Bailout Package to Industries hit by the Global Financial Crisis
January 3, 2009
This is the latest open letter to DEA by E.A.S. Sarma (Former Secretary to GOI)
14-40-4/1 Gokhale Road November 24, 2008
Tel. Nos. 0891-6619858/ 9866021646
Shri Ashok Chawla
Secretary (Economic Affairs)
Subject:- Bail Out Package to Industries hit by the Global Financial Crisis
This is in continuation of my letter of November 5, 2008 on the financial crisis that has affected the economy. As I had mentioned to you, the writing on the wall was clear last year itself when the government was a mute spectator to the casino kind of FII-driven developments in the capital market, a bubble that was taking shape in real estate business and the excessive exposure of the banks to sensitive sectors like real estate and capital markets. As usual, it is the silent majority of small investors that have lost in the bargain.
I have just seen a TV news report that the Ministry of Finance is working out a relief package for the industries that have been hit by the global financial crisis. I understand that the Ministry is likely to announce the package in about ten days. I would like to caution the government on this.
A few days ago, the auto industry in USA had approached their government for a large bail-out but their proposal had met with stiff resistance in view of the widespread public anger against the Chief Executives of GM, Ford and Chrysler continuing to fly in luxury jets despite the crisis that they had faced. In principle, the tax-payer's money cannot be used to reward those that are guilty of profligacy and imprudence in the use of shareholders' money.
We have a similar situation In India. Nobody had directed the banks during the last two to three years to over-expose themselves to sensitive sectors like real estate and capital markets. Many banks failed to exercise due diligence in appraising projects, before they extended loan assistance to the promoters. The top managers of some private banks have granted themselves huge salaries on par with their Western counterparts! The real estate companies have been profligate in bidding astronomical prices for lands and going ahead with mammoth house-building projects beyond what the limited domestic demand would have supported. The aviation companies went berserk in adding aircraft indiscriminately and running them on many uneconomic routes. Some of them had even resorted to cut-throat discount offers to divert traffic from the PSU airlines. The basic canons of commercial prudence were ignored by these companies. When they found that their operations became unviable, their first reaction was to sack their junior employees, not slash their own salaries and perks. The global financial crisis came in handy as it provided a ready alibi.
There is certainly a case in favour of temporary relief being given to companies that depended largely on export business. Textiles, IT etc. perhaps qualify for this. Others who have suffered on account of their own imprudence cannot claim relief at the expense of the tax payer.
Incidentally, the corporate world in India is already a receiver of extra-ordinary munificence from the government in several ways. In terms of tax exemptions alone, the revenue foregone in their case in 2007-08 was Rs.2,78,644 crores i.e. 48% of the aggregate tax collection during that year, as per the statement placed by the Finance Minister before the Parliament as a part of the Revenue Receipt Budget. This includes the benefits given to exporters when the rupee appreciated during the second half of 2007-08 and the first half of this year. Compare this with the much-touted, paltry amount of Rs.62,000 Crores of debt relief granted this year to farmers committing suicides! We often forget that small farming is as much a private enterprise as a large company.
I read somewhere that the sops offered by Gujarat government for the Nano car project, in terms of cheap land, tax waivers etc., added upto Rs.30,000 Crores!
In fairness to corporate India, what they really need is not so much of financial support but a more hassle-free, corruption-free, competitive environment in which they can function efficiently.
Against the above background, I earnestly appeal to your Ministry to apply the following tests to different candidate companies that seek relief.
1. Is the sickness of the company the result of its own imprudence and mismanagement?
2. To what extent is the sickness due to a fall in external demand?
3. Has the top management of the candidate company enforced on itself sacrifices in terms of cuts in salary and perks?
4. Does the company have luxury assets such as private jets, yachts, residential buildings in prime areas?
5. What time-bound assurances the company is going to offer to the government on internal economy and efficiency in its operations?
If these five tests are not applied strictly and the tax payers' money is used indiscriminately to reward profligacy and imprudence, I am sure there will be widespread public anger against the plans of the government.
I hope you will consider this before proceeding further.