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July 25th, 2002
The Hon'ble Prof. A.P.J. Kalam
President of India
Rashtrapati Bhavan
New Delhi.
Sir;
At the outset I congratulate you at assuming your new office and wish you every success. It was indeed refreshing to hear your speech after the swearing in ceremony yesterday and very reassuring to have a 'non-political innovator' as the President of India. This augurs well for the nation. It is for the first time ever that I write to a leader of this country in full faith that not only will he read what I have to say but will dwell in these thoughts.
For four generations now and most part of the 20th & 21st century my family has been involved with promoting education for the upliftment of our people. My grandfather, the late Shri. Manoobhai Doongursee was well known in Mumbai for his efforts in social work which he first commenced in Karachi before India was divided.
I have the privilege of continuing this work today. Besides, I have been an Investment Advisor and Management Consultant since the past 15 years. I started my working career in 1986 with a vision of wealth creation opportunities from Equities, Technology and Globalization. I realized that on the top most floor of investment opportunities sat business and enterprise and the elevator to access it was the stock market. If Business and Enterprise failed then that would be the end of the economic world - which to my mind is not possible. It is only a matter of keeping ahead of the markets in terms of knowledge and vision, which is what is necessary for a successful investment analyst and investor. This is where I realized the need to pursue a career as a management consultant - to see change well before the 'new' was delivered ...to participate in delivering the 'new'. The depth of knowledge necessary is analogous to a bottomless pit and will take forever to sink into. With this background I write to you with deep concerns about the present state of economic affairs in the country. But first - a review of how progress happens.
The current economic downturn (worldwide) differs from previous ones, as it has not been caused by a collapse in demand after a rise in interest rates to fight inflation. Instead, it is an investment-led downturn. A long expansion in the 1990s encouraged rosy expectations about future growth and profits, encouraging over-investment financed by heavy borrowing. When there is excess capacity and an overhang of debt, interest-rate cuts tend to be less effective in reviving demand. Investment-led recessions, which were common before the Second World War, tend to be deeper and to last longer because it takes longer to purge financial excesses and over-capacity than it does to tame inflation.
Having 'Globalised' since the early 1990's, we are now a part of the world economy and stand to gain or loose depending on how we play the game. The point I am seeking to make is that we aren't playing the game right. The way we are doing it doesn't make business sense for us. Instead of being mere knowledge fodders, for the globalization machine rushing to and fro from the kitchen executing orders, we need to widen our capabilities to define the agenda of globalization to begin with. Globalization by itself is a fantastic idea but the way it is being applied, resulting in exploding opportunities only for a few and shrinking opportunities for the rest, just won't work.
Multinational presence in India is a must. It is a part of the globalization process. I have always supported this, which is evident by my long-standing investments in MNC companies listed on our stock markets. The earlier arrangement was that for a multinational to do business in India they would have to be listed on our stock markets and Indian Investors holding would be 60%. But after the budget of 1999 this is not the case. The MNC's are permitted to do business in India as subsidiaries wholly owned by their parent companies with no Indian investor holding. To my mind it is reasonable that their prior 40% stake be increased to 74% as they wish to bring in their innovations and make money from our markets and have full control on the business. My quarrel is with the fact that now, we cannot partake in their profits by investing in their listed stock. Besides, as per the current regulations, MNC's that were already listed on are markets are permitted to set up wholly owned subsidiaries through which future business will come in. This is unfair to the Indian Shareholders of the existing listed MNC's. We must get Multinationals to list on our bourses when doing business & earning revenues in India (a cause I have been supporting since 1999). Look at this as a way to wealth creation for India and an equi-distribution of wealth through free market economy without imposing protectionist restrictions on free flow of capital. I agree with Dr. C.K Prahalad's (management guru) sentiments when in brief discussion with me, he said that we must create in excess of 15 million jobs per annum in India and will need MNC presence for the same. But at the same time I believe that salaries are not the only and certainly not the best way of creating wealth. We must partake in profits as investors. We have to remember that salaries and bonuses are only a fraction of the revenue that a business earns. Market capitalization of the stock is a multiple of these revenues. Even at 26% shareholding in India we stand to gain immensely. FDI will not stop because we are asking for a 26% listing whilst removing the regulatory obstacles. The new jobs offered by MNC's arent going away. They will be there as these companies come in and economic activity will spur anyways. The question is what our benefits will be - purely salaries or stock appreciation too. NRI's and foreign citizens of Indian origin are already investing in Parent Companies abroad but that is doing nothing for wealth creation in India. Even if currency is made convertible on capital account and Resident Indians can invest abroad in the stocks of Indian companies we still do need listing in India for the betterment of our economy. Directly or indirectly every Indian must be able to invest in businesses of tomorrow. Our politicians and bureaucrats fail to grip the very essences of the path to wealth creation through Globalization.
The Capital Market culture must be developed. As explained earlier, MNC's must be pressed to list here. Indian business must scale up and get globally competitive to become attractive to the global customer. If they do so, they will be able to attract global investors too. The Nasdaq is paying 10 cents for every $ 100 traded, to provide liquidity. Japan is in its third recession of the past decade, which has led to the collapse of the Banking Sector, which has also affected the investor's confidence. Large cap companies like Enron, WorldCom, Vivendi Universal, Global Crossing, Kmart, Xerox, Qwest Comm. and Bristol-Myers have been held responsible for major corporate frauds/ misdeeds, which have developed a feeling of mistrust. The Indian stock market appears to be the cheapest, safest and hence most attractive. The Indian market is currently trading at a price to earnings ratio of 13 compared to 74 for Indonesia, 17 for Korea, 28 for Malaysia, and 25 for Singapore.
However, with the exit of a powerful forward trading mechanism from the Indian Bourses, namely 'Badla', the markets here have lost a lot of their cash inflows. 'Badla' was a very successful mechanism bust was unfortunately practiced in parallel 'unofficial' markets. Instead of policing the same our Securities Exchange Board and the Central Govt. has gotten rid of this system. The dominance of Foreign and Indian Financial Institutions as well as Mutual Funds has resulted in the markets loosing their broad base. "Wild swings in share prices have more to do with the 'lemming- like' behavior of institutional investors than with the aggregate returns of the company they own" (Warren Buffet). Shareholder Capitalism has replaced Stakeholder Capitalism and money is now institutionalized. Large percentages of share capital are in the hands of funds and institutions, which demand quarter on quarter miracles from investee companies. This pushes corporates onto the wrong track. Corruption, scams and 'cooperative' trading are rampant, poor corporate governance is the order of the day.
We are looking at a budgetary deficit of ½ a trillion US Dollars in the next 6-7 years, given the current state of affairs and a reasonable compounding. This includes the central and state budgets and the oil pool deficit. We therefore must build our national wealth through innovation and entrepreneurship. We must develop, own and retain our intellectual property. This is the only way to achieve a needed growth rate in excess of 10%. We need to encourage Indian Entrepreneurs and Innovators. We are a developing nation with a large population and our needs are plentiful. Hunger makes man creative and this creativity when well channelised leads to productivity. We can make and we can consume and to link the two we must invest - our minds, efforts and scarce resources.
Tragically, India does not have a revenue model in the process of globalization, which has resulted in mere droplets of FDI and in a manner not conducive to creating wealth in Indian hands.
I conclude by suggesting the following:
"If you want to grow to your maximum or optimum potential, structure your society and your policies such that you can make maximum use of international capital, management skills, marketing skills, technology and knowledge." - Lee Kuan Yew
The best quality of education at all levels must be made available to all our people at as low a cost as possible. Info. Tech. is the best delivery method.
In the process of globalization, with regard to India - Are we going to address Indian producers, consumers and investors? Are we going to create wealth in Indian hands by way of jobs only or investment, profit sharing and entrepreneurial opportunities as well? We must also bear in mind that salaries are a fraction of revenues whereas market capitalization is generally a multiple of revenues. Is China going to be smarter than us at seeing this and frame its policies accordingly? We must find a way to equi-distribution of wealth through a free market economy without imposing protectionist restrictions on free flow of capital. At this critical stage of setting our global business model are we going to let our weakest participant and contributor to the economy, the Central Government, determine our path ahead and negotiate our future standing? Shouldn't the people participate in the deal making at our level too?
Encourage the Capital Market and systems that have worked. Systems will have their problems and have to be policed and ironed out. If what works is thrown away we will suffer.
The abolition of Income Tax will bring into circulation all the unaccounted for money. Considering the unmanageable mounting budgetary deficit this may be a dramatic way out of our 'mess'. Bringing to book such vast assets may be a much better solution than hoping for higher revenues through Income Tax collections, which amount will never be enough.
We have to look at creating new wealth in India by doing all this and not getting bogged down with thinking small.
The vision ...
~Adapted with all respect from Sidney Poitier's speech at the 74th Annual Academy Awards on Sunday, March 24th, 2002.~
- In fact this might never be set in motion unless we build a large number of courageous, unselfish leaders among us from a handful of visionary Indians, each with a strong sense of citizen responsibility in today's times. Each unafraid to permit their vision and work to reflect their views and values - ethical and moral - and moreover, acknowledge them as their own. They know the odds that stand against them and their efforts are overwhelming and could prove too high to overcome. Still those visionaries will persevere, speaking through their work to the best in all of us. India will benefit from their efforts, and in ways large and small, the world will also benefit from their efforts. -
Sir, I believe that you have the courage to dream. Please share this dream with those in power to give us a better life.
Rajiv Bhatia
Chief Opportunities Executive at Bee Management.
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