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MY HEART WEEPS FOR INDIA Inc.

Starting a business is not for the faint of heart. While the entrepreneur creates thousands of jobs, the system kills the entrepreneurial spirit. Not NPA’s but obsolete business models and strangling government systems are the culprit.

Had it not been for the entrepreneurs , where would have Indian Inc. been or will be ?

Debt and credit are the lifeline of any economy. Generally speaking, because credit creates both spending power and debt, whether or not more credit is desirable depends on whether the borrowed money is used productively enough to generate sufficient income to service the debt. If that occurs, the resources will have been well allocated and both the lender and the borrower will benefit economically. If that doesn’t occur, the borrowers and the lenders won’t be satisfied and there’s a good chance that the resources were poorly allocated.

In assessing this for society as a whole, one should consider the secondary/indirect economics as well as the more primary/direct economics. For example, sometimes not enough money/credit is provided for such obviously cost-effective things as educating our children well (which would make them more productive, while reducing crime and the costs of incarceration), or replacing inefficient infrastructure, because of a fiscal conservativism that insists that borrowing to do such things is bad for society, which is not true.

Can $ 5 Trillion economy be achieved by sacrificing entrepreneurs ???

Dark times shall prevail for Indian Inc. if we do not do the following to support family businesses which contribute 70% of the nations GDP & have age old business systems.

These family businesses have to “BLOW BIG”.

INDIA INC. ACTION PLAN — — A FUTURE FOCUSSED NATION !!!

1. Every ministry representing every sector of the economy has to have a vision of the future. The perspective plans do not work. The analysis of the last many years of perspective plans reflects that hardly 20% of the inputs in the perspective plans ever make it to the final budget provisions for certain actions that the government wishes to take in order to take India Inc to the next level. What is that level ? Even the 5 Tn $ vision is not broken down to industry , state, corporate and individual level as there is no system to visualize/objectify the same ?

2. Once such vision is drafted, every industry, its representing ministries, companies and bodies need also to align to such growth of the nation by fomulating enabling policies and participating in the execution. This vision has to be transalated into a economic growth and competitiveness scorecard. It has to be decided firm mindedly and executed single mindedly and passionately. Does such scorecard exist ?

3. I have hardly seen Indian Family Businesses have a Family Business Governance Council with an effective Corporate Governance System that enables appropriate internal control systems / whistle blower mechanisms that are powered by an end to end ERP like SAP and is modeled on Enterprise Wide Risk Management model like COSO.

4. Family businesses carry on with age old business models and practices. The Indian mind cannot get over the thought of my parents cherished business and hence even loss making businesses are pursued. Indian Inc needs to evolve with time into the relevant business models. Not NPA’s but obsolete business models and strangling government systems are the culprit. Spinoff /evolve such assets that do not fit into the new vision and become asset light. Create a Business Trust and Family Trust to ring-fence the remaining assets and personal wealth.

5. Realign the strategy for the remaining businesses within a 3 , 5 , 10 yrs planning horizon. If you are not able to do this, then you have no idea where you are going while being responsible for the millions of lives that you employ.

6. Do a complete financial restructuring for the new vision and institutionalize capability for raising cheap capital from across the world. Put up a financial ratios dashboard so that financial prudence governs the business operations. Constant pursuit of value cannot happen without a measurement system. How many Indian Family businesses have this ? And they complain that they cannot raise cheap capital ignorant about their inherent risks for which they are paying higher premiums.

7. Create a Balanced Scorecard to deploy the VISION and cascade the strategic objectives to all the SBU’s ( Strategic Business Units ) through X-Matrix , process charts and control charts so that the organization right from shop floor to the board is fully aligned. Why should not a similar system be built for the Governement. We are good about talking accountability but make no efforts to build a system. Nations are built by strong governance systems. Where are ours ?

8. Develop a Leadership Pipeline that can create unbeatable synergy amongst all stakeholders ( Employees, Investors, Customers, Suppliers and Government ) to support the VISION. Why dont we demand a leadership plan for parties. And we entrust our future to leaders who may not have the leadership thing in them ?

9. Create a strategy for inorganic / organic growth / R&D that shall fuel the Long Term Vision. Constant pursuit of perpetual value. Its ironic that even after 72 years of independence, 80% of our supply chains are not within our country which means we are allowing the continued LOOT of India Inc…

If you run government systems designed to undermine enterpreneurs’s ability and do not extend hand to them to make free choices and to understand what is real and not real, you are undermining democracy and treating entrepreneurs in the same way as you are treating terrorists.

Since we are going to use the terms “credit” and “debt” a lot, I’d like to start with what they are and how they work.

Credit is the giving of buying power. This buying power is granted in exchange for a promise to pay it back, which is debt. Clearly, giving the ability to make purchases by providing credit is, in and of itself, a good thing, and not providing the power to buy and do good things can be a bad thing. For example, if there is very little credit provided for development, then there is very little development, which is a bad thing. The problem with debt arises when there is an inability to pay it back. Said differently, the question of whether rapid credit/debt growth is a good or bad thing hinges on what that credit produces and how the debt is repaid (i.e., how the debt is serviced).

Almost by definition, financially responsible people don’t like having much debt. I understand that perspective well because I share it. For my whole life, even when I didn’t have any money, I strongly preferred saving to borrowing, because I felt that the upsides of debt weren’t worth its downsides, which is a perspective I presume I got from my dad. I identify with people who believe that taking on a little debt is better than taking on a lot. But over time I learned that that’s not necessarily true, especially for society as a whole (as distinct from individuals), because those who make policy for society have controls that individuals don’t. From my experiences and my research, I have learned that too little credit/debt growth can create as bad or worse economic problems as having too much, with the costs coming in the form of foregone opportunities.

Generally speaking, because credit creates both spending power and debt, whether or not more credit is desirable depends on whether the borrowed money is used productively enough to generate sufficient income to service the debt. If that occurs, the resources will have been well allocated and both the lender and the borrower will benefit economically. If that doesn’t occur, the borrowers and the lenders won’t be satisfied and there’s a good chance that the resources were poorly allocated.

In assessing this for society as a whole, one should consider the secondary/indirect economics as well as the more primary/direct economics. For example, sometimes not enough money/credit is provided for such obviously cost-effective things as educating our children well (which would make them more productive, while reducing crime and the costs of incarceration), or replacing inefficient infrastructure, because of a fiscal conservativism that insists that borrowing to do such things is bad for society, which is not true.

I want to be clear that credit/debt that produces enough economic benefit to pay for itself is a good thing. But sometimes the trade-offs are harder to see. If lending standards are so tight that they require a near certainty of being paid back, that may lead to fewer debt problems but too little development. If the lending standards are looser, that could lead to more development but could also create serious debt problems down the road that erase the benefits.

How Costly Is Bad Debt Relative to Not Having the Spending That the Debt Is Financing?

Suppose that you, as a policy maker, choose to build a subway system that costs $1 billion. You finance it with debt that you expect to be paid back from revenue, but the economics turn out to be so much worse than you expected that only half of the expected revenues come in. The debt has to be written down by 50 percent. Does that mean you shouldn’t have built the subway?

Rephrased, the question is whether the subway system is worth $500 million more than what was initially budgeted, or, on an annual basis, whether it is worth about 2 percent more per year than budgeted, supposing the subway system has a 25-year lifespan. Looked at this way, you may well assess that having the subway system at that cost is a lot better than not having the subway system.

To give you an idea of what that might mean for an economy as a whole, really bad debt losses have been when roughly 40 percent of a loan’s value couldn’t be paid back. Those bad loans amount to about 20 percent of all the outstanding loans, so the losses are equal to about 8 percent of total debt. That total debt, in turn, is equal to about 200 percent of income (e.g., GDP), so the shortfall is roughly equal to 16 percent of GDP. If that cost is “socialized” (i.e., borne by the society as a whole via fiscal and/or monetary policies) and spread over 15 years, it would amount to about 1 percent per year, which is tolerable. Of course, if not spread out, the costs would be intolerable. For that reason, I am asserting that the downside risks of having a significant amount of debt depends a lot on the willingness and the ability of policy makers to spread out the losses arising from bad debts. I have seen this in all the cases I have lived through and studied. Whether policy makers can do this depends on two factors: 1) whether the debt is denominated in the currency that they control and 2) whether they have influence over how creditors and debtors behave with each other.


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