need to ask what is going on.” Why are the fruits of economic progress not being translated into general well-being (as measured by the various components of the HDI)? Surely, there are undoubtedly a variety of reasons why this is so – particularly to do with governance and with age-old patterns of inequity – but the incongruity of declining HDI alongside rapid economic growth should make us sit up and ask some serious questions. Inspite of being a trillion dollar economy, India performs poorly on some of the basic measures. From the West Bengal politico vs Nano conflict, which eventually forced Tata’s car project to find a new home for itself, to the murder of the Cerlikon-Graziano’s CEO by angry ex-employees in Noida, everything which could shatter India’s image in the global forum has taken place in the recent past. And if these were not enough, religious conflicts took-off in Orissa, (where fanatics launched their concentrated attack on Orissan Christians, thereby killing thousands of innocent people &raping nuns), Jammu & Kashmir (which was experiencing a new wave of conflicts altogether). Avinash Dixit, Professor of Economics, Princeton University while writing to B&E on the issue adds, “What about physical infrastructure? Transportation, communication, and power supply networks seem clear examples of public capital that the government should provide.” In advanced countries, private enterprises can, and does provide these. There, property developers build residential, commercial, office, and even manufacturing complexes as complete packages with all the roads and utilities installed. “They profit from doing so, as buyers or renters are willing to pay for the quality and ambience they want. In economics jargon, the developers profit by internalising what would otherwise be an externality,” adds Dixit.
It’s become imperative to launch a programme for holistic development as all sectors are directly or indirectly dependent on each other. Restructuring the economy in order to ease regulation as well as tax burdens would boost trade and economic development. Global trade openness will integrate India with rest of the world, and obviously enhance India’s prestige globally. Similarly, more money will give people increased purchasing power. With more available money to spend, Indian households can proactively invest on health, education and other development-oriented activities. And gradually, educated, intellectual and comparatively clever Indians will raise their voice against corruption, tyranny and poor governance. Then perhaps, average Indians will pro-actively get involved in politics and work for national interest, keeping aside caste, creed and colour. This may lead to another revolution that would catapult the nation into the big league.  
There exists no logic to expect miracles from a single sectoral development and when many important factors are overlooked at and compromised with. What India needs to do is to strive towards achieving ‘positive synergy’ by working on all possible sectors at the same time. It is an all-time tested hypothesis that mere and sporadic economic reforms will widen social inequality (that is highly unequal in case of India) and negatively impact the social sector’s development. Economies like India face multi-dimensional problems of poverty, inequality and democracy. It’s the only country in the world where economic reforms do not support social development, and where the poorest pay bribes for getting, where heat and rain still kills people, and where everything happens which ought not to happen. And this is not the end of our cover story, for you should carry it in your minds. Ask yourself: Mirror Mirror on the wall, why are we the worst amongst them all? Think, and act!

God on Sale

Invoking the almighty or running after the all mighty rupaiah...  Call it faith or religion; modern marketers have infiltrated the divine corridors spawning the estimated Rs.116 billion Indian ‘Faith’ industry.

Sauvé and strapping Jatin Gupta (24), an MBA, has recently joined his father’s food processing business in Kanpur. Like most youngsters these days, he loves partying, movies and enjoys fast cars. But, quite unlike many others of his age, he is also deeply religious. And while he may sometime miss his weekly visit to the temple, he leaves no opportunity to update the ringtone and wallpaper on his cell phone with the latest devotional offerings from his service provider. Talking to 4Ps B&M, Jatin explains that till about a year ago, he never knew about religious ringtones. “One day I heard the Hanuman Chalisa as caller tune in my friend’s cell phone. I immediately called up my service provider and got one for myself too,” he says.

Today, Jatin has a sizeable collection of ringtones, devotional hello tunes and an array of wallpapers depicting Hindu gods and goddesses on his handset. He adds, “Of course, I paid the usual charges for these, but hearing the Gayatri Mantra every time my cell rings, makes me feel connected to the powers that be.” Like Jatin, a wave of India’s 464 million (and growing) mobile subscribers are getting hooked to devotional VAS offerings for precisely this ‘connect with god’ that has gone missing from their fast & furious lifestyle. So even as India’s Rs.1,200 billion telecom juggernaut races toward greater monetary success, there is a steady stream of marketers painting it with holy colours to cash in on the commercial power of growing religious sentiments. For India’s leading VAS content developers like Mauj Telecom, IndiaGames and Cellebrum, while cricket and Bollywood remain killer content, religious content has begun accounting for almost 12-15% of the total Rs.60 billion VAS industry. Says Dippak Khurana, VP-Content Business, Mauj, “Indians are religious and their mobile screens are a mere reflection of what they like. Since their handset screens offer personalisation, people like to set up either their favourite Bollywood track or religious song.”

For the record, VAS content providers have now become consistent in development of religious content, ranging from the frivolous (like astrology, numerology,  et al) to the profound. For instance, Mauj’s product ‘108 Krishna Names’, everyday offers the user a unique name of Lord Krishna, accompanied with a relevant picture, a detailed description of the name and a relevant TrueTone that the consumer can download. In January this year, they even launched two new 2D and 3D games designed on the Indian epic Mahabharata, which have become the most popular games in Mauj’s stable – surpassing even the cricket-based games in its kitty. Hungama mobile has gone to the extent of providing its customers with services like ‘Deity of the Day’, while Mauj Mobile has started ‘Gita Shloka Service’ on an average monthly subscription charge of Rs.30.

Not that Islam, Christianity, Buddhism and Jainism are not on the radar of operators like Mauj and Hungama. SMS alerts with quotes from the Bible, Gita and Quran, pan-religious downloadable mobile themes are also extremely popular, making devotional content one of the prime money-spinner value-added services. As per industry estimates, 40-45% of revenues are contributed by devotional music content alone, with most subscribers coming from semi-urban and rural markets. “We have a complete suite for Islam viz. Naaton, Hamd & Duaaein. Similarly, we cover gods across the regional markets, starting from South India. Our focus is pan India and we have products which cater to every mobile subscriber in the country,” avers Khurana, confident that as mobile penetration moves to rural India, the demand for religious applications is only set to grow from here. Last heard Mauj’s business model had attracted much-coveted VC funding to the tune of $10 million.

Religion: Off the Shelf

And you thought that religion is fading in cities and among the educated? Check this. A survey by Centre for the Study of Developing Societies (CSDS) has already established that the stress of urban living is pushing people to search for anchors in their lives, which they recreate through religion. The survey found that 93% Indians – irrespective of education – believe in God; 64% visit a temple, mosque or gurudwara regularly and 53% offer prayers daily. It’s almost as if the till recently subdued religious fabric of a nation is now seeking manifestation in the conspicuous consumption that defines modern times. And as the daily grind becomes more hectic & competitive, “quick connects” with god are fast gaining momentum. On the one hand are Gayatri Mantra or Hanuman Chalisa ringtones, while on the other are guys providing services like online prayers and mobile donations.

Even deity statue makers are carving their own special niche in this godly industry. And while most statue purchases are still made through the unorganised market, some organised players are stepping in to take advantage, with Lladro being a key player among the latter. Indian mythological and religion inspired arts and sculptures in fact contribute over 20% of Lladro’s entire turnover. Says Sachin Jain, Senior Brand Manager at Lladro: “We are not a religious commodity brand; instead we are a brand that sells emotions, art and lifestyle.” Lladro began its Indian religious tryst with Ganesha idols in the year 2001. And when the 2,000 piece limited edition was a super success worldwide, Lladro successfully created and began selling Radha Krishna idols. “Then we created Lakshmi, which has been our best selling product in the world,” adds Jain. When they began crafting Lakshmi wares, they priced them starting Rs.1.64 lakh a piece. The same art is being sold at Rs.7.5 lakh a piece today. As per Jain, with the Lladro Lakhsmi their customers possess a unique statement of art. “And so we call it a lifestyle statement,” he says. Jain and others of his ilk are now awaiting the peak sales and marketing season of Diwali. Having already sunk huge moolah into tracking and maintain close relationship with customer, Jain particularly is confident about customer loyalty in the upcoming Diwali season.

Even travel companies are cashing in by organising religious yatras for the young and old alike. Talking to the magazine, Arup Sen, Executive Director, Cox & Kings reveals, “Of the estimated 400 million journeys undertaken by Indians every year domestically, close to 100 million journeys (nearly a fourth) are to pilgrimage centres like Tirupati, Shirdi, Golden Temple or even the Char Dham Yatra.” And the numbers are swelling. As per the estimates of Cox & Kings, the growth in this segment ranges between 25-30% across age groups and socio-economic profiles. No surprise that they’ve priced their services straddling the lowest and highest rungs (starting from Rs.5,869 to Rs.1,67,000 per person) of the market. Industry estimates peg the annual pilgrimage to the Shri Mata Vaishno Devi Shrine alone at about Rs.474 crore every year.

This brings us to where the big monies really lie viz. the temples, mosques and churches, which are fast modernising their marketing and services to keep pace with the times and growing demand. And, leading the race are the gurus that claim to take you a step closer to spirituality and well being.

faith Healing

Walk into any ‘Art of Living’ centre (an NGO started by Sri Sri Ravi Shankar that claims to uplift humanity by bringing peace at the level of the individual, society and the world as a whole) and what startles you is the number of youngsters gathered there for spiritual healing, shattering preconceived notions that it was a place for ‘senior citizens’ who want to make the best of their retired life by enhancing their spiritual self. “Why don’t you opt for the YES+ course?” was the question that was thrown at us no sooner we walked into one such centre in South Delhi. Straight from a marketing text book, eh?

In fact, not only Art of Living, even institutions like International Society for Krishna Consciousness (ISKON), OSHO World, Patanjali Yogpeeth (Baba Ramdev), et al, are all places where gurus claim to offer peace of mind
for battered souls. Girish Bhardwaj, a new entrant to the Art of Living course who has already undergone two stages – the Basic and Advanced Courses – avers that “his perception towards life has changed” after attending these sessions. And if you thought that spirituality comes free, welcome to the world of materialistic spiritualism - the course fee ranges anything from Rs.1,500 to Rs.3,000 (for a week long session).
So, what is it that prompts a Gen-X youngster to be a part of such centres. And more importantly how do centres attract such huge crowd? Well, if you market your courses with tags like ‘Self Development’, ‘Stress Management’, et al, any person in the present scenario would be sure to lap it up. Don’t mistake us. We don’t disagree with the basic premise of such courses, which have almost become food for many souls in today’s stress filled society. What we are only bringing out is the manner in which modern marketing techniques are now being applied to this otherwise spiritual journey! Despite being low on ads in mainstream media, these centres have a huge presence on the Internet and that is one way they manage to attract tech savvy people like Girish.  “Having read some books I got all the more confused. Thanks to the Internet, I chanced upon Art of Living,” points out Girish. Moreover, word-of-mouth certainly seems to be one of their key marketing strategies. “You become happy and you would like your near and dear ones to become happy too and that is how it’s marketed” he adds. There’s even a fair bit of showbiz involved in the business because many gurus spend big bucks to buy TV time that allows them to reach out to masses, organise mass jagrans in well-off neighbourhoods and even hire PR agencies to spread their enlightened word to the stressed out world! 

Out of the Mandir; Into your Living Rooms

Meet NRI, Dr. Ravi Krishnamurthy, a Program Manager in Nanotechnology Victoria Ltd., of Australia. Dr Ravi recently donated a cottage in memory
of his (late) father at Tirupati. But because his hectic schedule really did not allow for a trip to India at the time, he simply used the more convenient e-Donation option on Tirumala Tirupati
Devasthanam’s (TTD) website. “The e-Donation option makes the distance from Tirumala for people like us irrelevant,” he told 4Ps B&M. Varaprasad Pakanati, Associate Manager, GMR group, Bangalore is another happy customer… oops devotee of the e-Seva facility provided by TTD! While his family pays regular visit to Tirumala, Pakanati himself could not take out time for the pilgrimage. “Being in the team of higher echelons at office, my schedules are hectic and time-management during the visits to Tirumala used to become
difficult,” he told 4Ps B&M. But that was before e-Sewa came to his rescue. The web based interface allows pilgrims (like Pakanati) to book for various services, minimum three days and maximum 90 days in advance. “That has greatly reduced my toil,” says a visibly happier Pakanati. In as much, the digital age seems to have given a new lease of life to these iconic temples of religion. D. K. Adikesavulu Naidu, Chairman, TTD told 4Ps B&M, “Devotees can even book the e-Seva and e-Accommodation at Tirumala through the Internet.” To ensure security, the veracity of the identity cards, scanned and submitted via the Internet, are physically verified at the security office at the time of the personal visit.

Seeing the potential and growing number of NRIs and RIs eager to make digital connect with their gods, a rash of fly-by-night operators have rushed in to gate-crash this ‘divine’ party. Talking about online pujas offered by private sites, TTD’s new Executive Officer, I. Y. R. Krishna Rao laments, “Yes! Some private organisations are collecting fees for the on-line puja at Tirupati. It is ridiculous as there’s no way that they are eligible to do so.”

Not that Lord Vekateshwara of Tirupati needed the support of his virtual devotees to retain the honour of the world’s richest god. The lion’s share of the income of the TTD is derived from the sacred ‘Hundi’ – the place where the visiting devotees deposit their offerings in fulfilment of their vows. The bulk of the TTD’s income, Rs.3.43 billion in 2003-04, Rs.3.49 billion in 2004-05, Rs.3.82 billion in 2005-06, Rs.4.81 billion in 2006-07, Rs.6.08 billion in 2007- 08 has now soared to a whopping Rs.8 billion per annum and is derived from these offerings. The collection from the temple hundi at present is not less than Rs.1 crore a day. In fact, it is not uncommon to find huge individual offerings ranging from Rs.50 lakh to Rs.1 crore dropped into the hundi, with rich devotees making spectacular offerings to the Lord. On a single day (May 30, 2009) for instance, the temple’s ‘hundi’ received a record Rs.2 crore worth of donations in cash and jewellery!

And while TTD’s financials are not public and there’s hardly any  information about how these funds are used, with that much quick money in their coffers, small surprise that there is a visible enhancement, both in terms of facilities for the devotees as well as TTD’s marketing budgets. There’s in fact even a flourishing audio and video cassettes, compact discs and publications business that is booming alongside, including a religious monthly magazine, Sapthagiri, which is being sold across the country in five languages viz. Telugu, Tamil, Kannada, Hindi and English.

The Siddhivinayak temple in Mumbai – that receives around Rs.45 crore as donation annually – is another big revenue earner. Talking to 4Ps B&M, Subhash Mayekar, President of the Sree Siddhivinayak Trust says, “About 40% of our total donation is used for poor people and development.” The temple premises, set in the heart of India’s financial capital, plays host to around 25,000 visitors everyday, while thousands visit the temple via virtual channel. Marketing is now acquiring bigger proportions in the temples annual budget. “We are building waiting halls – five storey buildings equipped with a library – which can accommodate 5,000 devotees,” adds Mayekar. Having roped in TATA SKY as their marketing partner, the temple has recently also ventured into mobile marketing as another way to attract customers (read: devotees) into its arms. The temple has even gone ahead to release a movie based on the deity titled Vighnaharta Shree Siddhivinayak. Marketed by Vistaas Media and Eros International, the producers have been able to rope in Master Blaster Sachin Tendulkar, Divya Dutta and Parmeet Sethi for the movie.

Divinity is in the air

Talking about movies, can one never forget the runaway TRP (and advertiser money) success of Ramanand Sagar’s ‘Ramayan’ and B. R. Chopra’s ‘Mahabharat’. The two combined could well be termed as the pioneers of  the modern day ‘faith industry’. If in the music industry, Saregama, T-series and Creative Eye Ltd. are calling the ‘divine’ shots, in TV it is a rash of spiritual channels, led by players like Aastha, Sanskar, Zee Jagran and Sadhna, which are cashing in on the market. Estimated to be worth Rs.60 crore and growing, rating agencies claim that the target group share of male and female viewers of these channels are 54% and 46% respectively. The fact that a majority of these channels are free to air is simply an added factor for their growing popularity. The aam junta’s ‘search for GOD’ is what these spiritual channels are banking on and are reaping rich dividends. For instance, almost 70% slots on Aastha TV are pre-booked by advertisers at any given time.

Even demand for spiritual and mythological books is growing rapidly at about 30% every year. Rajendra Prasad Sharma, Vendor, Gita Press Book Stall, New Delhi Railway Station has been associated with the religious publishing industry for the last 12-13 years and is euphoric at the monthly sales figures from his stall. For Gita Press, the greatest marketing strategy has been their pricing and the variety of texts in lucid language (The Bhagavadgita – The Song of Divine:  With Sanskrit text and English translation priced at Rs.10). But, as India continues to ape the West, does mythology have a market in India. Says P. Jayakumar, CEO, Toonz Animation India, “Mythology appeals to people regardless of their age. Even grown-ups would have enjoyed mythological stories in their childhood and love to see them take shape now in the visual medium. The key is in presentation. For kids, a visual fantasy in tune with our culture would be more appealing and hence the huge potential.”

Jayakumar has his own reasons to firmly believe in this ‘mythological’ market. While Hanuman (India’s first animated feature film on God with a budget Rs.4.6 crore) raked in a whopping Rs.15 crore for Toonz Animation, its sequel – Hanuman Returns (budget Rs.25 crore) – was an even bigger hit minting in a colossal Rs.80 crore (320% return) for the company within just a few weeks of its release. And for those who are still not convinced, here a nugget. The brand value of Toonz Animation’s Hanuman alone is worth over Rs.8 billion today. Need we say more?