Sentimental, Who?

Off the shelf In an emerging economy, the apparent reluctance of investors is often a sign that they are bargaining for more incentives
Off the shelf In an emerging economy, the apparent reluctance of investors is often a sign that they are bargaining for more incentives. Photo: Reuters

The CBI may (unlikely) or may not have a case against Kumar Mangalam Birla but the latest coalgate FIR is certainly not the most jarring episode in this scandal. Even before the agency carried out an investigation to determine if it had sufficient ground for a chargesheet, Central ministers — from veteran Anand Sharma to newbie Sachin Pilot — have jumped to Birla’s defence. It has been embarrassing, yes, but not unexpected.

All through the UPA-2, Prime Minister Manmohan Singh himself has been warning his Cabinet colleagues in the environment and the tribal affairs ministries against showing the rulebook to big investors. This year, Finance Minister P Chidambaram set up the Cabinet Committee on Investment (CCI) to bypass bottlenecks (laws to the rest of us) coming in the way of mega business.

Apparently, the demands of protecting the ecology and tribal rights hurt investor sentiment. Instead, governments at the Centre and in the states have been doling out subsidised resources and tax holidays. After all, investors are the ultimate nation-builders and deserve every bit of incentive. They pump in money, generate jobs and pay wages. They create wealth and eradicate poverty. They also make profit.

But is there anything sentimental about wealth creation, about rising bottom lines? The industrialist who invited the sentimental tag most frequently in recent times actually squandered his profit. Malden Mills CEO Aaron Feuerstein did not bail out with his hefty insurance when his Massachusetts textile factory was gutted but spent millions rebuilding it and paying wages to thousands of idle workers for months until the mill was operational again.

Malden Mills eventually went bankrupt, not so much because of the owner’s ‘sentimentality’ as due to price fluctuations in the international textile market. It changed hands and is still in business as Polartec. Feuerstein never rued his decision. In an interview in 1996, the devout Jew quoted Rabbi Hillel from the first century: “Not all who increase their wealth are wise.” Those words have become more prophetic than ever in the past three decades.

Until the 1980s, both corporate profit and investment remained about 9 percent of the US GDP. Then, the two curves swung in opposite directions. After the 2008 recession, the mismatch became galling. Corporate profit has crossed 12 percent of the GDP since while investment struggles to hit the 4 percent mark. The result is fewer jobs, lower wages and inflated value of shares in the stock market.

At home, Indian corporates reported a decline of 21.4 percent in profit despite a 20.2 percent rise in sales during 2008- 09. Spiralling global prices of raw material such as metals and oil played spoilsport. Even so, the cumulative net profit was eight times of what the companies bagged in 1998-99, though the net sales increased only six times in that 10-year period. Within a decade, net profit margins climbed from 4.7 to 6.3 percent.

If we consider only large companies (sales more than Rs 1,000 crore), profit margin in India peaked to 12.1 percent in 2007-08. In spite of the slowdown, it is still hovering around the 7 percent mark. In terms of percentage of the GDP, corporate profit scaled its high of 10.7 percent in FY2008, settling at almost 9 percent last year. There is no reason why investors should be shy of a market that still returns more than 6 percent of the GDP as profit — the time-tested realistic expectation — at a time when the global economy is in doldrums.

This rational expectation of profit was quantified by Warren Buffett back in 1999 and is borne out by historical trends throughout much of the past century. But greed has long settled in. According to a 2007 study by the Department of Statistics and Information Management, while the productivity of Indian manufacturing companies increased by one-fourth between 2000 and 2006, their profits went up by 17 percent per annum in the same period because the companies “did not pass the benefit from productivity improvement to consumers”.

Since much of the investment in India depends on FDI inflow and the health of the US economy, it is worthwhile to look at which way the wind is blowing on Wall Street since the 2008 recession. Much like the corporate sentiment at home, the prevailing lukewarm investment mood in the US is blamed on regulations, taxation and policy uncertainties. Yet, all these so-called impediments are not hurting soaring profits.

Writing in The New York Times in June, economist Paul Krugman explained this high-profit-low-investment phenomenon as a result of “the growing importance of monopoly rents: profits that don’t represent returns on investment but instead reflect the value of market dominance”. This “new disconnect between profits and production” may have shifted the “distribution of income away from wages in general, and towards profits”. A monopoly can be highly profitable, argued Krugman, because of its high mark-ups and may see no good reason to invest in expanding its productive capacity.

But as a nation-building instrument that conquers poverty, businesses and industries must expand. Increasing productive capacity creates jobs. Jobs and better wages create potential consumers of products and services. Demand-induced economy of scale allows lower pricing that, in turn, attracts still more consumers and demands further expansion of productivity. At a higher profit margin, a company can make the same net profit at a much smaller scale of operations but that does not help the economy or the people.

In a Financial Times analysis this July, Robin Harding quoted Botox-king Robert Grant to point out how the nature of public companies had changed since the 1980s with the arrival of leveraged buyouts, shareholder value, executive stock options, etc. Today, the focus is on earnings per share, on cost-cutting and efficiency, rather than investments that take time to pay off, Grant was quoted as saying. “If you are gaining market share then you win, even if the market contracts. If you grow the market but lose share then you could lose your job.”

None of these factors is alien to Indian corporate psyche and functioning. But, if anything, investment has been largely steady in India since the sudden surge witnessed between 2003 and 2005 when it recorded a 30 percent jump. But the plateau is causing much heartburn, even among those who themselves are holding back investment. The industry highlighted a Cushman and Wakefield report that claimed a 28 percent drop in investment in the real estate market in 2012. This July, Assocham rued a staggering loss of 75 percent in “proposed investments” in 2012-13.

In an emerging economy, this apparent reluctance of investors is often a bargain for more incentives and further relaxation of statutory norms. That is how they got Planning Commission Deputy Chairman Montek Singh Ahluwalia to talk about Chidambaram’s excellent idea of changing the rules of business for projects above a critical size so that “the permission that has to be given is given”. As of August, the CCI had cleared 171 projects worth Rs 1.69 lakh crore.

Granted, rules of business require simplification and decisions on investments need to be speeded up. But the delay is more often due to a promoter’s deliberate attempt to conceive projects in areas legally out of bounds and subsequent insistence on bypassing the laws of the land. That is not to deny that India certainly needs systemic reforms to do away with a dismal lack of transparency that allows the government and the industry to play the blame game and make other stakeholders pay the price eventually.

Every business requires a healthy bottom line to fund inventory, capital improvements or investment in new products and services. But the hunger for profit is now more personal than ever. Amid shipwrecks everywhere, Wall Street distributed bonuses worth $39 billion — nearly half the amount shareholders lost — in 2007. Even before the global economy recovered, $21 billion was shared as cash bonuses in 2010. A Service Employees International Union report says that 37 cents of every dollar the top six banks receive is spent on bonuses and compensation.

At home, Naveen Jindal made headlines last year with his Rs 73.42 crore salary. Despite a 10 percent drop in SUN TV’s profit, Kalanidhi Maran and his wife nearly doubled their salaries to Rs 64.4 crore each last year. A study by Aon Hewitt for Business Today on executive compensation for 2011-12 showed that though the median revenue of Fortune 500 US corporations were more than 20 times that of Indian companies listed on bt 500, the median US CEO salary at $7 million was just double the median package of the Indian CEO.

To rephrase stock market analyst John Hussman, who considers the present profit margin to be 70 percent higher than the historical norm, the surplus of one sector has to be the deficit of another. Rising corporate profits, says Hussman, is offset by the massive government deficit and depressed household savings — both a reality in the US and India alike. The richest 1 percent owns nearly half (46 percent) of the global wealth.

In their 2012 book How Much Is Enough, Robert and Edward Skidelsky returned to an essay written in 1930 by John Maynard Keynes. In Economic Possibilities for our Grandchildren, Keynes imagined that people in the developed world would have enough (richer by about eight times) to lead the good life and work only for about 15 hours a week. The people in his UK are already five times richer but there is no sign of that three-hour working day yet.

To reduce the incentive to work, the Skidelskys recommended a tax on consumption (not income) and no tax benefit on a company’s expenditure on advertising. That may discourage consumption but the insatiable hunger for profit means wealth spilling over many lifetimes of consumption is not enough. Perhaps, we need to ask again: how much profit is profit enough?

The question may sound naïve in a developed free market economy but, increasingly, the industry is shifting away from the values of a Feuerstein or, say, a heavily-unionised-yet profitable Southwest Airlines. Instead, the Koch brothers — Charles and David — probably best represent the psyche of the majority of contemporary corporate players chasing endless growth.

With a fortune of $35 billion, third only to that of Bill Gates and Warren Buffett, the two oil kings have been fighting for minimal taxes and social security services along with abolition of environmental and other regulations. According to a Greenpeace report, the Koch brothers doled out more money than even ExxonMobil between 2005 and 2008 to organisations to block global warming legislations. They also generously sponsored campaigns against Barack Obama’s healthcare reform and economic stimulus programmes.

The Kochs are no exception in a remorseless industry. Nor is such brashness an American preserve. In 2011, Bob Diamond, chief of Barclays, stunned the British Parliament by declaring that “there was a period of remorse and apology for banks and I think that period needs to be over”. Around the same time, wrote veteran American journalist and author of The Soul of Capitalism: Opening Paths to a Moral Economy William Greider: “American democracy has been conclusively conquered by American capitalism. Government has been disabled or captured by the formidable powers of private enterprise and concentrated wealth… Collectively, the corporate sector has its arms around both political parties, the financing of political careers, the production of the policy agendas and propaganda of influential think-tanks, and control of most major media… The objective now is to destroy any remaining forms of government interference, except, of course, for business subsidies and protections.”

Greider could be talking of any country. When Obama signed the Dodd-Frank Bill in 2010, he sounded emphatic: “Because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes… If a large financial institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy.” Only, the president did not mention that he failed to break down the giant banks in manageable parts and their sheer size would not allow any “winding down”. Key protagonists of the 2008 crisis continued as his economic managers.

Corporate funding is the backbone of almost all political parties in India. Unlike in the US, where members of Congress cannot earn more than 15 percent of their Congressional salary from other sources, our MPs are free to pursue any lucrative vocation. And money does win elections in the land of Kuber. Over 33 percent of those with assets above Rs 5 crore won the 2009 election while 99.5 percent of those with assets below Rs 10 lakh lost. Also, money begets power begets money. The average assets of 304 MPs who contested in 2004 and then re-contested in 2009 grew by 300 percent to Rs 5.33 crore.

Yet, our MPs gave themselves a mammoth hike to take home a monthly salary of Rs 1.3 lakh. Their entitlement to numerous perks, particularly prime housing, easily amounts to at least another Rs 1 lakh. That is more than 50 times India’s per capita income, far above the fair corporate practice recommended by Infosys chairman NR Narayana Murthy of fixing a CEO’s salary at about 20-22 times that of the lowest-paid professional.

In a system where the hunger for profit is matched by the greed of entitlement, few expect the Parliamentarians or ministers to take on or restrain big money. But their giveaway acts to defend the industry and investors will hurt the people’s (read voters’) sentiment. Or maybe we have altogether lost the capacity to recognise ‘enough’.


  1. Very well analysed and written. Isn’t it ridiculous that most of those who have made millions by ‘donating’ liberally to MPs’ election or funding political parties will assuage their conscience by gifting a box of laddos and or a sari to their workers and going early in the morning to temples to propitiate gods on Diwali?

    In the tussle over tends and means, clearly wealth as an end in itself has won hands down. Funny that call MK Gandhi the ‘father’ of the nation?


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