Wednesday, February 08, 2006

Why Liberalize?

Since 1991, India has seen a lot of industries being liberalized through relaxation of some government regulations. Many public companies have been privatized by selling off to private players. There has been a marked improvement in all parameters like growth, productivity, no. of jobs and consumer welfare. But I think there is still a lot of confusion on the very objective of these exercises, whether it is deregulation or privatization.

What is the aim of any economic reform? Is the objective to reduce prices through competition? Is it the welfare of the consumers? Or is it to generate jobs and create growth?

I think it is none of those. I think the only objective of economic reform is to deliver “economic freedom”! It is to give a free hand to individuals to conduct business amongst themselves on mutually agreeable terms. All the above are probable effects of the reforms, but not the main objectives.

The debate on reforms is too often led astray because of faulty assumptions about the objectives. And many a times decisions are taken which help achieving some of the above objectives but still leave a lot of scope for the state to indulge in its favorite game of dealing in favors using public money.

Take the example of the liberalization of the telecom industry. It has seen mind boggling success in terms of the effects, like reduced prices, better services, job creation etc. But is the industry truly free? We still have the state involved in the business of telephony through BSNL and MTNL. It is also the policy maker. The fact that there is an inherent contradiction in the state being both the policy maker and also a participant in the market is completely neglected by everyone! The industry continues to be over regulated with high levels of taxation, with restrictions on innovative means to reach the end customer and a continued protection of the vested interests of the government owned companies.

Ideally the first step in a process of introducing competition and private money in a state induced monopoly should be to break up that monopoly and sell the pieces completely to private players. This way nobody starts with an unearned competitive advantage. Therefore, BSNL should have been privatized first and the government should have exited the industry completely. Simultaneously, the rules should have been simplified to make entry and exit in the industry easy.

The way telecom was liberalized in India, BSNL started off with a comparative advantage due to its ownership of a huge network, which it had built up slowly over time when there was NO COMPETITION. It will continue to have an advantage due to its early start and the fact that it is also the policy maker.

Similarly, another industry which is seeing increased private participation is the aviation industry. There too the same state prevails. The state is still an active participant in the market through AAI and its two carriers IA and AI. Even though some airports are being privatized, the public monopoly is being replaced by a private monopoly.

Therefore, after the main airport in Mumbai is privatized, will it face any competition? Can another private firm buy land and set up from scratch a whole new airport in competition to the existing one. Then the airports will really want to attract both the airlines and the passengers to make use of their infrastructure for take off and landings.

Let me clarify that I do not insist on competition per se. Competition is not the objective of reform! But in a really free market, there is always a chance to compete, which means no regulatory barriers to entry.

Like I said, if setting up a second airport in a city is an unviable financial proposition, then no one will try to do that. But if the law of the land disallows it when it could be financially feasible, then we have a situation where the monopoly is forced.

Take the example of railways. If and when the government decides to privatize it, will the simple privatization of the railways work? Will the industry reach the same equilibrium that it would have reached had the government not interfered at all?

Think about what would have happened if the entire railway network in India would have been built by private companies. Company A would have built a track from Bombay to Pune and run a daily train service. Company B would have got the same idea and would have started the service between Delhi and Lucknow. Slowly, the railway network as we know now would have been built up, with different companies building and own in different parts of it.

One day, company C would have decided to run a train from Mumbai to Delhi. It would have made agreements with A & B to use their tracks. And so on. Then one day, company A with its huge profits, would have decided to take over company B to form a big network, as it might have been economically more feasible to own the rail tracks. These kind of developments would have shaped the ownership structure, and an equilibrium would have been reached which would have created maximum overall value!!

Now, if we simply sell off the whole railways to one company and disallow any other company from building up a parallel network, the public monopoly will simply be replaced by a private monopoly. Will the industry ever reach the equilibrium?

Therefore economic reforms have to achieve one and only one objective, and that is to set individuals free to trade on mutually acceptable terms. All other objectives eventually destroy value!

Monday, March 14, 2005

Wag the Dog

I was having a chat with a couple of friends today on the political situation in the US, when I was reminded of this wonderful movie starring Dustin Hoffman and Robert De Niro.

Wag the Dog is a tragicomic political satire, with a very imaginitive storyline. Dustin Hoffman stars as a Hollywood producer who is given the task of "producing" a war in far off Albania in order to divert attention from an underage sex scandal involving the President. Driven by the immense challenge of creating a war out of thin air, Hoffman creates a frenzy amongst the media hungry public. The best part of the story is when he "creates" the story of a US marine caught behind enemy lines, Sergeant Schumacher (Woody Harrelson). Using the picture of a little known murderer, he takes the public for a royal ride. An old classic "The Old Shoe" is "created" and played on the radio, dedicating it to Sergeant Schumacher, making it a massive hit! Then he creates the story of how some people are expressing their solidarity to the war hero by throwing their old shoes onto tree tops. Soon all of America is throwing their old shoes onto tree tops!

At the end, the "war" is an immense hit, enabling the reelection of the President. Having produced the best work of fiction of his life, Hoffman is left yearning for the fame and recognition that he thinks he deserves, but can never get.

This film eerily resembled Monica Lewinsky episode, but it was made before the controversy and the subsequent restart of military action in Iraq.

This just set me thinking on the power of the media. Just by leaving out some things, and making some small additions, the media can totally change the way the Truth is remembered
by the general public. This kind of spin doctoring has been going on for a long time though...
The truth being changed, or worse, stories being created out of thin air to suit certain vested interests, has been going on since time immemorial. Just study most of world's religions and their texts as a case in point :-)

Monday, March 07, 2005

Gandhi's expirements with Extraconstitutionality

I think there is something in the surname Gandhi that makes all types of people behave in an unconstitutional manner.
First there was the saintly Mahatma Gandhi, who used his fasting skills to the hilt in order to get things done as he wished ( e.g. appointment of Nehru as Congress President inspite of the election of Subhash Chandra Bose)
Then there was the villanous Indira Gandhi who severely deroded all institutions of democracy in India and even went to the extent of grabbing complete power by force.
Now, there is the self sacrificing Italian bahu of the great Gandhi parivar, who is resorting to cheap tricks to grab power in states (Goa, Bihar, Jharkhand.... )

Sunday, October 03, 2004

Cruel Joke

If it is true that mint causes impotency, then I must say that Polo - the "mint with a hole" is a rather cruel joke!

Friday, October 01, 2004

Some things that I have been dying to do:
1. I have been dying to get my hands on the a sexy new black Mahindra Scorpio. I just love the looks of that vehicle and from what I hear, it is quite a powerful and comfy machine. Though I cant buy it as yet, I am definitely going to get a test ride from some showroom.
2. Watch the movie Shwas. All friends who have seen it have loved it. Even the unemotional ones claim to have shed tears. I want to find out if it has the capacity to draw tears from this emotionless rock(as alleged by someone).
3. Don the gear, pick up the bat and get onto a lush green cricket field with a beautiful turf pitch. Its been ages since I last played a decent game of cricket. Sob!!!
4. Post a blog about something.. anything!! ( here it is)
One down, three to go.

Thursday, September 23, 2004

The Australian tour of India

There is an interesting change I have observed about the typical Indian cricket fan. He is generally extremely pessimistic about India's chances against the likes of Australia and South Africa, even in home series'. But nowadays, when it comes to test encounters against Australia, inarguably the most dominant champions since Clive Loyds worldbeaters, there is a surprising swagger in the stride of the fan. He seems confident that the world champions will once again bow to the Indian might at home. Australia has repeatedly failed to win any series in India for the last 35 years. Even after the resurgence of Australian cricket under Mark Taylor, they have continued to fail in India.
Going plainly by gut feel, I think that this is going to be the historical series, when Australia conquers their last frontier. They came close last time round under Steve Waugh, when they led 1-0 in the series, and had the Indians on the mat in the first half of the second test. Just as people started predicting a 3-0 whitewash, Rahul Dravid and VVS led an amazing fightback to reverse the direction of the series. The series was won, but it took awe inspiring performances from Harbhajan and VVS to put down the Aussies. I just wonder whether we can expect miracles to happen everytime.

On a purely objective evaluation though, I find that this Indian team is actually a much superior bowling side to the one in 2001. We have much better bowling teeth this time round with Irfan, Zaheer, Nehra, Balaji and Agarkar giving Saurav plenty of wicket taking options. Particularly Irfan seems to be a cut above the rest of the Indian bowlers. If you compare a young Srinath or a young Zaheer to the current Irfan, he is clearly far ahead of them in terms of both talent and discipline.
Also, Anil Kumble, who was absent last time, is back in action and bowling well. Harbhajan has returned from his injury, and if his bowling in the ODIs is anything to go by, he is in divine bowling form.
The only worry may be in the batting department. But if we look back to our recent performances in tests, the batting has been nothing short of superb. It only remains to be seen if the batsmen let the recent one day reverses affect their confidence.
All in all, it is going to be one helluva contest and a great time for cricket buffs like me.

Saturday, September 11, 2004

Market Test

I have always been a firm believer in the principle that every company should stand up to the test of the market. For example, any company which is being closely held by a conglomerate will always perform better if it raises capital from the general public. The market ensures that the value of the firm is evaluated everyday based on the business decisions that its managers take.

Simply put, the market is many a times the best impartial judge of the ROI of a business decision. In an openly held firm, every action of every person in the company theoretically affects the company’s market value. This happens since each employee’s actions will have to affect either the cash flow potential of the company or the risk profile of the company, thus affecting the company’s market price. Thus in such a firm, the onus is on the managers of the firm to align all their structures, processes and plans towards the improvement of the future health of the company.

This belief is only being reinforced now that I am getting a sneak peek in the day to day running of exactly such a company.