Special Issue – The Future of Industrialization

by October 3, 2018 0 comments

Future of IndustrializationFollowing industrial norms, accounting procedures, and discipline, is important for all enterprises, whether private or public. But the main objective of any business is to main profits.

There are any number of citizens who feel ‘just as well that Air India has not been sold, it’s akin to selling the family jewels.’ To put the corporation on sale, wait for several weeks and then fail to get even one offer, however low, was a lesson for the Government to learn. In fact, for a perceiving observer, the Maharajah story is a compendium of what not to do with a national asset. In principle, the Modi Government was right when it stated ‘jis desh ki sarkar vyapari, wo desh bhikari’ (in a country whose Government is a trader, that nation will be a beggar).

The objective conditions in India are such as to require a relook at the Government’s policy of privatization as well as future industrialisation. The following is a bad example but nevertheless it is not an uncommon one; ur else, the bank NPAs would not have been so enormous:

Quite some years ago, an acquaintance of the writer wanted a project manager who would later be suitable for taking over as chief executive. The gentleman asked the writer to look out for anyone he knew who could fit the bill. To explain, he said what he was about. It was a mini steel plant; its project cost estimate was Rs 20 crore. The machinery, the costing of which he could take liberty with, was worth about Rs 10 crore and he proposed to jack that figure up to Rs 15 crore. Financial institutions would lend at least two-thirds of the Rs 15 crore which meant Rs 10 crore. The capital was to be a total of Rs 10 crore to be divided into — half by promoters and half by so-called public subscription. The first half was to be shared between the acquaintance and the State government, two and a half crore each since the steel mill was a joint sector unit. If all went well, he would get five crore from the machinery supplier and invest only half of that in shares. In short, the project would for him make a profit of two-and-a-half crore rupees much before any steel was produced! This is only an illustration of how the worst entrepreneurs think. The writer’s reaction to the acquaintance was: Why start siphoning before the project starts? He laughed and said: “You are too innocent.”

There is a widespread impression that privatization of industry will deliver the goods which the public sector has failed to do. We need to look at this belief afresh. Has the community of entrepreneurs delivered the goods in setting up industrial units of its own choice? Yes and no, it is a mixed picture. There are a few outstanding performances, some successful enterprises but there are innumerable cases of failures and closures. Quite a few industrial estates for small and medium units look like industrial graveyards. The quality of managers is not greatly different between the private and public sectors though the opportunity to be a committed professional who works hard at his job is greater in the private sector.

The prevalence of ill-conceived project choices has existed in both sectors. For instance, the Government has promoted some quite weird schemes like a fruit export corporation or a photo film company. At the same time, some private promoters who were essentially traders did not graduate to an industrial culture and failed. Corruption was and remains a common factor; the odd entrepreneur drew out cash as some corporations were favorite cash cows of the Government, like the State Trading Corporation in its heyday. In skills, ideas and integrity, overall there has been no significant difference.

Kingfisher Airlines and Air India are a useful illustration of the failure of integrity in the two respective sectors; in the former case by a private player and in the latter by ministers and bureaucrats. To add to the public sector’s woes came the sick and closed units from private sector failures. The Textile Corporation is one example.

Neither sector is likely to deliver India’s national goods as are necessary to take its industrial economy into the super league. Until recently, there was an imaginary hope that private entrepreneurs would help to take over some PSUs and then proceed to set up large units. No one, however, had the time to look at the priorities of private industrialists. They are either fully invested with no financial surpluses large enough to takeover more industries or themselves sick and have huge NPAs and/or are trapped in insolvency. Moreover, not many of even the viable business houses have managed to inspire the faith that can attract unlimited public investment. The people at large have plenty of spare money to invest; in fact, there is a shortage of investment opportunities. Foreign industrial giants may not be in a hurry to set up industrial units with only their money plus the expectation of public subscriptions. The Central Government has to step in and play a financial or investment role. If that were possible without scope of Government interference, foreigners could be attracted.

The reason why many a PSU has failed and others did not succeed was that we did not distinguish between administration and management or between the importance of disciplined procedure and of generating profit. The IAS officer knew the former and generally enforced it effectively but profit-making was not part of the ethos he grew up in. In fact, in Nehruvian India, profit was a dirty word. For many years Jawaharlal Nehru considered many a profiteer as deserving to being hanged on a lamp post. And often the new IAS batch began its career with a speech by Prime Minister Nehru. Moreover, the joint secretary seldom learnt the tricks of keeping out the fingers of his pecky minister. And yet he acted the role of a member of the owner family and tried to drive fear in the heart of the PSU unit’s managing director. Adherence to procedure and accurate accounting as well as discipline are important for all enterprises, whether public or private. But objective number one of any business has to be profit, no doubt keeping in mind fair and legal practice. When it comes to large-scale finance, a resort to the Government treasury is virtually indispensable. The question now is how to reconcile depending on the State and, at the same time, ensuring its non-interference.

The answer would lie in a synthesis of management excellence supported by State finance while ensuring the protection of every stakeholder. This is possible and it is best illustrated by quoting a live example and then describing a proposed model. Larsen & Toubro was for many years well managed by its two founder gentlemen and later their successors. Few common observers realized that 54 per cent of the company’s shares were owned by Government financial institutions. The company was not considered public sector because the President of India i.e. the Government directly did have shares in it. The Reliance Group later came into Larsen & Toubro and the shareholding profile changed. Then they sold out; the company was demerged to split it into two, the profile changed further.

Now for a model for the future, the Government should confine its industrial investment to lending money at a reasonable rate of interest to its financial institutions like LIC, GIC and its subsidiaries as well as banks. Suppose a European corporation of repute wants to come to India in order to manufacture its line of products. It needs the economy of scale in production; at the same time, it may be reluctant to invest large enough sums to be able to control a majority shareholding. Hence one must enable the European company to have only 26 per cent holding and yet with a guarantee by at least 25 percent of institutional holders to vote with the company for a certain number of years. The rest of the shares can be offered to the public; if individuals do not subscribe to the full balance 49 per cent, the institutions should be willing to step in. The European firm would bring with it its style of management, its technology, its brand equity, all for 26 per cent holding. It should therefore be entitled to a royalty on turnover of product sale. Such a scheme should be open to reputable Indian corporates too.

If this model were to succeed to attract industrial growth, the present PSUs could also be dealt with on similar lines. Incidentally, provided the management of greenfield companies proves to be efficient and cuts down on their gestation time substantially, the State could be well placed to find funds on a large scale through deficit financing. Delays in the completion of projects are criminal; they cause inflation and perhaps render the product outdated. This could lead to the unit go sick before it takes off.

(The writer is a well-known columnist and an author)

Writer: Prafull Goradia

Courtesy: The Pioneer

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