Another Financial Scandal, Growing NPAs and Indian Political-Economy

Another Financial Scandal, Growing NPAs and Indian Political-Economy

By: Vijay Sardana

Are you surprised with PNB Bank - Nirva Modi scandal in Indian banking system? Maybe yes, but I am not.

Are you surprised mounting NPAs in Indian Banking system? Maybe yes, but I am not.

Are you surprised with declining investments in the corporate sector? Maybe yes, but I am not.

Are you surprised with declining exports from India? Maybe yes, but I am not.

Barring few business houses may be a handful of them, most cannot be trusted. 

The author, due to my proximity to various decision-making domains, was witness to many of these developments very closely and also in many cases the first-hand witness.

Let us discuss the whole situation based on evidence.

1.  List all major companies which are loaded with NPAs, you will find they all were close to some political establishments or political leader a few years ago – during their peak time.

2.  From Harshad Mehta to Satyam to NSEL, etc.there were series of scandals and now Nirav Modi / Geetanjali.

The reasons are very simple.

Most of the business leaders today suffering due to NPAs, had wrong priority. They assumed that political proximity will lead to success in the marketplace. This was their biggest flaw in thinking. All these NPA leaders invested their most precious time on political networking in place of investing time in understanding the customer and markets.

These NPA leaders outsourced the thinking activity to managers and that too to those managers those who were loyal to them personally, and merit and competency were ignored. This was the time when knowledge and competency were ignored by Indian corporate world and its leaders.

How was this started?

This all started at the beginning of the century when all MNC consulting companies started projecting the 21^st century belongs to Indian and we will be the biggest consumer market in the world. They were keen to spread their business in India and all new theories and jargons were projected to Indian corporate leaders. They were fully aware that majority of business leaders don’t read beyond newspaper headlines. MNC Consultants got hefty business and the outcome is in front of us.

At the same time, the high flying project reports and industry studies were projecting India’s growth story which was far away from ground reality. The political class was also keen to take the credit for India’s growth story. Corporate lobbies with the support of Industry chambres started demanding liberalization of all rules and regulations so that Indian growth story should become a shining star on the world stage. “Shining India” campaign was the outcome of the same mindset.

So, the initial success of IT sector based on millennium changeover labor work, we all assumed Indian became the hub of knowledge Industry, without realizing that filing of a patent is still the lowest in India and quality of education and quality of products are far away from the global standards.

The whole environment was projecting as if India is the only country which will grow and we have the best of the brains in the world. Rest of the world is full of idiots, they have no game plan and they all will look towards Indian for everything.

There was pressure from world bank and IMF to allow Indian market access and remover all barriers and systems so that their companies can use and exploit Indian market as per their wish. Regulatory over-reach and systems were dismantled by giving a message that market forces and corporate goodwill will ensure all remains within control.

Any word of caution or concern was considered as negative thinking or negative attitude. Any clarification asked by authorities was considered as corrupt practices.

The Bombay Club:

When Indian industry chambers were voicing the demand of their main event sponsorers i.e. cash cows, in another word, the MNCs. The group of homegrown widely traveled companies issued a note of caution. Which was rejected by media and chambers? The sponsor's voice was loud and clear.

In fact, one of the leading industry chambers in Delhi organized a full day seminar with a title, “How to solve problems faced by Foreign companies in India?” This was the time when all industry Chambers were trying become closer to embassies. When I wrote that this is illogical for any chamber to promote competition against domestic members. How any industry chamber can promote and support competition against their own members. I was told that Secretary-General was quite furious with my article. This was the mindset in Indian Industry and policymakers at that time.

WTO influence:

India was forced to remove all quantitative restrictions and only custom duty was allowed to be used as a protection mechanism. As usual, the Indian industry was absolutely clueless about the impact of WTO on Indian business environment, imports and exports. Lack of reading habits of corporate managers and ill-informed media articles started projecting as if WTO is only a policy tool which Government of India will handle and Indian Industry is safe and nothing is required.

The outcome:

Indian corporate leaders assumed that Indian market will remain with them. Indian consumers will remain loyal to them their outdated and bad quality products.

Indian stock market started showing some early signs of growth due to foreign fund flow. This gave wrong impression that Indian corporate world is going great.

Exposure to the internet and foreign travel started influencing consumption behavior of up-class Indian consumers and the same aspirations started to percolate downwards.

Every state government started organizing “Vibrant Gujarat” like events to show the investments and projections. Corporates leaders went overboard to create headlines by making illogical statements and to get political attention. In the whole process, common sense was kept outside the discussion rooms. The hype was the new theme all over.

Large consulting firms involved in mega shows are also now behaving like politicians and not able to justify why their projection are going wrong.

Implications:

· Wrong parameters were adopted to define success

· Wrong policies were adopted to define liberalizations

· Wrong systems were adopted to penetrated corruption - means approval, inspection and renewal without any transparent system loaded with discretionary powers with inspectors (with the support of political class in posting and transfers) frustrated the honest investor and spurious manufacturers sued this system to frustrate the competition.

· The wrong classification was adopted to define scale of business

· Policymakers, business leaders, and media all were projecting “Shining India” without realizing that world has changed and priorities have changed and after WTO rules of games were also changed.

· All WTO members are only looking at India as a market, nothing beyond. No one is looking at Indian a sourcing base or inspiration.

In 21^st economy, knowledge is power but we refused to accept that we are far behind in this game as well.

Indian Industry actually became low-cost commodity and labor supplier only.

When things were turning against us, all these bubbles started collapsing in the form of NPAs and banking frauds.

In my view, more pain is yet to come because what is visible know is still hiding very gray areas of Indian economy. Rural distress is more painful than what is projected.

The inherited political funding system will not allow this country to grow on global level.

As a country, we have already lost 15 valuable years. Still, we are not learning because our political system is only keen for next election, not the welfare of society.

Political parties still not keen to remove the bad laws and ensure opportunity for fair trade and honest investors. As long as political funding is linked to unfair trade practices, India will not be able to respect merit and honesty. Inefficient industries and promoters with the help of policy makers projected their in-house problem as problem of industry. In place of surgery, first was recommended by industry association. This soft approach was also acceptable to political leadership. Such incidences like mounting NPAs and banking frauds will continue to happen.

Indian will remain attractive consumption economy unless laws responsible for corruption and inefficiencies are changed investment is not visible on the horizon. Companies will prefer to outsource. 

It is up to political leadership to decide what is important priority for them -  Elections or Economy.

If economy is important for political class - review and reform all laws and regulations, mandate of all education and research centers with honesty. 
All policies related to economic activities which are more than 20 years old must be reviewed keeping in mind global best practices. 
Good economics is good politics, provided politics is based on honesty. 
Till this happens, let us wait for more NPAs and more scandals from the companies which were close to political parties. 
The next round of NPAs may come from Education loans and Mudra Yojna. I wish, I am wrong.

Sorry to be critical. You may call me pessimist or spreading negativity. You may choose to ignore that facts, but facts remain. I will continue to be fact oriented because I am not in a pleasing business like political person or a investment banker.
The biggest question is : When Indian corporate will start respecting merit and investment on knowledge for its own survival in globalized economy?
When Business schools in India will have mandatory subject on "Ethics in Business"?