(My Reply to Kunjan)
Hi Kunjan,
Let me shall try to answer few questions raised.
Let me make all of you clear that most of the companies invest in
charitable acts to get the tax exemtions. They can show any amount to
the govt as an investment and also for the goodwill of the company. If
investing in charitable act is in company's marketing preference then i
have no question. Once i happen to read about an company producing
"Mecca Cola" a product like coca cola and anounced the ten percent of
its annual profit to be used in providing homes to the displaced
palestines. The company had record sales of about 40% of the sales of
coco-cola in France and similar good results in many arab countries.
This is a smarter marketing more than a valuatic act.
TATA and Birla are having many business houses and they need fame in the
market for their products to sale. They expend very less in
advertisements than their competitors and still stand in market. The
way they do business is not with charity but "Corporate Social
Responsibility" and this is not an help but an marketing act.
How many of you are aware but its a truth than TATAs pay less then their
competitors now. TCS pays mere 12k per month (on hand) for the fresh
engineers which is far below other players. Most of the people join TCS
just to be linked to TATAs.
Regarding subsidy and the energy efficieny I have an interesting
historical facts. Let us share.
Once in 1970's there was energy crises throughout the world due to the
rapid economic development and fuel prices were rising. Saudia Arabia
is also blamed to make that price rise by decreasing the supply of fuel
to the market. Whatever might have caused that, the effects were far
more interesting than mere price hike.
Here are the actions taken by the govts and their effect:
1. UK subsidised the fuel cost.
The effect was that more and more fund was needed for subsidisation.
This made their companies in benefit but socail sector costs were to be
cut. The companies never cared about the energy cost as they were
getting at cheaper cost so were enjoying their rise.
2. Germany subsidised partly far less than UK and invested heavily in
alternative sources of energy like wind mills and small hydro power.
The effect almost the same as UK.
3. US declared an aggressive R&D for increasing fuel efficiency and
decreasing fuel dependency and invested more on nuclear energy leaving
market play its role.
4. Japan implemented import tax on petroleum products further increasing
the fuel costs. All economists were saying that in next 10 yrs Japanese
will crumble, people were againsting the move but govt didnt move back.
The companies started doing tehir own research to decrease the fuel
dependency.
The result is the Japanese and American economic imperialism of 80s and
90s. The energy efficieny in India is only 10% of that of Japan now.
What might have caused this?? The subsidy. And this shows where we are
haeding towards with subsidy.
Cheers.
Wednesday, February 15, 2006
Subsidy not a boon for economy.
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6 Comments:
Hi Bhups,
While I agree with the fact that subsidy should not indefinitely continue, subsidy should be offered for the first few years/months until people get the confidence to compete with rich or able competitors. I would like to point to the analogy of bringing up of a child. When a child is born, it does not walk. It slowly crawls, takes help of parents, then takes help of walkers or walls and slowly develops the ability to walk. You cannot expect a child to just walk by itself. During nascent stages, people need support. It is very similar to intensive care supports or support drugs given to patients. It is absurd to say that poor will take care of themselves and will come up by themselves, and is akin to saying no medicine should be taken for any illness and the illness will get cured by itself. But, do you continue to eat medicines even after getting cured? NO! That is where our governments make a big mistake. I argue that subsidies should be removed slowly once the economy is maturing and I think that is what all growing economies do. It happens a little slow in India, that is the only difference.
Its ok Venkat, but remember onething companies small or big is run by grown ups. They are not and mustnot be run by children or people who are not capable of running them. And its the weakness to say that growing companies need protection.
Who gave protection to Google??
Who gave protection to Bharti Telecom (Airtel)?
These companies took the market eladership from the bigger companies the only difference being the excellent leadership and vision which the earlier market leaders were lacking.
Talking about poor, i dont say just ignore them. They have to be helped but in a suatainable way. Bringing them into economy is the main challenge and the upper we hold them in economic cycle the better. Helping them by providing them support is at the lowest level of economic cycle from where there is no return, its the wastage of resources. They have to be put into work and for that savings and investment must be encouraged. No subsidies have ever helped any sector in any country for long. Its totally unsustainable and short term support.
Regarding your example - GOOGLE
Google had the first move advantage. They came out with a completely innovative product, you could call it a KILLER APPLICATION and they operate in a virtual economy, whose worth you cannot calculate but only manipulate.
Regarding Bharti - They do have a private sector first mover advantage. They cashed in on the service which was missing with the government companies.
We don't have to offer any subsidy to bring them out.
Subsidies offered to PSU banks, companies to bring them out of red is a BIG NO NO.
I was talking of subsidies for poor, for food, oil etc.
And, please explain again the following sentences of yours again
"Bringing them into economy is the main challenge and the upper we hold them in economic cycle the better. Helping them by providing them support is at the lowest level of economic cycle from where there is no return, its the wastage of resources. They have to be put into work and for that savings and investment must be encouraged"
They don't have even a rupee to pay for food, do you ask them to save? For that matter, do you think many middle class families save? For savings, the disposable income ("disposable" NOT net income) has to increase and for that, the economy should be vibrant and should grow healthy.
We need to open the market to more industries, schools, so that people get educated and work in the industries. Till they are in a comfortable position, they need to get some mode of subsidy or else, who will want to study when they dont have food?
Apart from discussing, let us go down to the grassroots. We cannot listen to speeches of Americans or Eurpoeans as they have seen only rich or pro-rich policies. They may not know what is poverty or for that matter, how slums would be. We are in a country where we know what is abject poverty. You cannot just remove subsidies because it is a burden on exchequer. For your information, 400 million people in India are in abject poverty levels. Imagine what will happen if you remove subsidies to them? I am sure, at least a few millions will die of hunger or sheer humility. Let us talk after looking at the grassroots. Let us not talk only from the confines of our air-conditioned cubicles.
First I dont believe that total removal of subsidy in food (in particular) will increase its cost. It may increase to a certain level but it wont make it very costly as you say. India, along with its neighbors Bangladesh and Nepal, have surplus food production. That will bring the cost down. One way it will give more power to the consumers and also the farmers to choose the food products. The farmers will get more benefit by trying to produce more of more valuable products and so on. The food subsidy is killing the competition and thus killing the efficiency of the farmers in one way and next way it is making some food items exceptionally cheaper than other (subsidised are cheaper) and rest very costly. This is restricting the consumers from consuming those higher valued products degrading the public health. Coming to helping people once agian I say that investing more than 1000 crore yearly on food making it slight cheaper is not helping them to enter the economy. How many people get employment in that project of distribution?? A very few. A thousand crore investment will do a lot, it is enough to build a good highway to connect many unconnected rural areas to the cities. A part can be used to build the good cold-store houses that will preserve food that is being wasted in lack of those infrastructures. Also govt can think of building more irrigational facilities to increase the farm production than to think of subsidising.
Google didnot had any first mover advantage, they expanded the business with more efficiency and vision. Before Google came into picture the Altavista was the market leader in search engines. I also object that the valuation of Google cannot be calculated, it had 6 billion $ in revenues in 2005 which itself gives its valuation in some way.
Regarding Airtel agian I object your comment saying that it was the first private sector company benefit. This is absolutely false conception about Bharti. Bharti has been competing with many private sector companies and it is winning the race. The challenging move by Sunil Mittal to outsource the network management and IT services to the world best vendors like Erikson and IBM brought all the success. The move is seen by many market analyst as the most risky step ever taken by any indian business man. The deal was huge (i think the IT deal with IBM along was above 500million$, i forgot the actual amount) and Bharti was expected to die under this deal but Sunil proved himself right. Now he got the backing of Vodafone making him partner in Airtel lessening the possible competition by Vodafone and also increasing the knowledge base of the company. The Airtel story is not alone the first move advantage too.
Entering in a economy means giving service and getting something in return. Doing some useful work in other term creating some value of own work. A man eating food for free is eating for no service or other's service and this is also called the end point of economy. I dont say in all levels and all conditions help should be stopped. But that is the sustainable and best point when we have no subsidies.
A point venkat, we have 400 million poor people who need help. Let us give 100 rupees each or subsidise products that they use equavalent to this amount. We are spending 40,000 million rupees. How long that 100 rupees will help them, a day, two day ... not more than a week. What then? Its totally useless man. Just see how the subsidies are given and how its wasted. I dont say dont help poor but help in sustainable way, this is just temporary effect.
One eg there is rs.100 to 500 per yr given to the old age people as old age allowance in some states. What will that old man do for 500 rs in a yr? he can hardly eat food for a month, provided he is in very rutral place. What about the other months?? In inspite of this had some companies be opened a part of this poor old people would eat food for the entire yr by the earning of his son/daughter. This is just a vote colecting gamble and nothing else. The people friendly declaration by Jayalalita just last month is to make her god nothing more. That will push Tamil Nadu below many states in next 5 yrs (if it is applied) and thats my challenge.
I reiterate again that many policies followed are for exhibiting the populism of our politicians and I definitely agree for more creation of infrastructure etc. Already many things are happening on the right way.
Regarding Airtel (Bharti Televentures) They were the first private company to apply for licences across many states, and they could operate in economies of scale since they rolled out services across the states. Reliance, Hutch, TATA came in only later and it is now we see consolidation in the industry. AirTel definitely had a first mover advantage, as they were the first to roll out mobile services in the main metros as well as the main states. They were the first private landline operator too. Clubbed with a forward vision and strategy, they are able to move ahead.
yes, Google's MC is around $6b, but read my words, I meant virtual worth. I meatn their killer app as being disruptive to other technologies already existing. KILLER APP was what I was insisting on..
Let me explain my point with a few numbers:
Say year 1950 - food subsidy 1000 crores - no of people benefitted - 200 million -
1960 - food subsidy 800 crores - no benefitted 150 million, number of people brought out of poverty 50 million
1970 - food subsidy 600 crores ......
It goes on..
Do you get my point. This is what i visualise (assuming all other currents to be normal) and that is what should have happened in our countries and eventually over a period of time, subsidy would have come down to "ZERO" and poverty number woudl have also come down to "ZERO".
But Here is what ACTUALLY HAPPENED
Subsidy amount increased, population increased, number of poor increased, corruption increased since so much amount was involved and it was centrally mis-managed. I visualise a system, where subsidy is initially offered, slowly reduced and at the same time, the objective for offering that subsidy is also achieved. Very ideal, but why not hope for it?
Venkat, there are no people brought out of poverty by subsidy. It is the employment that brings him. Subsidy just is a support and that also i say minimal support, which has very less or no significance. It certainly gives laugh in poor faces and had you pointed out that then i would agree but i have never seen any people brought out of poverty by subsidy. A rickshaw man or a thela man eat food at the small canteens where they have to pay the amount of teh competitive market. If they prepare food for the family at home and take the subsidised food items from the Food Corporation then they save a small amount of money which is I guess almost equivalent to the money they could have saved in vegetables or pulses from the market had the same amount been invested in irrigation or market access infrastructures. It should also count that with no subsidy he will have higher chances of getting job due to more investment on development.
I understood what you mean to say venkat. But my point is why to run after those impractical ideals when its not showing result anywhere in the world. The more subsidy the more problematic is the sector, this is what the experience of the world shows.
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