Feb 8, 1999
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KAUTILYA Old Days Are Here Again North Block sings the 'Essar, Essar three bags full saar' tune. By Jairam Ramesh If proof were ever needed on why we must privatise our financial system quickly, it was provided last week by a government that came to power vowing to end what it called "crony capitalism" but ended up doing exactly what it criticised. In a most ill-advised move that will set a dangerous precedent, the Finance Ministry has arm-twisted financial institutions (FIs) like IDBI and UTI to finance a Rs 2,500 crore bail-out package for the cash-strapped Essar Group. The institutions will provide Rs 1,700 crore and Essar will come up with Rs 800 crore largely through the sale of its power plant at Hazira. The institutions are livid but are not protesting publicly since they know their jobs depend on keeping their bosses in North Block happy. More such rescue gifts for steel companies like Ispat, Lloyds, Bhushan, Rajender and Mukand are reportedly in the pipeline. Is it just a coincidence that some of these companies have also been strong supporters of the BJP and of its influential leaders and enjoy the backing of self-styled economic gurus of the RSS? If the institutions, in their best commercial appraisal, felt that such help was warranted, then there could be no serious objection. Lenders all over the world will do all to ensure that their portfolio remains healthy and Indian institutions can be no exceptions. What is wrong is the proactive involvement of the Finance Ministry in championing, formulating and coordinating the entire effort. Laying down policy is one thing, brokering deals is another. Under the garb of "sector-specific" policy packages, we are moving back to the pre-1991 era, when FIs were extended arms of the Finance Ministry. Every bad practice in India has its counterpart good practice in a developed country. It is, therefore, being said that what the Finance Ministry has done is exactly what the once-powerful MITI, the Ministry of International Trade and Industry, did to power Japan in its high-growth phase. Apart from the fact that MITI was the by-product of a unique social system and is itself now thoroughly discredited, the MITI analogy is based on a profound misunderstanding of what fuelled the Japanese miracle. The Essar Group has been built by the dynamic Tamil-speaking Ruia brothers, entrepreneurs for whom Kautilya has personal admiration and affection. Two years ago, Kautilya even "spoke" to one fi to look at Essar's Punjab telecom project. The institution examined it and said no. That was the end of the matter. Like most other Indian family concerns, Essar has allowed itself to be horribly over-extended. Its corporate governance practices leave great room for improvement, to put it mildly. At one time, it had a major presence in steel, aluminium, iron ore, shipping, power, oil, telecom and commodities trading. Each of these businesses is investment-intensive. Feeling the pressure of intense competition, Essar has rightly decided to get out of non-ferrous metals and trading. The actual damage to our steel industry from low-cost imports -- one reason being given for the bailout -- is vastly exaggerated. Imports as a proportion of consumption have actually declined from a peak 9.2 per cent in 1994-95, when the economy was booming, to 7.8 per cent in 1997-98. In April-November 1998, the proportion was even lower at 5.3 per cent. The investment famine in the country is behind the steel industry's woes. The industry built up capacity in the early '90s expecting a 7 per cent rate of GDP growth in India and in the hope of world trade growing at over 8 per cent per year. In the past two years, growth rates everywhere have crashed. This has eroded the profitability of steel companies. The immediate provocation for Essar's bail-out appears to be a short-term loan of about $250 million, which it has to repay in July 1999. Essar and its advocates in North Block say that if it defaults on this repayment, then there will be hell to pay for India itself. This has no economic logic. Surely it must have occurred to the pundits in the Finance Ministry that the Government's move itself could be sending the very signals. Are there other ways of avoiding Essar's default? There certainly are. For example, over a billion dollars of the Resurgent India Bonds are parked with the SBI abroad, invested in US treasuries while supposed to be used for lending to Indian corporates in infrastructure. Essar could take a $250 million loan from SBI, London. The risk could be shared among institutions and the debt could be retired once and for all. Essar could then work out a schedule for repaying the amount owed to the SBI. It must be forced to sell its telecom business and if need be loans should be converted into equity for a specified period by FIs. The point is simple -- any bailout must be preceded, not accompanied, by fundamental restructuring of the company. In this case, the FIs must put in the Rs 1,700 crore, if indeed they have to, after Essar has coughed up Rs 800 crore. Even now it is not too late to insist on this so as to uphold the Government's commitment to cleaning up and professionalising the financial sector. |
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