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Journalism of Courage
Tomorrow is Budget Day. I fear that the reactions will be entirely predictable. To quote Charles Dickens, a parliament correspondent before he made his reputation as a novelist: 8216;8216;The Ins rubbed their hands; the Outs shook their heads; the government party said there was never such a good speech; the opposition declared there was never such a bad one.8217;8217;
As for the much-desired 8220;feel good factor8221;, I predict that this will depend more on the result of the much awaited World Cup meeting between India and Pakistan on the day after the Budget is presented. When was the last time that there was dancing on the streets and fireworks in the sky to celebrate a Budget?
This resulted in an anomaly. The cost of finance for the Indian entrepreneur remained about 18 per cent. In sharp contrast, his competition, even in China, could raise loans at a third of that figure. Think back a dozen years, and you may recall that in the first flush of liberalisation the Indian market was flooded with cheap goods manufactured in China and elsewhere in East or Southeast Asia. That was not the result of any calculated move by the Chinese to take over the commanding heights of the Indian economy, it was a purely rational business decision to buy cheap, well-made goods.
Even granted that productivity in India is notoriously poor 8212; and the trade unions must take their fair share of blame for this 8212; it does not tell the full story of the precipitous decline of Indian manufacturing. The true villain of the piece was the atrocious rate of interest imposed on Indian borrowers by Indian banks.
Actually, even the simple notion that Indian manufacturers had to pay three times the interest as their foreign competition did not tell the whole story. Since interest is calculated on compound rates 8212; standard business practice everywhere 8212; a loan taken from an Indian bank shall double in four years. The same loan would have taken about twelve years to double had the lender been a foreign bank. Industry, unlike trade, requires large gestation periods. So, when the repayment starts, the loan has doubled. If only that!
Here, I should point out that interest rates are now even lower abroad than they were a decade ago. To give a fillip to their struggling economies, the American and Japanese central banks have sliced away at the lending rates until they stand at barely 1 per cent! Is it anyone8217;s case that the recession is truly worse in the United States than it is in India? Yet our banks, especially the development institutions, continue in the old set pattern.
Idiotically, it pays to be inefficient. If a borrower is running at a loss, the bank falls over itself to offer write-offs, lower rates of interest, simple instead of compound interest, and so on. But there are no concessions for businesses that keep their head above the water, and there may even be a penalty on prepayments. At this rate, even companies that continue to make a profit today shall fall sick tomorrow.
I am not sure who benefits through this complicated nuttiness. IDBI, IFCI, ICICI and the rest might have thought they were striking good deals when they disbursed money at high rates of interest. The truth is that they 8212; especially IDBI and IFCI 8212; are stuck with non-performing assets amounting to crores of rupees. Again, I fear that many of these can be traced back to the 1992-1996 period. Today, the situation is so bad that IDBI and IFCI themselves are drowning in red ink.
In the past decade several Indian companies have offered dramatic proof that they cannot compete on equal terms with foreign firms. But there are also some who proved that they can do so 8212; if India8217;s banks permit them to stay healthy. At what point, then, will it make more sense to simply shut shop in India and move all manufacturing operations to another place where it makes more economic sense? And what happens to the Indian workers who shall then lose their jobs?
I take no names, but there are promoters who acquired thousands of crores by way of loans and who have now taken up NRI status with assets abroad. They are the fortunate ones. The idiots are the ones who stayed back in India and worked hard to make a profit!
Is it not time that we put an end to this mollycoddling of the dishonest and the inefficient? Maybe there is some reason why Indian entrepreneurs cannot borrow at rates competitive with those available abroad. But can8217;t they be given loans at a rate that is 8216;8216;only8217;8217; 50 per cent higher? Or will the banks be satisfied with nothing less than currying the golden goose?
Once the immediate rumpus over the Budget 8212; and the assembly polls 8212; is over, ministers will get a little breathing space. Perhaps they can spare a little oxygen for Indian entrepreneurs as well.
