Add this

Friday 22 April 2022

MOVE OVER, ECONOMICS-- CRONINOMICS IS HERE !

   I've always had a sneaking suspicion that my father-in-law always doubted my educational credentials and felt that there were significant gaps in my education. This was based on the fact that I did my Masters in English from Hindu college. I can see where he came from: the English in this Jat citadel was something even Chetan Bhagat would despair of. What we did to the Queen's language should have attracted various sections of the IPC, in particular 303, 376 and 377. But he was wrong- what I missed out on was not English but Economics.

   I know all the basic rules of Economics, of course: that we are all dead in the long run ( and in the short run too, if you happen to be in Ukraine or Lakhimpur Kheri), that every economist has an equal and opposite economist, that when the government wants to rob Peter to pay Paul it can always count on the support of Paul, that the problem with socialism is that eventually you run out of other people's money, and with capitalism that you run out of people to rob. I've even read Freakonomics by Steven Levitt and flagellate myself every week by plodding through Swaminathan S Aiyer's articles and reading Mrs. Nirmala Sitharaman's lips. Nothing works, because I just can't make sense of this dismal science as practiced in our country.

  Take the stock market and its baffling tumescence: it keeps rising and rising even while every financial indicator around it keeps collapsing. It was at about 40000 in March 2020, and then Covid happened. In the next 18 months the bottom dropped out of our GDP, hundred of millions became unemployed, 120 million were forced into poverty, more than 5 lakh people died ( 50 lakhs, according to a stalled WHO report), 4 lakh businesses shut down. But the Sensex kept rising, crossed 60000 last year and is now at 58000. Dalal Street has to be hallowed ground because here even the dead would rise from their graves. I guess somebody is making money out of all this legerdemain but is anyone counting the bankrupted? I can't for the life of me explain how this happens because I myself stay away from shares- gentlemen prefer bonds, you know. But I know of someone who explained this insanity very well, being the head honcho in one of these lunatariums: John Meynard Keynes it was who said: Markets can remain irrational longer than you can remain solvent.

   Consider next our Unicorns, of which we have about 130. Less than 30% of them are profitable, the others naturally pay no dividends to their star-struck shareholders, and yet their market valuation is all above one billion dollars ! How can a loss making company be worth Rs. 7500 crores, for God's sake? The basic laws of economics do not apply to them, however. Every time a Unicorn floats a public issue the market goes ga-ga and dances begin in the TV studios. This, even though a recent Economic Times article reveals that 543 IPOs have been listed in the last ten years, of which 85% have either stopped trading, or dropped below the issue price or turned into penny stocks ! And yet, whenever a new IPO is announced the riot police have to be called out to curb the enthusiasm of the lemmings who want to pour their life savings into it. The most recent example of this virus of capitalism was the PayTM IPO fiasco: the company raised Rs. 18300 crore just four months ago by listing the issue price of its shares at Rs. 2150. It was over subscribed three times. The shares are now trading at just Rs. 659.00 or thereabouts- 70% below the issue price ! Millions have been ruined. As the Kingston Trio sang: when will we ever learn?

  Spare a moment to reflect on the magical properties of our Bankruptcy Code and its prime instrument, the NCLT. You would expect that a bankruptcy law would protect the interests of the investors and creditors of the company which goes belly up. You would be disappointed- it actually serves the interests of the promoters and their ilk. And the magic?- it lies in converting public money into private profits. Ruchi Soya is a shining example of this: a Rs. 31900 crore company which owed Rs. 12146 crore to the banks was acquired for just Rs. 4350 crores by another jholawalla; to make payment of this latter amount he took a loan of Rs.3250 crores from the same banks who were owed money by this company; he then paid off this loan by issuing an IPO for Rs. 4300 crores and getting the funds from the public. The bottom line- said mendicant now owns 95% of a Rs. 40000 crore company by putting up just Rs. 1000 crore of his own funds. And, oh, one more small detail: the banks have lost about Rs. 6000 crore in the whole deal. These are financial contortions worthy of a Houdini.

  This is not an isolated example, it is the norm, and explains why our NPAs continue to increase by a few lakh crores every year. Banks  (read you and me) lose thousands of crores, the promoters who siphoned off the moneys get away scot- free to build on their expertise and float other companies, the banks' directors get cushy sinecures in these new ventures. Here is a short illustrative list of companies which have gone through the bankruptcy/ NPA process and the haircuts taken by banks:

LOAN GIVEN TO-LOAN AMOUNT-NCLT SETTLEMENT-LOSS TO BANKS-BENEFICIARY

DHFL                       91000 crores           37250 crores                53750 crores         Piramal Group

Bhushan Steel          57505 crores            35200 crores                22305 crores        Tata Steel

Essar                        54000 crores             42000 crores                12000 crores        Arcellor Mittal

Bhushan Power        48000 crores             19350 crores                28650 crores        JSW Steel

Lanco Infra               47000 crores             5300 crores                  41700 crores         Kalyan Group

Videocon                  46000 crores             2900 crores                   43100 crores        Vedanta Group        

   Do you notice the delicious irony in the above figures? One fat cat exits with his pockets bulging and another moves in licking his chops.  You and I get another 100 bps less on our savings because the bank has taken another haircut and has to recover its loss from its depositors. This perhaps explains why private sector investment has been declining- a promoter can make make more money by bankrupting his existing company than by starting a new one! One cannot but suspect that these bankers and industrialists are part of the country's most exclusive club, relegating Parliament to second place. There is just one eligibility requirement for admission- one must possess a degree in Croninomics . It's high time the UGC introduced this in its syllabus, for the old style Economics is now as obsolete as decency and honesty.


11 comments:

  1. Finally at last I see the truth at 70yo. Though I graduated with Eco, helping a close friend get through too, but it's now that I witnessed Croninomics in action.
    Excellent blog post 🙏

    ReplyDelete
  2. They say justice delayed is justice denied. Our nation is a great example, a cut and dry rape case goes for years, while demolition of a unauthorised occupation of road is disposed in an hour. The corrupt and the cronies become chief ministers and carry on. Family rule is the norm in most of the states and it's perfect constitution working democracy. WHO adds zeros on COVID deaths with divine eye. Every day cry of poverty, and population growth is abundant. They call this country third world aptly, every neighbour wants to migrate in to this country. What economics all the laws are defied and it goes on, God only knows how?

    ReplyDelete
  3. The Truth about the Economy, but more insight into our croni-conomists! Do economic offences figure in the NCRB data??

    ReplyDelete
  4. Could only have been written by a bureaucrat Babu, who pretends to not understand why such decisions are taken, or how economics work..

    ReplyDelete
  5. Someone must stop this loot of public money and bring to book the culprits.
    Brilliant article as always by Avay Shukla as long as he stays away from politically loaded blogs.

    ReplyDelete
  6. This is the age of acche din - with a vengeance. It's all going to get better, much better. Thoda wait pleej.

    ReplyDelete
  7. The low one time settlement number reflects inaction on the part of banks. Doing nothing is the safest bet for the Chairman. Enterprise value depreciates rapidly - but the PSU banks have zero accountability - answerable only to their political masters and the bureaucracy in the MOF (who now have their man in RBI as well). NCLT and the Insolvency Law was a good move, except badly drafted law has led to delays creeping in and clogging of the judicial process. The problem is the way the Bank's Chairman are appointed...and the Banks Board Bureau... didn't change anything. Members are appointed based on their closeness to their political masters. The buyer in the NCLT process is paying true value because of the risk of unknown liabilities and certainly not "another moves in licking his chops." The seller banks rather sell cheap, rather than make the effort to package the company for sale - as was the case in Air India - buyer had to take over all the staff.

    ReplyDelete
  8. It is not pleasant hearing PM of Singapore describing our political system.Soon many citizens of our country would be encouraged to eat pakodas and not cake!

    ReplyDelete
  9. The handshake of the wily politician with the shrewd businessman makes an asphyxiating partnership that engulfs all free and ethical business practices to create an oligopolistic environment favouring its chosen few.
    We in India have added another hand to Cronyism - the Crony Baba - that demi-god, emancipated higher life form who invariably has long white, unkempt hair with a similar beard and moustache radiating across his face. Who spends millions in dollar currency to maintain the simple facade in order that the commoners get beguiled by his frugality. I urge all to read a scathing article by noted journalist Harish Khare on this in The Wire dated 11th March 2016.

    The confluence of this new triumvirate has had an unshakeable grip on our businesses and polity. Where else do you find shifty-eyed business magnates, super hairy men in flowing robes, and unctuous politicians, assembling at economic conferences, book seminars, business conclaves and life conventions - enlightening us on the benefits of GST and Demonetisation, which we attend to after paying for the ticket plus the GST thereon, and return feeling divine by the cathartic effect of Demonetisation. While many of those who have retired find their interest incomes whittling away faster than their health. Those in jobs find themselves caught in a maelstrom, unable to switch or stay peaceful in what they have because of zero security. As to those in business, they may as well shut shop unless they are safely ensconced among the cronies.

    Cricket has had its brush with Cronyism too - can we forget Hansie the Cron(j)e who started it! The spectre of match fixing still looms large particularly over privately organised cricket tournaments. The IPL has never been immune to play mixed with business and betting. Where the money is high and beauty only in the flesh, the IPL is almost perfectly manicured to derive dodgy results and dubious outcomes in the excitement it supposedly throws up.

    I am tempted to believe that Economics as a subject of pursuit is a precipitate of Cronyism and not the other way. The latter being the original activity from the inception of Man, and Economics having crystrallised as a purer and higher derivative of research, aimed at unifying society into its fold in the form of free activity, liberated from the vice of Cronyism. How much of that really happens in the world is debatable.

    ReplyDelete
  10. the problem is well known, pernicious and supported by all those in power, whether politicians or bureaucrats - the former actively conniving, the latter at best not protesting against their masters & the bankers/lenders having little interest in the outcome. The judicial & regulatory framework is gamed ab initio.

    ReplyDelete