Wednesday, October 29, 2014

Global Manufacturing and Make in India magic


Too much intrigrued by the brouhaha of Make in India, I have been following the socio-political scenario globally and every political institution be it in the struggling European clusters, labour intensive Asian behemoths or in the uber mature US states, is rightfully allotting significant importance to one critical data to measure the political and economic success of the countries. Employment data. Rightfully so, the need to create jobs has come out as one of the paramount drivers to satiate the public outcry for progress and development.

“In a century, once, the youth gets to choose between respectable competence and ways of tainted wealth. One who is honorable and dedicated, holds the single element of success.”
Leadership of even self-sufficient countries, such as the Saudi Arabia which has been maintaining significant positive balance of payments for eons now has stressed the need to pursue the goal of job creation in right earnest. The creation of job is not only the creation of money and constructive chain of reactions but also a tool for countries such as India and China to keep its teeming youth’s energy constructively challenged in building a nation.
Since the industrial revolution, Countries have looked at manufacturing sector to create jobs through the government investment and mediation. It is the easiest and most plausible sector where the government through its investment can jumpstart the job creation process and see visible results from Day 1. It makes sense for countries like India and China, since they have such a huge demanding population coupled with the cheap manpower to give me the cost competitive edge.
The other side of the scale is also tipped as economic demand theory rules across. As more scope is presented so is the indulgence of the economies. The room for export is increasingly getting crowded and limited as more countries jump into the manufacturing bandwagon. Thus forcing countries to start leveraging their competitive advantage factors to attract investment and increase its product marketability in the global arena.
Russia, Latin American countries such as Ecuador, Argentina, Peru, Brazil and Middle East countries such as Iraq, Saudi Arabia and Israel leverage the wealth from their natural resources such as oil and gas and minerals. Scandinavian and Germans use their highly skilled manpower and some like India and China are using their access to huge demand of consumption and cheap manpower.
However, a special mention goes for countries such as Singapore and Dubai, who have built their prowess of people and propagating their efficient governance as a magnet for investments.
India has been failing miserably in these counts, it has neither been able to leverage its huge pool of intellectual capital nor has it been able to attract investors propagating its huge scope of internal consumption market.
Manufacturing in India has been trending on wrong path with no steering from the government. Indian made products can be only served to the purpose of internal consumption since it has limited scope of exports. India has to first fix the competitive disadvantages such as abysmal power cost, high capital cost, and crippled infrastructure from a governance and utilities standpoint and fill the void of superior technology in manufacturing. India needs to primarily work on making the domestic market lucrative for manufacturing sector, greatly for SMEs in terms of scale, profitability and structured governance.
The irony of the matter is itself evident when India is trying to position itself to the world as one of the largest consumption market to investors to look and invest in India but we are trying to fix the export sector more than developing the internal market dynamics of the country.
India has to first work on plugging its loops in the low quality product standards more so from changing the global perspective as they view Indian made products. From the sheer number which we boast of, the manufacturing sector would hardly require to export if it satiates the internal demand of 1/5 of the world’s population.
The government from a longer term perspective should look at developing co-manufacturing and knowledge sharing agreements with the Germans and the Scandinavian economies at the corporate level so as to develop and enable skill transfer to bring the Indian workforce at par with the global quality standards. It should also initiate educational and curriculum changes at the IITs and NITs and encourage steps and measures such as student transfers and invite lecturers and industry doyens of the advanced economies so as to develop the nubile skills at its germination.

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Indian government should look at developing the sector as a hub for developing homogenous product market, which can leverage the huge manpower to provide scale. Sure it’s a utopian idea, given the kind of fragmented political power centers are emerging at regional level. The idea of uniform taxation, standards of product manufacture, uniform regulations and laws, and inter-state movement across India would take an impossible convincing skills and humungous political will to be implemented.
The next step should be our focus on facilitating innovative technology. India has given birth to the disruptiveness, ‘Jugaad’ but it has failed to come up with new invention of core technology. Since long we have been dependent on the Koreans and the Japanese to bring forth inventions and Indians have been successful in replicating it by tinkering around and customizing it to Indian needs. We have been awfully brilliant in reverse engineering the products and bring forth the cheaper version of everything available in the market but shamefully none as a first except the Nano (being a fan of how it was developed, I had to mention it).

Oh I hear a snigger there, well, it would seem good to add, that a need of an innovative product begins with an understanding of market need. Importantly, the need should be fulfilled by precise delivery of the product, sieved through financial value, albeit, with a pinch of social brand value (Hope, you are happy egomaniacs).

Once the need assessment is set right, the product is a cakewalk. Today, the value emerges is in realizing the product outlay right and tailor it to suit the need to hit the sweet spot, e.g., Apple.

It is evident that judgement plays a crucial part in evolution of innovation and as always failures will form a part of the learning and growth. If we are to encourage innovation, then we also need to embrace failures and even celebrate them. In India culture, we hardly respect failures and we go a step ahead and ridicule them. This typical mindset will have to change to propel manufacturing ahead in India. We should look at encourage the innovation and start looking at valuing intellectual property.

Saturday, October 4, 2014

SARFAESI Act, 2002 and the Indian Banking Industry.


Last couple of weeks has been good reading time going through the SARFAESI Act of 2002.
SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act was formed for the banking sector (including financial institutions) to allow them to seize underlying security such as hypothecated, mortgaged and pledged collaterals, without the court's intervention in secured loans category. This is really refreshing as now banks can focus on what they were meant to do rather than focusing on building distressed asset teams or in other cases were outsourcing it to specialized firms. A great relief for the PSU banks as they never would have amassed the toughness for the part.
Just to look at the numbers the stressed assets at banks (NPAs + restructured loans) had increased from Rs. 0.7 trillion in 2003 to Rs. 5.3 trillion in 2013. Banketing the asset sale to ARCs was not helping the cause. The AMCs (Asset Reconstruction Companies) were not helping much than just being a way of government recapitalization to reflect on the bank's balance sheets (I hope we were not thinking to fulfill the Basel III norms through it, pun intended)
The ARCs were crippled by too many unnecessary and myopic regulations, hail the RBI and the financial lawmakers :P . Oh just for the record, Indians are known to spoil the broth by bringing in too many cooks… All  the time  without exception, especially with Government machinery works. The banks should have never delved into peeking what the ARCs do with the sold distressed assets. The system should have let the ARCs function independently and not mire it with short-sighted RBI over regulations.

The manner in which the sales of the distressed NPA's to the banks were executed was opening up the wounds formed from the banks frailty, majorly Public Sector ones.
Predominantly, the banking system has norms driven more so attributed to regulatory compliances rather than risk assessment, simple example being even though an asset getting redundant and after being overdue on for 3 months period is declared as non-performing, the law lets the bank provision the loss amount across for 4 annual balance sheets just delaying the booking it in the balance sheets.
However, in reality when we effect a sale of the assets then we book the loss upfront for the year. This has lead the banks to play smart and hold on to the assets on their balance sheet till the book value is optimal to sell the asset. The ARCs do not get the asset till they have nothing left to salvage anything as value. The ARCs were doomed and this actually send the ARC industry to cripple away.
Ideally, the banking system should look at bad assets sale exercise in a more commercial viable approach and not just for salvaging lost pride for meagre cash, which at times don’t care of the transaction cost of the deal. We need to act upon some issues such as bringing in rigor (forgive my American spell errors) for the provisioning rules for the NPA.
We should be immediately condemn the shortsighted nature RBI/ of the 2 year time frame given to the CEO's of the PSU's. Every CEO just focusses on trying to not be in any bad news (Sale of NPAs) and play the musical chair game with his/her successors. Their major is just to avoid any dent in the balance sheet due to sale of NPAs.
The other reason for the dismal performance is the debt recovery tribunals (DRTs) and the process errors in the bankruptcy process. The outstanding amount for the DRTs has been hovering around the 15% recovery in the last two years. The SARFAESI Act didn't help the cause and push the number merely by another 5-6%. Restructuring these ARCs is still a laborious and time taking one, which calls for bringing in professional skills and long term financing, both of which ARCs may not currently possess. Given the time and cost involved in this type of restructuring, only NPAs with very high recovery potential will be selected for this type of resolution.

Oh the rabbit hole keeps on getting deeper …..
RBI please bring some political will to reign in some sense about the Acts or recruit better people to effect loopless change.

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