No one to bribe, therefore no investment

Author : Ajit Dayal , Article Courtesy :

For the past few months there has been some data that is worrying a lot of people. The respected CMIE notes that the decline in capital expenditures by India, Inc is disturbing. After all, future GDP growth depends on investments made today.

Mr. Deepak Parekh, the respected business leader who has been “known to call a spade a spade” (source: Times of India) says that “I have been told by several large industrial houses that they are now looking at investing abroad as it’s much easier. Their aim or strategy is to now have 50% of their turnover from abroad. Take the top five to seven group – the Tatas, Birlas, Ambanis, Ruias…Some have already achieved their target…These are industrialists who have established their reputation, capacity and stature in India. ”

Mr. Parekh went on to rightly question the rationale of investing abroad when there is demand in India. But I have a few issues with this statement and some of the examples of the business houses quoted.

Is the “reputation” they have established good or bad?

Is the stature being referred to classified as “good” by some ranking of the richest industrial families or are we referring to their stature in terms of people who have helped build a more fair and transparent India?

The end may be more important than the means to some – but the means may be equally important to many others.

Business is free to go where it wishes to – and we should not stop it from investing there where it wishes to establish its reputation, capacity, and stature. Countries who wish to host them are welcome to do so.

Goldman Sachs, Merrill Lynch, Morgan Stanley, Citibank, J P Morgan – and many other Wall Street firms and banks – have established their reputation, capacity, and stature in the USA. Their business plan is simple: they mug an investor, whack his wallet then end up paying fines in a settlement (if they are caught) with their host regulators. On July 7th, J. P. Morgan agree to pay a fine of USD 228 million in settlement of accusations that it was rigging the US municipality bond market. The fine, the article noted, “will have no material impact on the firm’s earnings”. Nor will this have an impact on most parents’ desire to have their children work with J. P. Morgan.

Every time I meet a proud parent of an NRI living in the USA they happily proclaim how proud they are that their son or daughter is working with one of these infamous firms. Maybe they, too, one day will see the movie “The Inside Job” and realise that most of these businesses are basically built on questionable practices. Maybe, after watching “The Inside Job“, these proud parents will ask their children to quit their jobs and petition the regulators to protect their own citizens from the fee-generation business plans of these financial geniuses. Or, like many of us who get blinded by some wealth ranking statistic, they will hold the industrial equivalents of the financial firms in high esteem and continue to highlight the “reputation” and “stature” of these firms.

But, while statements of “stature” and “reputation” are subjective the data from CMIE is a dose of hard, cold facts.

Capex and corruption

In an article carried in the Financial Express on May 3, 2011 Mahesh Vyas – the MD and CEO of CMIE and a person I respect a lot – pointed out a “deceleration in the pace of announcements of new investments”. As Table 1 shows, India Inc and all its high stature business leaders seemed to be frightened about announcing new investments.

Table 1: A sharp decline in announcements of new investments.

Quarter ended 31-Mar-11 31-Dec-10 30-Sep-10
Capital investments announced (in Rs trillion) 2.63 2.92 3.57

Source: CMIE, Financial Express
The second disturbing sign that Mr Vyas highlights is the decline in the completion of projects (see Table 2). Also, if the completion of projects stays at Rs 2.63 trillion range, this would be the first time since 2004 when there is an actual decline in the year-on-year investment by India Inc.

Table 2: India Inc completes fewer projects than it announces

Year-ending 31-Mar-11 31-Mar-10
Projects announced (Rs trillion) 8 NA
Project completion expected by CMIE (Rs trillion) 6.5 NA
Actual completion (Rs trillion) 2.63 3.84

Source: CMIE, Financial Express
The third point brought out by CMIE is “the sudden rise in projects abandoned in the March 2011 quarter”. As Table 3 indicates, at Rs 516 billion, the projects abandoned were over 2x the normal rate of projects cancelled. Mr. Vyas does note that most of these cancellations are in the real estate and SEZ areas.

Table 3: India Inc gives up on projects at an alarming rate.

Year-ending 31-Mar-11 Average for most quarters
Projects abandoned (Rs billion) 516 250

Source: CMIE, Financial Express
So, is it time to bail out of the long-term India story? If there is no capex, there will be no job creation, and if there is no job creation, the 120 million young people looking for jobs by the year 2025 will not be a happy lot. Chances are they will happily sign up for Baba Ramdev’s army or be willing – and natural – volunteers in any fast unto death programme!

Was past capex driven by corruption?

CMIE does not feel that things are that bad. They note that revenues are growing by 20% in general and that net profit margins are a healthy 8%. Good enough incentive to get corporate India to move ahead with its investment programme.

Obviously, the industrial houses – based on the comments by Mr. Parekh – have a different take. They have no incentive to invest in India. There is uncertainty. There is no clarity. They are people of stature and reputation and can take their money anywhere.

Maybe Corporate India ko gussa aata hey because they no longer know who to bribe.

And they are not sure if the person they bribe will be in power to follow through on the deal.

The timing of the slowdown is interesting. Over the past year we have had the Adarsh housing scam. The CWG sports event. The Nadia tapes. The 2-G scam. Just to name a few.

There are now investigations and queries into the hydrocarbon ministry. There was the incident of 16 bubble-gums hanging around the Finance Minister’s office – supposedly places to plant bugs to listen into conversations. We have 2 Ministers sitting in jail. Many more bureaucrats, industrialists, and CEOs are also being denied bail.

In addition to Jairam Ramesh trying hard to protect the national resources and the tribal assets, the Supreme Court is ordering land stolen by governments and passed on to real estate developers to be returned to the villagers. And the Supreme Court wants a definitive trail on the black money issue.

In such an environment, which of our industrialists who have “established their reputation, capacity, and stature in India” would have the guts to announce or implement capacity? Their skill set of bribing their way through the system is in danger of being extinct. Most of our industrialists have surely added to capacity – but they have also helped to make our society and our system more corrupt. Let them take those skill sets to other countries, if they don’t have the determination to work in a cleaner environment.

As Mr. Vyas notes in his concluding paragraph: “It is better that India Inc battles issues related to proper land acquisition, environmental clearances and graft rather than worry about a liquidity crunch.”

Indeed, stop whining Mr Corporate India. Stop complaining about the RBI raising interest rates because that is not the real cause of the slowdown. Just admit that while you may be individually happy to light a candle for Anna Hazare’s cause, if corruption was to decline, you would stand exposed for what you have become. And it will not be a pretty sight.

Author : Ajit Dayal

Ajit Dayal, is a well known fund manager with the distinction of managing equity assets on a global basis including the position of lead manager of the then USD 2 billion Vanguard International Value Fund.

Ajit has championed the need for India opening its capital markets to international investors since 1984 – eight years before the Foreign Institutional Investor (FII) rules were announced.

Ajit Dayal is the founder of Quantum Asset Management Company, Equitymaster and PersonalFN

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  • Osho Shivo

    Amazing take Ajit. I truly appreciate your courageous stand, as you are in a ecosystem, which considers all mal practises as hip things. We need entrepreneaurs who grow by creating and leveraging value and not by manipulations and exploitations.