DARE - Because Entrepreneurs Do

Budget is out, and there are more brickbats than cheers for it for the Finance Minister (FM) Pranab Mukherjee. The market has reacted adversely falling drastically immediately on the day of the budget. Fiscal deficit is at 6.8% of the GDP, with government announcing huge sops for rural sector. There has been no concrete promise on disinvestment, though a paltry sum of Rs1,112 crore is slated to be raised. Industrial sector across the board does not find encouragement for itself in the budget. This has come as a bitter pill in the aftermath of the Economic Survey, laid out before Parliament just a couple of days ahead of the budget, asking to raise Rs25,000-30,000 crore from disinvestment.

But is the budget the conclusive statement by the government as far as the policy is concerned. No, it is not. Budget is an important policy or intention announcing document of the government, but it has not remained as sacrosanct as before.

As FM said there was a clear mandate to give more push to the rural development policies. The changes in rural areas are there for everyone to see. NREGA has made definite impacts in rural areas. FM is, after all, not supposed to do what pleases the market all the time. There is no harm in focusing on creating a sustainable growth in rural areas. To expect a 4% growth is agriculture is appreciable, and if this is achieved, it will give a tremendous boost to all other sectors, including the Indian industries.

FM has also rightly focused on infrastructure. The government expenditure has gone in excess of Rs10 lakh crore, and the provisions of Fiscal Responsibility Act has gone for a toss.

Fiscal deficit at a high of 6.8% indicate a possible return of monetization policy. When coupled with the 4% fiscal deficit of the states, this assumes a scary proportion. This makes it a cut and dried case for a distinct increase in interest rates and inflation. This in itself will be a paradox, as India will prove to the only country in the world to have high interest rates at this juncture - at a time when LIBOR is in the vicinity of 0%.

But the FM is a learned person, and he is well aware of the expectations of the various sectors, and the high fiscal deficit. FM has given indication that FDI will be increased. It will be no surprise if the FDI limits in several sectors are liberalized further. Minus the communists this will prove easier for the UPA -II government. In such a situation, it will also be no surprise if the amount raised through disinvestment is actually used for improving infrastructure. This will help keep interest rates and inflation under some check.

The FM has, in all probability, shown only the tail of the tiger by announcing a small target from disinvestment. The FM has also hinted at it in the post-budget interviews. Some big PSUs would witness disinvestment for sure in the year, and amount raised would be many times more than the target.

The market may show disapproval in the immediate scenario, but affects of huge expenditure on rural sector would start reflecting in the second half of the year. This will have a positive bearing on the share markets as well in the long term.

One should not forget the government is in place for five years, and not just for this year. Fiscal deficit may be allowed to inflate it a bit this year, but it may not be the same next year. FM has given an indication that deficit would be brought down to 5% and subsequently to 4% by 2011-12. And, one thing is sure, a little inflation for higher growth rate is not an unusual event in India.

One must wait and see the announcements by the FM later in the year. It is pretty sure major policy decisions are going to be announced. We should not discount the fact that announcing major decisions outside budget have become a common practice now.

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Does political climate influence economy, or is it the money which control politics and shape up policies? Difficult to say, but time and again, it has been proved money makes a lot of difference to the political climate and policies. This seems to be proving itself once again, and this time in Greenland - the secluded Arctic island which has been under Danish control for close to 300 years.

The Greenland natives, the Inuits, have decided through a referendum to grant local self government additional powers of self-governance over domestic affairs. The island witnessed a turnout of over 70 percent in the referendum, and over 76 percent voters voted for more self-governance powers.

This has given Greenland, which has a population of only 56,000, its most significant taste of independence since Danish rule was established in 1721. Denmark now remains only in charge of foreign affairs, security and financial policy. In addition, unlike Denmark, Greenland has opted to remain out of the European Union, as the Inuits do not find any resemblance to Europe and Europeans. A new law is expected to be in place soon permitting Greenlanders to be recognized as a separate people under international law and make the Eskimo-Inuit tongue known as Greenlandic the island's official language.
To many these are the signs of Greenland moving towards independence, which, in turn, is expected to bring prosperity to the island population, on the lines of another Arctic country Norway.

This prosperity is slated to come through the exploitation of the huge oil and gas and mineral reserves Greenland is supposed to have. Seismological analyses by experts in the US, Canada and Greenland have pinpointed enormous oil reserves, especially off the west coast. EU governments estimate that Greenland's oil reserves are at least 110 billion tons. Two smaller fields west of Nuuk (the capital of Greenland), with reserves of about 2 billion tons, are believed to contain as much oil as the amount produced in the North Sea over the last 40 years. Eight other fields are located off the coast of Disko Bay, at the mouth of the island's famous Kangia ice fjord, with its picturesque icebergs.

The potentials of exploiting these, ironically, have been unlocked because of the global warming. Arctic circles are increasingly getting ice-free in summers, and this is what raises the hopes of Greenland to do an economic metamorphosis. New relationship norms, after all, dictate that revenues from oil and minerals will be split between Denmark and Greenland and will be deducted from the subsidy of $637 million, that Denmark provides Greenland every year. According to calculations done by the treasury chief of Greenland, if oil revenues exceed 6.5 billion kroner (about €1 billion or $1.28 billion), the island will have practically bought its freedom.
This can prove a real good news for Greenland, as it is ravaged by low rates of university and college education, high rates of alcoholism and domestic violence, and high unemployment rates and suicide rates.

When this happens is still a question, but even Greenlanders seem to be aware that it is no longer possible for Denmanrk to decide on their independence. With tacit support from Canada and the US, it seems this time round economic interests will dictate next round of politics. And, it is getting clearer, it is just a matter of time when Greenland will be a full fledged independent nation, though it would be interesting to see how a big country (Is many times bigger than many European countries in size) with a meager population manages its international presence. Denmark seems to have resigned to the fact.

 

 

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National Highway Project, the ambitious project of building highways crisscrossing the country, seems to be making a comeback after hitting a snail's pace during the last government. National Highway Authority, the autonomous body formed to oversee the highway development works, saw as many as four new chairpersons in one year, thanks to the meddling by none other than the then Transport Minister T.R. Balu. The slow pace of road construction was widely criticized in media and by economists. Surprisingly, the opposition failed to cash on making this an important issue in the elections, though this had all the potentials of creating problems for the Manmohan Singh government. 

With the Congress-led government  returning to power with a better mandate, the Prime Minister realized the mistake, and has brought a more active and decisive person in the Transport Ministry.  The ministry, which  has already missed several deadlines, seems to be trying to catch up. The ambitious Golden Quadrilateral of highways still remains incomplete and the National Highways Authority of India (NHAI) was unable to award a single project in 2008-09. 

Kamla Nath, who  earned praise for his work as Commerce Minister, has already announced an ambitious plan to construct 20 km of road on daily basis. For this, he has already sought doubling  budgetary allocation to Rs 6,000 crore from Rs 3,350 crore as available currently.

Kamal Nath is also seeking to earmark funds for projects other than those under the NHAI. The Minister is pitching for a "Road Finance Corporation (RFC)" with an initial corpus of Rs 500 crore to provide easy financing options for the sector.This may probably prove important as the investment required under the 11th plan is estimated at Rs 3,50,000 crore. This would be reuired to complete a road length of 70,000 km. Of this, state spending is limited to Rs 2,50,000 crore and the balance has to be mobilised from the private sector under the public-private partnership (PPP) route. RFC can be particularly  important for a time when slowdown grips economy, as is the case right now.

In order to rekindle the interests of the private sector bidders in the highway projects,  NHAI  has restructured the cost of about 35 projects across the country. It has sought to innovate a lucrative model for private parties. This ia hybrid model combining both toll as well as annuity payment under build operate transfer (BOT) scheme. According to the proposed model, a concessionaire will get the viability gap funding (VGF), meaning the gap between the cost of the project and the expected return, up to a maximum of 40% of the project cost from NHAI. However, in case the developer needs more than 40% VGF, it has to make its own investment.

These efforts have borne fruits, and the private parties have started showing enthusiasm in the latest round of bidding for upcoming projects.  Of the bids invited recently for 35 road projects worth Rs 39,000 crore, 25 received enthusiastic response so far in the technical bidding stage, a far cry from the scene in the previous government. 

These sound good, but will these bring back the highway program on track? Will the Minister's ambitious target of 20km of highway every day become a reality? This is not so easy. Planning commission has already raised objections to the hybrid model, the NHAI have used to invite tenders for the upcoming projects. Eyebrows have been raised over the target of 20km a day. Red tape is still there to slowdown the pace of highway development. Private players are restricted to bid for more than eight projects, and documentation required on their part while bidding for projects run into more than 9,000 pages right now. NHAI has asked Kaml Nath to cut on these. Time taken from the bidding to actually winning a bid is more than four months right now. It is important to cut on this.

 One things is for sure - there is a realization among the top rungs that highway program needs to gather some momentum now. Intentions for the same has been shown. What remains to be seen is whether the good intentions translate into action cutting across all bureaucratic hurdles. Hopefully, it will be so this time. 

 

 

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This is a tough time for several sectors, with one of those severely affected being the aviation sector. Air India, with the largest fleet in possession, is struggling. It  posted a loss of over Rs4000 crore in the last financial year. It is said the airline is making a loss of Rs15 crore every day. The situation on cash front is so grim that the management delayed the salary of the staff in June. It has also appealed to staff to work one month for free -  demand akin to what British Airways made earlier this year.

No doubt the aviation sector is witnessing unprecedented dip in air traffic, and with it dips the revenues. Being so desperate Air India has sought a package of Rs14,000 form the government to stay afloat. The government is considering the package, though the final aid is expected to be much less than demanded. 

But the government has asked the company to come up with a 5-year plan to turn the company into a profitable venture.  

Woes of the company are clear now.  What are the solutions to these?

First and foremost thing - NACIL, the company controlling Air India, must cut on the perks it provides to its employees in the form of free business class travel. It is assumed close to 30 percent of Air India business class seats are filled by its own staff. Instead, if the company shows impressive results, it can give some bonuses or incentives, once a year. 

Secondly, the company must consider trimming its employee size. With a fleet of around 150, it has over 50,000 employees. Contrast this to British Airways, which maintains a fleet size of 228, and yet has just over 40,000 employees. When British Airways is making loss despite leaner workforce, it is but obvious to expect the worse of Air India. 

Thirdly, the company must reassess the routes it flies on. If certain routes are proving really burdensome, it must get rid off those. It should not buck under political pressure of maintaining social obligation. If there is pressure to carry on flights on these sectors, it should deploy smaller planes, and that too procured on lease. MDLR and Paramount Airways have succeeded in making profits plying on 'less lucrative' routes'. 

Most importantly, it should create more accountability in the system. If ticket sales are not increasing, it must explore the reasons for it, rather than relax and look for government packages to be bailed out. Best of facilities at any airport in India is with Air India, and yet Kingfisher and Jet manages to sell more than Air India. 

The fifth step the company can take is to try raise resources from the market through disinvestment, either in the form of IPO or placement of equity with some investors willing to invest. 

Last, but not the least, the company must work on enhancing the reliability of its brand through one way or other. For instance, Kingfisher advertises itself as the only 5* airline company in India. Air India can try to get something like this. It has best of pilots, and a reasonably good record on keeping flights on time. The company can use this or something else on which it can create a refreshing brand image for itself.

Hopefully, the Finance Ministry passes on stern messageto perform or perish. Yes, as a last resort government should think of closing down the company or selling it off if its proposed measures also fail to stimulate the company's growth. This has happened in the past in many countries including Malaysia, Birtain, Netherlands, and Italy.

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After a long lull India's initial public offering (IPO) market seems to be coming to life. IPO of  Mahindra Holidays & Resorts, part of the Mahindra conglomerate, is all set to hit market on Tuesday (June 23, 2009),  aiming to mop up anything between  Rs255-301 crore.  Club Mahindra IPO is the first equity offering by a major group in 15 months.

The company, which has 27 resorts in India and Thailand (of which 11 are company-owned),  is going to sell 92.65 lakh shares representing 11 per cent of the fully-diluted post-issue paid-up capital through its IPO. The company has fixed a price band of Rs 275 to Rs 325 per equity share of the face value of Rs 10 each for the initial public offering (IPO). The proceeds of the issue are expected to be deployed in setting up new projects and expansion of some of the existing resorts.

 Company officials are delighted about the recent spurt in the sentiment of investors, reflected through rising Sensex.  The firm's revenues and earnings have grown 43% and 76% respectively, on a compounded basis, over the past four years, and its membership (close to  93,000) has shown consistent increase as well. This must have boosted the confidence of the company to price its IPO in the said band.  But is the pricing on the higher side?

There are reasons to believe so. The firm was priced at Rs349 per share last year, when it placed minority stakes with a private equity player to raise resources. The firm's value was estimated at $815 million in the international market. Compared to it, considering the price band announced and the number of shares put on the offering, the present market value of the firm is anything between $480 million and $565 million.

Considering Club Mahindra depends almost solely on the discretionary expenditure by holiday makers, the pricing seems quite a high. At a time when the economy is on the path of recovery after a slowdown, possibility of people not responding warmly to the IPO at this price range cannot be ruled out completely. It won't thus be surprising that company does not get the kind of response it is expecting. Perhaps Club Mahindra is relying heavily on the brand name of Mahindra, which has made big news recently in other sectors, particularly by acquiring Satyam. What also seems to have swayed the company to go for this pricing is the fact that it is a market leader in time share segment in the market. Close to 72 percent of the market is with the company. But it should not have ignored another fact that time share is not a popular trend in India. Many people do not even understand the concept.

The company also understand this. This probably  explains why the company is planning to make a foray into budget segment in future.This if for future though. Presently, we will have to wait and see how public responds to the IPO. Hopefully, it will work for the company.

 

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