Prime Group - Speeches

Global economic crisis – some Micro issues of this man made crisis

Dear Friends,

Let me first of all admit that I am neither an economist nor a statistician. I only studied some bit of Economics, first at the Modern School, Barakhamba Road and later at Sri Ram College of Commerce and therefore, my understanding of the global economic crisis is based on my own global business experiences and my own perception more as an entrepreneur rather than as an Economist and I think you will agree that, undoubtedly, entrepreneurs are the backbone of any economy and therefore they do understand the reasons as well as some practical solutions to such economic crisis which has a huge impact on their own lives too. It is with such kind of understanding and practical exposures to the business and economy that I stand here before you to share my views on this huge issue of global economic crisis which is the biggest challenge probably the mankind have faced since ever.

It is very commonly said and you have all heard it umpteen number of times that when America sneezes the rest of the world catches cold. But in today’s time even America has caught cold and the most severe kind of cold ever. Even the medical sciences have gone so advanced that in today’s time, any kind of problem has not only to be treated by appropriate medicine but before that a thorough diagnosis needs to be made about the cause of the problem. Therefore, it will be appropriate not just to wait for the time when this terrible cold which the world has caught falling the American sneeze and cold, to settle down in its own with the passage of time, but it is extremely important to analyze some of the very important reasons which led to this crisis in the first place and then plan the corrective action as well as the strategy as to how to prevent this happening again or to think of a possible mechanism as to how to fight it in a manner that it never shows of any signs of a comeback in any form, ever again. 26 recessions and depressions worldwide in last 100 years. It’s time we look for its permanent burial.

I strongly believe that all the important factors that have contributed to this global crisis gaining unmanageable proportion are entirely manmade. We all have contributed to drive ourselves to this position in some form or the other. Some of such important things I would like to highlight and the first point that comes to my mind is the element of greed.

We all know that in the last decade in particular, our expectations towards growth suddenly gained such a huge momentum which was never seen before. We all wanted to become not only rich but super rich millionaires and billionaires and all this not even in one life time but just in a few years time. If Mr. Dhirubhai Ambani became the richest man in the country in one life time it was considered to a rare, rare distinction. But today almost everybody wanted to replicate and that too almost instantly, what even Mr. Ambani did in his whole life. It is good to have ambitions but certainly not over ambitions.

Unrealistic and over ambitious people just could not be stopped from targeting unrealistic growth. Everybody wanted to maximize their profit to unbelievable levels. To say that you had a 10% profit or 10 to 20% annual growth, was considered shameful. People started talking in terms of 100% to 200% or even 1000% growth, net profits after tax of 25 to 50% or even more. Everybody was in a rat race to double or triple their capacity. Buying out companies with super speed to become one amongst top 2 or 3 or 5 or 10 in the world in their field, mergers and acquisitions thus became norm of the day and the greed factor become bigger and bigger.

Giving air to this fire was the easy flow of money from the banking system and then again, the factors guiding the banks or financial institutions or investment banks, they all seems to have themselves joined the rat race to multiply manifold in the shortest possible time. It seemed that the feeling was as if the world was going to come to an end may be, it was also the intention of one and all that make hay while the sun shined since no one knew how long these conditions may last. So earn as much as possible for yourself for your company or for your bank and in the process end up getting huge amounts of profits or bonuses and incentives totally unheard of and of unimaginable proportions.

Motorola example Sanjay Jha 104 Mill. - Annual salary of FM & PM around 0.5% - A real loot?

The result was that the manufacturing or services economy’s money flowed out of the system in the hands and personal pockets of people and the first choice of such people obviously was to invest this money in creating personal assets, most of which simply resulted into raising values on paper and not really helping the base of the economy to grow bigger.

The greed level was not limited to people in business or in banking but also the people in power, be it the politician or the bureaucrats everybody seemed to be in a hurry and all of them seemed to follow the basic Reliance mantra to think big, the very common phrase used by such class of people.

President Abdul Kalam’s slogan of “thinking small is a crime” – unfortunately people took the route of crime to become big.

And as a result, when huge amounts went out of the economy in to the personal pockets of such powerful people, a major part of that did not roll back into the economy to further propel the growth. As per some recent report, over 14 Trillion Dollars are slashed in Tax heavens. And as they say anything of excess is bad, the results are before us. When the demand for goods and services reached some saturation level, the signs of recession were bound to surface.

This man made problem was further aggravated by the sentiment factor in such a way that almost everybody decided to pause for a while and see how the situation takes what turn? This pause proved to be killing. The charged batteries of the economy discharge rapidly. The economy worldwide became like a car standing in the middle of the road with discharged batteries which could be restarted only with a big push. But the problem being huge, any amount of push was not proving to be sufficient, at least for the time being.

The vested interest of the people in power and the policy makers further added to compounding this global problem. It will be absurd to say that the brains who ruled the world had not anticipated of what was going to be result. My personal experience of that was my chat on this issue with my younger brother, who is a citizen of America, was in the year 2006 during one of my visit to New York when he told me that based on his personal experiences of dealing in the property mortgage business in which he has engaged in U.S.A for last over 20 years, he was almost sure that this balloon is going to burst very soon and it was going to be a huge problem for America which may become almost unmanageable and unbearable. I really wonder as to how this strong impression of an ordinary resident of the country of America like my brother, could have escaped the notice of wisdom of the great economists and the financial wizards who managed the largest economy in the world and the American government. But I believe their vested interest was that everything seemed to be going fine and would probably easily carry on the same way at least till the tenure of the then government was to last. What happens thereafter was not really their concern. Had the American government at that point of time stepped in to stop the unlimited flow of funds to the property market at subprime levels, perhaps most of the their banks who subsequently failed or landed up in to huge financial problems, could have avoided this huge crisis that they are in today.

Vested interest of Govt. of India – Heavy doses of taxation – FBT – Service Tax –

Even on the taxation front, the policy to maximize revenue for the government on the plea to have enough resources for development and to keep the fiscal deficit down, needs a re-look. The huge tax doses in the form of Service Tax levied during the last few years covering almost every kind of service that we can think of, and then the levying of Fringe Benefits Tax, FBT as we call it, which is in reality an expenditure tax levied on the business in the disguise of another form of income tax, are only further putting pressure on the economy of our country.

Ultimately, all these additional taxes are passed on to the consumers thus hitting their pocket severally and resulting into gradual erosion of their purchasing power. This automatically leads to a direct negative impact on the entire spectrum of industries which were surviving and thriving on continuous spending by the consumers. On the other hand it is well known that only a small percentage of the huge amount of the taxes collected by the government are actually put into the infrastructure or for the growth of the economy and major part is pocketed by middle man or interested quarters or spent on administrative costs, which amount, seldom comes back to the mainstream of the economic system to propel further growth as it is generally kept in some form or other as a secret reserve for emergency requirements and we all know that emergency of such category of people rarely comes during their life time.

To maximize tax revenue is absolutely justified but it should be a result of economic growth and not by levying more and more types of taxes and further increasing tax burden without corresponding real economic growth. At the same time, the revenue so collected should be judiciously spent to propel economic growth rather than to invest it either for political gains or simply to be pocketed away by the administrators or the middle men.

Tax reforms – Differed tax liability, Wind Mill investment deferred tax liability – case study.

The greed and the vested interest did not spare the stock market either and the viral was wide spread across the globe. Some major stock operators even in

India ended up making not just a few crores but a few thousand crores and we all know that for most of the industrialists in the country, even in today’s time, it is nearly impossible to even dream of such a figure in one’s entire life time. The sensex going up from 12000 to over 20000 plus in a short period of a year and a half and at times going over a 1000 points within just a couple of days was clearly a combination of the greed factor and the vested interest in the stock market having taken full control of the situation to take the world for a ride. There is absolutely no justification as to how the value of a particular stock could be over Rs.1000 a few weeks ago and same stock without any change in the company’s financials, almost Rs.100 a week later. So everything seemed to be unrealistic and the whole world was getting excited about it and the results are here for all of us to see.

One small suggestion for stock exchange regulations could be to do away with the practice of publishing quarterly result of the companies which put tremendous pressure of the companies to show substantial growth and profits not only on annual basis but also on quarter to quarter basis which in most cases absolutely unrealistic and at time even absurd and invariably this pressure of quarterly results leads to window dressing and fabrication or falsification of accounts which factor coupled with greed factor led to the examples like Satyam, which further dampen the business sentiments and further delays the economic revival.

The lesson to be learnt from this is that anything in excess is bad and it is high time we start coming back to the philosophy of moderation. It is also time to take a lesson that we should not just have vested interest, we must also look at the interest of the society, interest of the country and the world as a whole, which is so deeply integrated in today’s time. They say that as we sow, so shall we reap. If we are sowing the seeds of problem, we are bound to have a crop of problem not only for ourselves but also even for our children in future. And this unfortunately, no one remembered when it came to their greed or their vested interest.

The role of media also needs to be looked into to plan corrective action for future. It seems to be a fashion of the day to have your photograph or statements to be printed in the newspaper or on Television even if the statement is always negative. One is left to wonder as to what is the need for an eminent economist or a powerful national figure in politics or in government to say to press that I don’t see any revival before 2011 and the media is left with no alternative but to print it or telecast it prominently not realizing that in the process they are further dampening the sentiments and making the revival difficult and more distant and at the same time, hitting at their own advertisement revenue too which is bound to drop drastically thus hitting their own bottom line in a big way. It is therefore, humbly requested to the opinion makers whose statements are taken seriously by world, to think twice before making negative statements about the revival of the world or their local economy. It is much better for them to keep quiet if they can’t speak positive and the same apply to media too. I really wonder why the same negative statement cannot be put in a positive tone and made together with some important suggestions to boost up business sentiments. This will be a big help in faster recovery out of this present global economic crisis because the whole issue is about sentiments and negative statements keep the business and investment sentiments low and further delay the economic revival for sure.

The regulations of our banking system in particular and the state of economic condition generally in our country, have proved beyond doubt that some kind of regulations is actually a must to protect our economy from such huge recessionary crisis as is the case currently in world. Too much freedom is too dangerous because it is impossible to believe that there will not be greedy people and there will not be people with vested interest who have huge financial muscle to push the global economy first to the top of the hill and then push it to down. I therefore, believe that some basic regulations are going to stay for almost ever and that the regulations are necessary for the entire financial structure of the economy which includes not just the banking system or the central financial planning but also the vital institutions like the stock market which directly affects the business sentiments in a big way to become the first trigger for any kind of economic crisis.

Stimulus packages announced by various Govts. to protect jobs and to create jobs – The fundamental requirement – one point programme

- To ensure they reach the destination fast and at lowest cost.
- Not to adjusted by banks against entire dues.
- Bank charges / interest to be lowest
- Credit rating agencies – regulation
(i) 50 to 100 Nos. instead of only 4 as at present, globally.
(ii) System of rating 3 – 4 years experience youngsters – rating committee rules - absurd.
(iii) Policy / philosophy – Govt. controls – under 500 crore turnover SME to suffer.
- EMI’s to be halved with double re-payment time – Govt. support.

To counter recession – only One point program – To protect jobs and to create jobs – only salaried class or SMEs’ suffer – Not the big fish.

We all have actually pushed the world in to this huge recession and we alone can bring it out it. It is simply a manmade disaster and it’s revival is totally sentiment based. We only have to create conducive environment to revive the sentiments and bring back the confidence of the markets to pull it out of the recession and push it back on the growth path. Undoubtedly, political stability, good economic policies and good monsoon etc. are some fundamental requirements for our economy to grow continuously at a reasonable level, yet the human factor can play a huge and a very vital role to bring us out of this mammoth problem of global economic crisis and thus help save the world from the brink of disaster that we are at in today’s time. Be honest to others and be honest to yourself. Think in terms of the society, country and the world rather than in terms of greed and the vested interest for self and self alone. Think of your children and grand children and not just for yourself. This human approach will go a long way to save this world from another global economic crisis which would otherwise be of a proportion which would surely be impossible to manage, if it were to ever happen again.

We all pushed the world into this crisis and it is only we all who can bring it out of huge mess. Let us think Positive a Get Going. We have a great future ahead of us and we alone can make that possible.

Thank you.