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For some years now, I had wanted to read this book Finance and Profits by N.J. Yasaswy, but could mange only some extracts. By this time, this edition of the book that I have, is nearly 15 years old. So, I decided, that I should read it at least now. In the field of finance, the things tends to change very fast. Taking up a book that is one and half decades old, has its own deficiencies and benefits. Deficiency would be that if any newly initiated to this field reads it, s/he would get the facts wrong. The benefit is, that those who are into this area, it makes them realise to what extent the world has changed – its a sort of reality check on what progress has been made in the finance-economics-accounts-tax world.
This book was written just before the new industrial policy (1991), that was promulgated under the then Finance Minister and the current Prime Minister Mr. Manmohan Singh. The book is definitely a useful book as it incorporates the real life cases with the theoretical aspects (though these cases are now only of historical value). Even the theoretical aspect is not as heavy as the word would suggest, as the book is meant basically for practical day-to-day use of non-financial managers, businessmen and entrepreneurs. The book is a clear demonstration of how the finance world has changed in India in so many years, and at the same time some of the issues dealt with are equally pertinent even today. Those who are into this line for them its an easy read.
Some striking things on how the world has moved ahead. Firstly in the macroeconomic scence, the book reflects the situation in the licence-inspector-control Raj of the Indian Bureaucracy. Everything was under the control of government, from deciding on issue of licence to production quotas. We find mention of the Balance of Payment (BoP) crisis that had started to loom large after the Gulf War under Bush Sr., and we find no references of the new industrial policy of India (1991). For the Indian corporate the world still revolved round FERA, MRTPC and CCI. Today FERA has been substituted by FEMA, in place of MRTPC we have the Competition Commission, and the office of CCI (Controller of Capital Issues) has been abolished. We find that SEBI had just been formed, and as the book says, it is expected to function like a watchdog on the lines of SEC in USA. One could not think about things like Dunkel Draft, WTO etc. Globalisation still seemed a distant dream.
Thirdly on the theory side, we do not find anything relating to Accounting Standards, as the accounting standards had not become popular and not framed on the extensive scale as we find it today. The importance of strengthening of the Accounting Standards in the present times can be gauged from a small quote from the book: Indian Rayon has an insulator division, a flax division and a synthetic division which are apparently not doing that well… but from the balance sheet data, you cannot make out how much money the company may have lost in the problem divisions, All one can find out is that Indian Rayon made profit of Rs 9.81 crore in 1988-89.. There are different examples in the books on how the corporates could manipulated their financial data during those times, whether it related to financial reporting periods, inventory valuation, segment reporting, and those relating to cash flow. Today there are strict standards relating to these issues. Whether it be the Accountants or it be the Auditors – they have to bear greater responsibilities towards the financial statements. Now a days, there have also been major steps taken towards the issues relating to Corporate Governance, particularly after SEBI has recently made compliance towards Clause 49 of listing aggreement strict with companies having to induct independent directors in the Board of Directors. The world has also in the meanwhile faced the shocks of Enron and WorldCom corporate frauds that also saw one of the biggest accounting firms (Arthur Anderson) shutting shop and the promulgation of Sarbanes Oxley Act in USA.
Some of the issues that are taken up in this book still continues to be pertinent. This is despite of the fact that the world has moved so much ahead from those times. One of this is corruption – as the author writes at one place relating to project decisions – You should be willing to spend money like water. Since corruption is rampant, you should kill your conscience before it pricks you. Eqully pertinent is the observation relating to the Indian legal system, and such a thing still continues to exist – as the author writes – Do not think of filing cases… instead, persuade, cajole, and coax. Avoid litigation at all costs. Given the Indian legal process, you will only make your lawyer rich…. Quite true! These are the two issues, in my opinion, which if corrected in any society, then Rule of Law would indeed have been established. Unfortunately in India, while many of the colonial hangovers have been overthrown, we are still left with these ills of colonial times – one is the corruption, particularly by a public servant. The public servant of today is the camp follower of the Merchant of the East India Company. And even today such official continues to desires the power and the lifestyle of the nabobs. Its not to say that all are corrupt, but the corruption rackets in the public offices are simply pestilence on the society. Today at least there are the TV channels who have come forward to expose such corruption through sting operations, whether it be by the public official or by the public representatives. Also, the British legal system that came to India was not for providing justice, but to legalise the actions of the East India Company, and in that it ended up as law for the rulers. Unfortunately the same thing still continues. One can easily hear the saying in India – Show me the man and I shall tell you the rule.
There are also the infrastructure bottlenecks that continues to exist. Despite of the economy becoming strong, our infrastructure has continued to remain poor. Yasaswy makes the point clearly. As he writes – The abysmal economic and physical infrastructure in India also affects the working capital needs adversely by prolonging the operating cycle… Given our poor and non productive industrial infrastructure, there is no way that even Japanese companies can think of JIT inventory management in India.
Similarly his observation regarding the Income Tax act is equally valid. He writes – … the income tax act has been amended thousands of times and rendered one of the most incomprehensible legislations man has to deal with… every finance minister seems to get a vicarious pleasure in compounding this confusion. And that trend continues still today. The confusion with Fringe Benefit Tax of our times are there to be seen. And such a confusing system continues to breed corruption and at the same time is costly for one who abides by law. Unfortunately, the tax system in India is still to be modernised. Better use of data and also strengthening of the PAN system for purchases and expenses is required. Also, for whatever talks of modernisation and reforms that happens in the policy level, the executive level still remains the typical bureaucratic machinery, where one still does not gets the refund, and has to pay bribes to get them.
At the altar of our vote catching socialist ideology, we are sacrificing the interests of the poor consumer… If we have to get out of this economic mess and emerge as a world class economy, our markets should be opened… That is possible only when we encourage competition in every field, and destroy the state monopolies. We seem to need a Mrs. Thatcher (to privatise our sick public sector), a Mr. Reagan (to deregulate our economy) and a Mr. Gorbachev (to bury our antiquated socialism)
Yasaswy also seems to burst his pent up anger and frustration against the system (quote above). In this regards, the most controversial chapter is perhaps the one dealing with Privatisation of Public Enterprises. Before we read this chapter at such a later date, we must know that the neoliberal market policies of Reagan and Thatcher were the fad of the eighties and Yasaswy’s observations accurately describe the mood of those times in the business community. At one place he writes This nation of 850 million people can no longer continue to support at a great social cost, the plum jobs of 2.2 million public sector employees…, clearly indicating the need for privatisation as well as exit policies. At another place in this chapter he makes a full plan for privatisation of SAIL.
The world has indeed come a long way from those times, and the issue of privatisation vis-a-vis public ownership continues to be as hotly debated, as it has become more complex in our times. It is true that privatisation in UK succeeded for as big as sectors as mining and airlines. However the similar model is quite difficult to replicate in India. This in my view, is because of the variety and diversity of India, its huge population and the nature of democratic process through which our political economy functions, and also including the intentions of the politicians. Today we find that all the public sector banks are now profit making. Even the four public sector banks which in a report had been spoken as fit cases for closure have also become profitable. It came out later that the committee that recommended closure of these banks had industrialists who had been defaulters in repayment of loans and owed these banks crores of rupees in principal, leave alone the interest! Today companies like SAIL that had once gone deep into red are back and profit making organisation – so much so that it has now even absorbed its once nationalised subsidiary, IISCo at Burnpur that had gone sick into its fold. Even IISCo after so many years of privatisation and sale tantrums by the policy makers has started making profits.
In the last decade, we have seen the privatisation debate turned on its head. The Rao-Manmohan liberalisation of 1991 had envisaged that sick PSUs should be first tried to be revived and then if that does not happen it should be sold or closed. When the BJP government came on the Swadeshi slogan, it turned this logic upside down, saying that since no one was interested in buying sick PSUs, the government should sell the profit making ones. Arun Shourie as BJP’s disinvestment minister would speak of big ticket disinvestment. The fact that BJP lived in an ivory tower with its India Shining campaign, was amply proved when the electorate routed it in the general elections. And the media with all its energy, which a week ago before the elections would be speaking of India Shining and the market economy, started to talk about the poor and the failings of market without the human face! This issue has become so complex that even the business community has become more cautious when demanding deregulation and unbridled liberal policies. Today despite of so many cable channels and internet, when there are talks of foreign investment in print media, the media suddenly raises the hue and cry that bringing in foreign investment in print media would compromise national security!!! Even the private sector is not left behind – whenever there are talks of FDI in retail, the big traders start opposing it.
Infact, government should not have entered in so many sectors or nationalised factories during the 70s. These are though political decisions, and each leader has his mandate. Economics cannot exist independetly of Politics. But the issues are much larger and critical. The problem stems from the functioning of the organisation – and it spans both public sector and private sector or any other sector. For every sick PSU, there are many more sick private sector enterprises. If the organisation is not managed properly and run in financially prudent conditions and market oriented manner, then there would be problem. At the macro level, the issue is absence of proper regulation.
But when it comes to public sector, the issue becomes more critical because the lost money is that which came from taxes and borrowings, the brunt of which the people as a collectivity has to bear, while, if its a private sector company, the loss is of the owners and the equity holders. However the issue again is not so simple. Even in the so called private enterprises the loan component of public sector banks are even larger than the private equity – and unfortunately such issue go unnoticed. A private sector company going sick is equally bad for the national economy as that of the public sector going sick. The private sector also gets many benefits that can be termed public – these includes tax breaks, subsidised land, freedom from compliance to certain laws and regulations etc.
The privatisation debate during BJP times had reached such an illogical point that business magazines would give cover page report that if the government would sell one of the big PSUs, then all its budget and fiscal deficits would be wiped off. One magazine even wrote that selling off BSNL would even rake in 40,000 crores of rupees, and that was sufficient to plug all the budgetary holes. And all these while the excise duties and income tax in arrears from the private sector which the government had not collected or under litigation amounted to over 80,000 crores!!! Similar was the situation of uncollected loans to the Indian private sector corporates by the public sector banks. When some of the banks due to their NPAs (non performaing assets) seemed to become unprofitable, there were demands from the free market economists for privatisation of these banks. These NPAs had arisen primarily because of inefficient use of capital by the private sector, and at the same time political collusion when these loans were sanctioned without proper due diligence, but on political considerations. During those times, I remember one of the reputed economists on a TV channel, when asked to give one example of the success of deregulation and privatisation, could come up with the example of McDonald opening shop in India, suggesting it to be the epitome of efficiency and competition!!!
What had happened bad about the public sector was that they were not being run on business lines. Such things still happen with the oil PSUs, where the burden of subsidy is not reimbursed by the government, but the PSUs have to take the brunt of the loss that shows in their Balance Sheet. Similar is the case with the electricity boards in the states. These boards have to comply with the policy of free power or subsidised power announced by the state government. While the state government distributes such largesse, it does not pay that amount subsidised to these electricity boards for years together. When such things became problematic, the state governments had to take loan from international financial institutions, who forced the state governments to unbundled their electricity boards – which in some ways is a good thing. However the issue of privatisation had such an impact at one time, that it seemed that the private sector is just there to provide a better alternative to the SEBs. While there were so much talks of privatisation, many private sector projects did not come up and many years were lost, when the demand went on increasing and there were no capacity additions. However after the Enron fiasco, policy makers have sobered down in the electricity sector. In such areas like electricity where the gestation period is long, we again find that the public sector investment is on the rise.
It would be foolhardy to laud privatisation for its own sake. However, competition is a must. Whether the organisation is public sector or private sector, they should be open to competition. We have in front of us the examples of big public sectors like SBI, BSNL, SAIL, LIC etc living up to competition from not just Indian private sector but also from the foreign companies. In this regard, it would be appropriate to say that proper regulation of the industry should be done in the form of regulating authority, a model which from its initial hiccups now seems to be maturing in India. The bureaucrats should not have any say in the day to day functioning of the PSUs. Apart from that with the changing times, we see that the PSUs have become customer oriented and profit oriented. Such things were woefully lacking two decades back when a PSU was as equal as the command of the sovereign. Such change in attitude of the employees is also a welcome change.
Equally there are models of public-private partnership, where the state government has put its equity with the private player and the management is in private hands – though this concept is fairly old is worth exploring more widely. However, even in such areas, there are issues relating to giving full equity to private players. Take for example Maharashtra Scooters, about which Yasaswy speaks quite well about the foresight of the state government in making Bajaj the partners. However, after so many years, when the Maharashtra government is giving over the full equity to the Bajaj, the latter have come quite openly that they want to acquire that company, so that they can stop the scooter related production and turn it into a financial company, while giving VRS to the workers ! That is what the free market is all about – for the owner it is not the product that is important – neither the factor of production (ie. workers, among others) but it is the profits that assumes primacy among all other consideration. It is therefore worth noting that when the government of India sold the bread factory (Modern Foods) or hotels, for the buyers, it was not the business that was the main consideration of purchase, but it was the land being owned by these companies that was important. It is another matter that government should not have been in such businesses at the very inception – but if the government would have simply shut these companies and sold the land, it could have perhaps raked in more.
In a way the disinvestment policy per se seem suspect where the allegations of corruption are forthcoming, as in the sale of the BALCO. More than that, when profitable companies are disinvested, people see it as a breach of trust by the political rulers. And any such deal is looked at with greater suspicion as most of the time, such deals are made at a lower valuation or certain fishy event happens that makes the deal seem suspect – as when the hotel chain sold by the government was resold by the buyer at a much higher price after a year of purchase of the company. Moreover corruption allegations are as widespread as is the verdant ground of disinvestment.
Due to large complexities and issues of workers and human aspects relating to a business enterprise, whether it be publicly owned or privately, they need to be addressed with greater maturity. Such things would go a long way in redefining the public private debate than the somewhat inane potato chip vs. computer chip debate as this issue once used to be debated. Perhaps, more important than focussing on disinvestment, is the focus on improving the work culture, creation of more employment opportunity (not by opening more PSUs), providing quality and politics free education, creating laws with more clarity and making people understand the sanctity of contract – which seems to be absent among the Indian corporates, if they are on the receiving end – for example FM radio bidding fiasco some years back, when the bidders pressed for renegotiation of the fees as soon as they had received the operating licence; or the persistent nagging by the private telecom operators for renegotiation as soon as they see that under the previous contract, they would have to pay higher fees or levy to the government, while the new one does not charge as much.
And more than all that the democratic process itself has to be strengthened, where the politician do not see the business people as the cows to be milched for their election and personal benefits. Till there are compromising public representatives, there would always be willing businessmen, and the casualty would be the public policy and the rule of law. After all, the debate on the liberalisation and privatisation of the economy was not just an economic one, but a political one – the choice of economic policy is invariably governed by the choices of political decision making.
Coming back to the book, Yasaswy wrote – By privatising public enterprises, as fast as we can, we can unlock, at least Rs 400,000 crore. We can use that money to build better roads, better airports, better telecom, better schools… – an argument with which not many will agree. Given a decade and half of watching the debate and direction of liberalisation and privatisation, such a blanket prescription from Yasaswy also sounds intolerant as well as illogical, and grossly naive.
There are many interesting things in the book, which are useful guide to understanding the importance of proper financial management, as well as the need to keep up with the times. The importance of prudent financial management, profit orientation and strategic management cannot be much emphasised without some of the illustrations in the book. These includes API (Lambretta Scooters), which once a competitor of Bajaj, lost out in the race. Similarly, the Raleigh cycle (Sen Raleigh) which was quite popular during the 50s and 60s, is now no more. The book contains many chapters relating to technical issues of finance like ratio analysis, investment management, dividend decisions, working capital management, budgeting, CVP anlysis, standard costing, cost control, etc. These issues and concepts remain as pertinent today as during any other times.