An Open Letter To Finance Minister Mr. Arun Jaitley

As usual, present Finance Minister also want interest rates to come down and for this, he as his predecessor Finance Minister want RBI Governor to reduce interest rate. Public perception is already clear that RBI Governor is not in tune with ideas of Finance Minister on the issue of interest rate , whether it should come down or remain stable or be allowed to go up to some extent. Our learned FM Mr. Jaitely thinks that slump in manufacturing sector is mainly due to high interest rate. He says cost of capital is one singular factor which has contributed to slowdown of manufacturing growth. On the contrary , our RBI Governor Mr. R. Rajan thinks that interest rate cannot dance as per sweet will of the government but can go up or come down as per economic scene, inflationary pressure, national priorities and other financial inputs. Normally politicians do not want to understand economics of the financial matters of the country and economists do not like to understand the politics of vote bank. But it is always the best when both understand the reality of the financial and political issues in the larger interest of the common men as also that of business enterprises.

In my opinion Finance Minister in Modi Government Mr. Arun Jaitley and all who are protagonists of his line of thought are mistaken and on wrong footing. Cost of interest in total cost of manufacturing is insignificant. Even when interest rate used to be much higher during seventies and eighties, growth in manufacturing used to be much better than what it remained during low-interest regime. And it is ironical that even during the period of post liberalisation and post reformation , when RBI forced drastic reduction in interest rate charged by banks, the growth in manufacturing sector was almost negligible . It is important to say here that a business man decides to do any business only when there is possibility of higher profit and it is undeniably true that profit percentage is not diluted by one or two per cent rise in interest rate charged by banks on amount of loan availed from bank.

Credit growth target achieved by banks during last few years was not due to credit delivery for manufacturing sector or by delivery of credit to priority and neglected sector . Credit growth even in farm as well as export sector achieved during last ten years of UPA rule was also not sufficient and good to desirable extent although interest charged for farmers and exporters use to be much lower than charged on any other sector. As such it is not wise and proper to imagine that only low interest regime will help in growth in manufacturing sector. It is unfortunate that despite low interest rate charged by banks on export finance, trade deficit grew continuously during last ten years of UPA rule. Import grew without any break . Gold import touched its peak disturbing trade balance. But growth in manufacturing was dismal and negative in many sectors due to many other hurdles in such activities.

When imported goods are cheaper and easily available in market , none of business men will attempt to manufacture goods in India. When trading of goods yields good return on capital , why one will go for investment in manufacturing activity .Hundreds and thousands of business entrepreneurs in India are such who have got industrial land allotted for the purpose of manufacturing a product by submitting a project to District Industry Centre, got sanction for coal linkages and bought minerals from mines at cheaper rate . But they avoided real manufacturing of goods because  they found it more profitable to sell scarce commodities like coal, fuel, minerals, land to others at higher rate.

When profits can be earned without doing business, that is only by cheating government departments, why one will opt for taking the pain of manufacturing. When subsidies are distributed by government only by planning a project, why one will go for real execution of project as per plan submitted to GOI or various departments of State governments. When Self Help Groups and Non Government Organisations are getting aids without doing real business, how real income and real employment will be generated in our country is a million dollar question.

Credit growth in manufacturing sector has been poor due to several other reasons which play vital role in credit delivery . High rate of interest cannot be considered as reason behind Low credit growth .Contribution of interest in overall expenses of a company is very low and then further rise of one or two per cent in interest rate on loans will have totally insignificant role in balance sheet of any company. Rather it will be far far better and desirable that government of India decides national priorities, assess cost of deposits for banks and then fixes rate of interest for each useful sectors . Such uniform rates  will be uniformly applied by each banks throughout the country. This used to happen after nationalisation of banks .

During reformation era from 1991 to 2014 public sector banks have caused loss to each other by competing with each other in credit growth. To achieve the target , various PS banks indulged in bribe based lending sacrificing quality of lending and thus contributing in growth of Non performing assets .. GOI can avoid such competition among PS banks by imposing uniform interest rate structure for lending. After all , the purpose of any prudent government is to increase manufacturing, to increase job opportunities and to produce goods and services at cheaper and affordable rate and not to create competition among banks of the same government and not all to earn profit. The purpose of the government should to be to make the loan available to really needy persons comfortably and in shortest period of time and hassle free .The purpose of the GOI or that of at least public sector banks is not to earn profit but to serve common men who are starving due to high price and due to rampant corruption in all offices including banks.

But in the era of liberalisation , banks have been given freedom to decide rate structure . Unfortunately this freedom has been used to damage banks by bankers in nexus with politicians, businessmen and corporate houses. It is open secret that base rate is decided by Chief of majority of banks not based on various ingredients and inputs prescribed by RBI but decided and altered as per whims and fancies of political bosses.

Interest concessions are more often than not ,given to rich borrowers not based on national priority or health of industry or bank's benefit of business but based on relation of bank officials with promoters of business. Various gifts and cash incentives to bank officials also play key role in such concession. The most painful part is that industries which enjoy lowest rate of interest and which enjoy maximum concessions fail quicker than those industries which are charged higher interest rates.

I may say with full confidence that ninety five per cent of stressed assets in bank or non performing assets in banks is not due to charging of higher interest rate by bank on loan availed by the borrower. A good and successful business man never considers interest rate as a hurdle in growth. Business men who are expert in doing business do not depend solely on banks for loan , they freely and frequently avail finance from private lenders at much higher rate. They do business and do business only .There are many such corporate houses and public sector undertakings  which are having hundreds and thousand of crores of rupees as idle fund which they are unable to invest in manufacturing due to several hurdles, delay in getting statutory clearances, unavailability of coal, fuel, minerals and due to several local hurdles. NPA rises due to failure of promoters in doing business in proper way, due to lack of capital or diversion of fund, loss of money in bribing officials etc

Then the question arises why people are not going for manufacturing or not interested in doing business. To make it clear we will have to understand what are the factors which may spoil future of a business or which may stop businessman opting for manufacturing. Government should make an analysis on key reasons why business fails, why business men avoid manufacturing and why there is price rise of all goods. It is never interest rate which causes disincentive to business men. Banks are advocating low interest rate for credit growth.

I would like to ask  clever and wise bankers to say how much share of stressed assets in their banks is due to charging of higher interest rate. I think they will not honestly admit that in 95% of stressed assets or fall in credit to manufacturing sector , reason is other than rate of interest.

Can they give a guarantee that if interest rate is reduced or even made to zero , they will give unprecedented credit growth in all the years to come without improving other extraneous factors which are greater impediments in growth of credit. No They cannot, I am sure. When Interest rate will be reduced , these clever bankers will put blame on global recession, economic slowdown, political environment etc to save their evil deeds.
 
 

There may be following reasons for failure of business or for not starting a new business.

Lack of experience , improper management, lack of vision , selling of goods on credit to earn higher profit margin, defrauded by mischievous and fraudulent staff etc

Insufficient capital (money) , or misuse of capital , unplanned expansion of business

Poor location , poor infrastructure needing higher cost on transportation ,

Poor inventory management

Over-investment in fixed assets

Poor credit arrangement management , delay in bank finance, under finance by bank , excessive finance from bank,

Personal use of business funds , huge expenses and huge withdrawal of fund from business by promoters for benefit of self and own family

Unexpected growth , diversification of fund to other business without proper planning

Competition , failure to change strategy of doing business when business environment changes, when liking of consumer changes , when other substitute product is introduced in market, when cheaper product with better quality comes in market etc.

Low Sales. It may be due to tough competition or even due to monopolistic business. Promoters ambitious of earning profit at exorbitantly higher rate , quality of goods being inferior ,price higher than other branded goods, poor selling arrangements, pilferage of money by staff, goods sold on credit not getting paid, inputs are not available, rise in cost of inputs required for manufacturing etc

Political interference in all matters related to business including appointment of staff, their salary ,leaves , transfers etc

Disturbance by local mafia, naxalite elements and anti social elements. A Business man has to pay bribe or donation or Dadagiri fees to local mafias to survive in an area and to do business without facing any local disturbance. Police personnel are normally agents of local mafias and musclemen or absolutely indifferent to grievance of business men and hence there is always fear of doing business .

Money extortion by government officials, tax men and local muscle men . Business men are tortured by government officials. Every now and then they have to give money to inspectors, auditors, police men , mafias , politicians etc to remain in business.

poor quality of man power, wage load of labour going higher due to price rise. Cost of natural resources like coal, fuel, minerals , land etc have gone sharply up during last ten years of UPA rule where majority of natural resources have ben given to private business houses who are charging exorbitant rates on each such items. One acre of land which used to be available at Rs.one lac ten years ago is not available now even at Rs. one crore. Cost of house or rent of a house used to be lower upto 1990 and after 1991 cost has gone up even upto hundred time. There is no control on earning made by builders.Rate of coal and fuel used to be nominal and government used to sell these items on cost basis . But in the era of liberalisation cost of all these inputs have gone up multifold. Similarly cost of iron, copper, cement, sand, transportation etc all have gone up many fold during last ten years. A few hundred of Corporate houses and business men have become owner of billions and billions of rupees whereas 125 crore or Indians are subjected to pain of price rise . When price goes up for all commodities of general use, purchase capacity of people shrinks and hence demand do not rise.

Five Reasons 8 Out Of 10 Businesses Fail

Inability to nail a profitable business model with proven revenue streams.

Leadership breakdown at the top

Failure to communicate value propositions in clear, concise and compelling fashion.

No real differentiation in the market

Not really in touch with customers through deep dialogue.

I therefore feel that

　

First and foremost reason is that, previous government used banks to lend money for growth of infrastructure, for electricity distribution agencies and for power generation, for Big retail mart ,for jewel export business, for real estate sector etc which do not help in growth of manufacturing. More than fifty per cent of incremental growth in credit achieved by public sector banks during last ten years was due to finance made for infrastructure, for housing and for other retail loans. Credit growth in manufacturing sector was not a choice of bankers . Though after nationalisation of banks, GOI before liberal era, had decided priority sector for banks for lending, banks in general avoided lending under priority sector ,They achieved target of priority sector either by manipulation of data or though tit better not to achieve the target and deposit money in Government accounts or in mutual fund or park money at low rate with GOI to compensate for gap in target and actual in priority sector lending.

Public sector banks totally neglected manufacturing sector. Banks used to give loans to only those business men who could please bosses of banks. Loan processing for honest business men and sincere industrialists is so much cumber some that loan seekers think it better to avail loan facility either fro private banks or from other private money lenders.

Other reason for lesser growth in manufacturing is several hurdles in setting up an industry. There are several hurdle in setting up an industry and these are like getting clearance from pollution board, getting license fro competent authority, fear of sales tax and service tax officials, fear of income tax officials, fear of local mafias, anti-social elements, labour problems etc . Person desirous of setting up an industry has to face problem of getting power connection , getting land at suitable place, procuring coal and other minerals etc.

Cost of power, cost of coal and other fuels , cost of labour, burden of tax. Cost of all relevent input have gone sharply up due to rise in cost of coal, land and other natural inputs. Unemployed unskilled labour were engaged in unproductive schemes under MANREGA scheme .

Share of labour cost, power cost, fuel cost, input raw material cost all have gone sharply up and as compared to these expenses , burden of interest in total manufacturing cost for an industry is hardly a few percentage in total cost and one say that interest cost caused by one or two percent rise in rate of interest charged to such loans compared to cost of other input is negligible. As such demand for low interest rate to facilitate credit growth is false, baseless and improper .

On the contrary , if banks decide to reduce interest rates on loans they sanction, they will have to reduce interest rate on deposits they accept from public. Due to such fall in interest rate on deposits, people who have surplus income think it better to invest in other savings schemes, gold, land or other unproductive items. If banks do not e enough deposits, their capacity to lend also get reduced.

Obstacles in doing business or in manufacturing are many in addition to what has been said above. I recapitulate some of them hereunder.



Government policy and procedures: Government policy and procedures in India are among the most complex, confusing and cumbersome in the world. Even after the much publicised liberalisation, they do not present a very conducive situation. One prerequisite for success in globalisation is swift and efficient action. Government policy and the bureaucratic culture in India in this respect are not that encouraging.

High Cost: High cost of many vital inputs and other factors like raw materials and intermediates, power, finance infrastructural facilities like port etc., tend to reduce the international competitiveness of the Indian Business.

Poor Infrastructure: Infrastructure in India is generally inadequate and inefficient and therefore very costly. This is a serious problem affecting the growth as well as competitiveness.

Obsolescence: The technology employed, mode and style of operations etc., are, in general, obsolete and these seriously affect the competitiveness.

Resistance to Change: There are several socio-political factors which resist change and this comes in the way of modernisation, rationalisation and efficiency improvement. Technological modernisation is resisted due to fear of unemployment. The extent of excess labour employed by the Indian industry is alarming. Because of this labour productivity is very low and this in some cases more than offsets the advantages of cheap labour.

Poor Quality Image: Due to various reasons, the quality of many India products is poor. Even when the quality is good, the poor quality image India has becomes a handicap.

Supply Problems: Due to various reasons like low production capacity, shortages of raw materials and infrastructures like power and port facilities, Indian companies in many instances are not able to accept large orders or to keep up delivery schedules.

Small Size: Because of the small size and the low level of resources, in many cases Indian firms are not able to compete with the giants of other countries. Even the largest of the Indian companies are small compared to the multinational giants.

Lack of Experience: The general lack of experience in managing international business is another important problem.

Limited R&D and Marketing Research: Marketing Research and R&D in other areas are vital inputs of development of international business. However, these are poor in Indian Business. Expenditure on R&D in India is less than one per cent of GNP while it is two to three per cent in most of the developed countries.

Growing Competition: The competition is growing not only from the firs in the developed countries but also from the developing country firms. Indeed, the growing competition from the developing country firms is a serious challenge to India’s international business.

Trade Barriers: Although the tariff barriers to trade have been progressively reduced thanks to the GATT/WTO, the non-tariff barriers have been increasing, particularly in the developed countries. Further, the trading blocs like the NAFTA, EC etc., could also adversely affect India’s business.

Factors Favouring Globalisation



Human Resources: Apart from the low cost of labour, there are several other aspects of human resources to India’s favour. India has one of the largest pool of scientific and technical manpower. The number of management graduates is also surging. It is widely recognised that given the right environment, Indian scientists and technical personnel can do excellently. Similarly, although the labour productivity in India is generally low, given the right environment it will be good. While several countries are facing labour shortage and may face diminishing labour supply, India presents the opposite picture. Cheap labour has particular attraction for several industries.

Wide Base: India has a very broad resource and industrial base which can support a variety of business.

Growing Entrepreneurship: Many of the established industries are planning to go international in a big way. Added to this is the considerable growth or new and dynamic entrepreneurs who could make a significant contribution to the globalisation of Indian business.

Growing Domestic Market: The growing domestic market enables the Indian companies to consolidate their position and to gain more strength to make foray into the foreign market or to expand their foreign business.

Niche Markets: There are many marketing opportunities abroad present in the form of market niches.

Expanding Markets: The growing population and disposable income and the resultant expanding internal market provides enormous business opportunities.

Transnationalisation of World Economy: Transnationalisation of the world economy. i.e., the integration of the national economies into a single world economy as evinced by the growing interdependence and globalisation of markets is an external factor encouraging globalisation of India Business.
NRIs: The large number of non-resident Indians who are resourceful – in terms of capital, skill, experience, exposure, ideas etc.– is an assed which can contribute to the globalisation of Indian Business. The contribution of the overseas Chinese to the recent impressive industrial development of China may be noted here.



Economic Liberalisation: The economic liberalisation in India is an encouraging factor of globalisation. The delicensing of industries, removal of restrictions on growth, opening up of industries earlier reserved for the public sector, import liberalisations, liberalisation of policy towards foreign capital and technology etc., could encourage globalisation of Indian Business but has adversely affected domestic business.

Competition: The growing competition, both from within the country and abroad, provokes many Indian companies to look to foreign markets seriously to improve their competitive position and to increase the business.