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Government's hesitation to give up or drastically reduce certain taxes on certain items and services and / or to subsidize specific consumption segments creatively has pushed it to settle with the simple way of subsidizing every one across the segments. In the case of diesel the government also failed to take notice of the progressive increase in the numbers of expensive diesel driven cars over the years which is induced solely by the fault in the diesel pricing.

 

  13 February 2014

  Helping the rich with cash !

Published in: governancenow.com - on 15 February 2014         

Batch after batch, in teaching corporate social responsibility at management institutes, I have egged students to debate the misplaced sense of social responsibility in the way government uses its oil companies in its efforts to balance cost impact on critical sectors and sections of the society. Against my hopes, every time, students have debated it just like our politicians who have kept the oil prices far lower than the cost - for years, talking about consequential price rise and how that would hit the poor. The fact that any business, including the ones in the public sector, would hurt the larger interests of the society if run without the care to recover cost, even when it is deliberately run so hoping to benefit the society, has been elusive to the collective wisdom of our nation for rather too long.

 

Nielsen report published recently on a survey it did on the behest of the ministry of petroleum is no surprise and proves only the obvious fact on the fundamental flaw. The report says, in the last financial year, of the Rs.92,061 cr of diesel subsidy about Rs.12,100 cr plus Rs.8,200 cr was enjoyed by very rich and the affluent. That's awfully huge to be wasted away by a country that is ever short of cash for primary social welfare initiatives. Ironically, the contention of social welfare in justifying the mistake which has been pushed relentlessly for so long arguably amounts to gross irresponsibility considering simple feasible options for redirecting funds where it is badly needed. And the pricing of oil with the layman logic all these years, proven to have been ironically in detriment to the poor, the government should at least now know the tenet that while companies should optimize (as against maximizing) profits factoring-in social considerations they should more importantly ensure that they do not run up losses irrespective of social constraints. And, that includes businesses of all sorts and particularly those run by governments.

 

Government's hesitation to give up or drastically reduce certain taxes on certain items and services and / or to subsidize specific consumption segments creatively has pushed it to settle with the simple way of subsidizing every one across the segments. In the case of diesel the government also failed to take notice of the progressive increase in the numbers of expensive diesel driven cars over the years which is induced solely by the fault in the diesel pricing.

 

Similar misguided decisions and practices throwing back absolutely inverse results are many and many more that are awfully low on effectiveness. Reports on banks run by government tell of stories that ridicule the very purpose of nationalization. In spite of the political push, which is often arbitrary, these banks hardly meet the targets on the lending to the priority sector. A good chunk of the big money lending they do happen to be for big and thriving businesses and much of it defies social and even business prudence. Ever growing and never under control NPAs they build up (they build up) tell about the fault in the system and not really of unexpected casualties caused by economic upheavals. A good check on the NPAs of these banks would tell that most of them relate to fewer accounts, belong to the rich individuals and otherwise thriving business groups. Not surprisingly these banks have discovered a category of barrowers called 'willful defaulters'. Disgustingly, a recent report says that about Rs.23,000 cr was swindled out of the system in the last three years by the employees of these banks which include a good number of top management staff. The new low in governance in India is the discussion about the NPAs of these banks in the parliament and the frivolous advices thrown often at the managements of these banks by those who had assumed supreme responsibility to keep the affairs of the banks in check and some of them have been in charge of the sector for years to make any statement to dispel the charge of responsibility. The soft sounding reprimands can hardly help cut the list since the flaws in the system seem to be indeed creating the loans that eventually turn bad. Consider this classic case. Over rupees six thousand cr wasted in the lending to Kingfisher Airlines tells a lot about skewed fundamentals, irresponsible practices and of course certain lack of capability of these banks in sensing the imminent risk or in understanding their own business, let alone understanding barrower's business. Understandably, Kingfisher Airlines is not just an unfortunate case. It very much looks like a typical one - of lot many that make up the NPAs of these banks.

 

Banks, particularly those run by the government, seem to mostly chase things big - big groups, big sectors, big individuals and of course big money changing hubs. Their ability to know the business and the risk is mostly dependent on the prudence and knowledge of the barrowers. That is precisely the reason these banks loose heavy when they engage (and even team up) with barrowers who are notoriously wise.

 

Banks loosing money to the rich, at the cost of poor, owing to wicked men within and outside has been so regular that the flaws in the system seem to be conditioned and nurtured systematically over the years. These banks also lend to certain sectors without the care for finer thoughts on the larger purpose and thus cause conditions negative to the larger society. Banks feel absolutely secured against collaterals of realty and are willing to compromise larger social good in supplying money against real estate. A major portion of the inflated prices in the housing sector is due to criminally superfluous lending by the banks to property developers that gives them the evil support to keep the prices rising by keeping the flats unsold. The equation is simple. Number of flats done but unsold and sold but unoccupied in any metro city, which on a real count can be terribly surprising, is the stuff that keeps the prices flying ever. And, that is largely financed by banks; to the builders directly and through the investors indirectly. Multiple house loans by banks to individuals is a socially negative practice which in fact creates investors and goads them to stretch out again and again in buying properties as investment. Helping the rich with cash!

 

One other classic example that has perennially used up cash, little - relatively though, away from social welfare unnecessarily is the business of 'Air India'. This is one transport company which has tried everything in the management books trying not to loose money and at a certain point of time had engaged about four expensive multi-national consulting firms simultaneously to - know how. Not even one could tell the guys who asked for their services, that - "...a company that does not have a responsible owner does not thrive". It transports the rich, most of its employs are rich and it is managed by the rich and the government, unlike it has in the case of the PSU banks or the diesel pricing, has any chance of any excuse that can be related with social welfare for running this one. But as in the case of diesel the government, by all chances, will lament the grand loss in this too a bit too late possibly sooner now with more mature operators joining the gang of private airlines who, almost all of them, have proved as misfits for the business year after year.

 

Adve Srinivasa Bhat

Management Consultant

 
Mail comments into: advesrinivasabhat@adve-advice.com
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Copyright: Adve Srinivasa Bhat, India
 

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