Why is the govt so keen on a flop telecom auction ?

There seems to be a surprising haste in calling the spectrum just auctioned in India as a flop. Even the government which auctioned it seems to be keen on calling it a flop.

It has even convinced media and others to see its action as a flop. Why is it so:

1. It takes the steam out of the CAG charges that the government lost Rs 1.76 lakh crores. CAG had used the 3G spectrum prices to predict he loss to the govt.

2 It will allow the govt the leverage and reprice the spectrum or even move away from an auction system for allocation.

3. It also blow hole in the arguments given by Supreme court that the auction is the best way to price natural resources.

Now the facts

1. The incumbents or the existing spectrum holders did not bid as they already have too much spectrum,Moreover the pricing in this round of auction would determine the pricing when they go for an extension of their existing 20 year license, coming up for renewal next year.

2. Some circles like Delhi and Mumbai did not receive any new bidders as these circles already have so many players. The competition in these markets is so high, plus the incumbent seem to have enough spectrum for growth or expansion. Therefore neither new nor existing players bid for spectrum in these markets. It should not be seen as a failure of the auction process or the pricing.
While these high revenue circles are important the high number of players mean that the overall margins are low. And the penetration is almost hundred per cent. These circles are also not attractive to new comers due to the high cost of customer acquisition.

3. The banks are not keen to finance new telecom players hence there were no new bidders in the auction. Only those players who have their licenses cancelled came back to bid for the spectrum, these player have already committed investment and have to get the spectrum.

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Difficult to trust

Politicians with trust
A politicians stock in trade is trust, but trust between politicians and people is at its lowest level. Inspite of the general loss of trust it is difficult to find a politician who does not own or runs a trust in India.
It may sound like an ironical, but there are very sound reasons for politicians to own trusts. The beauty of a trust is that it can hide both income and expenses. Cabinet Minister Salman Khurshid can rage about the lack of any wrong doing in the functioning of Zakir Hussain Trust. India Today group along with other media can argue against it. These charges and counter charges about whether a signature was forged or not, a camp was held in the year 2009 or 2010 will only add to the confusion. And as the debate shifts to micro elements general public will lose interest. And it will die a quiet death buried as much bigger scams are revealed.
The questions that will remain unanswered will be :
Why does Salman Khurshid or for that matter politicians in general own so many trusts and NGOs ?
More importantly is there nothing wrong that a trust owned by a cabinet minister gets funds from the government on a regular basis? Is there a conflict of interest here?
A cabinet minister is very capable of influencing a bureaucrat to disburse funds to an NGO on a regular basis almost for six years. The amounts may not be large ut the regularity means that there is almost assured income enough to attract attention. Nobody is surprised that in a country with 3.3 million NGOs, only an NGO owned by a Minister and his wife gets funding on regular basis.
India has the largest number of NGO’s in the world, almost one NGO for every 400 people. Accountability and audit of these NGOs is poorest in the world, there is no transparency. The last few years have also been very tough for these organizations. Due to the economic slowdown in Europe and US, foreign donations have almost dried up. Last one year Indian government has also become very tough about foreign aid. Therefore, the only source and the largest source of funding is now the Indian Government. And the competition for the government funds is fierce. It is no secret in Delhi’s corridors of power that only those NGO’s get funding which are owned or affiliated to a politician or a powerful bureaucrat.
Cronyisms is so well accepted in Delhi, even among media that it’s not even considered wrong if a minister nudges a secretary to give funding to his own or his wife’s NGO. After all, the funding or grant is for a social good. This behavior is condoned as the funds will be used for social good. Whether they will be or not is a separate matter. Nobody asks and nobody tells. A bureaucrat will certainly never audit or stop the funding of an organization connected to a politician in power for fear of reprisals.
There are no rules, guidelines for a politician holding public office and his family members getting grants and funds from the government for their various NGOs. Though most politician including the legal luminaire Salman Khurshid will point out that he does not own the trust, it is registered in his Mother’s name and his wife runs it. Therefore there is nothing wrong if a fellow minister or the Ministry of Social Justice has given it grants for so many years.
A trust, NGO or a not for profit company is one of the most convenient legal entity for a politician. It can accept funds or donations from practically anybody, bury any kind of expenses and avoid taxes. Yes, do all this in the name of doing social good.
It is easier to spread the funds through multiple NGOs rather than a body corporate due to disclosure regulations. An NGO need not disclose its accounts publicly, while a company has to disclose related party transactions in its balance sheet on an annual basis ( which Robert Vadra has found to his detriment).
The reason these not for profit entities are preferred because they also help maintain the façade of a social activists for the politician. While helping in managing expenses that a politicians has to bear. A typical politician’s household supports several families. There is the entourage and regular stream of favor seeking vote giving constituents. All these people need to be fed, given accommodation and jobs. How is that possible for a full time politician? Moreover as most politicians claim that they do not have too much income, a trust works well to take care of their expenses.
It becomes a convenient vehicle for burying all these costs in a single entity. Even the salaries of the entourage or supporters can be buried in it. The next step is to get funds from the government under a social scheme to meet these costs. An NGO also makes it easier for corporates or business houses to give money. Companies can make a tax free donation to these trusts in cash or kind. They can give funds from their corporate social responsibility budget to avoid any adverse comments from the auditors. This has been done over and over again. Even in the coal scam we saw corporates giving funds to NGOs owned by politicians in Chattisgarh.
The culture of accepting small corruption is endemic. Each politician owns multiple trusts or NGOs. So that grants can be spread across multiple organizations and thus not attract attention. It is easier to own capital assets like land and building under trusts. There are politicians in Maharashtra who have perfected the process of getting land from the government in the name of their trusts. The land is procured in the name of a trust formed for the purpose of running a school and college. Government land is allocated and then it goes on to do commercial activities by renting or leasing the properties on the land.
It is very difficult to trust a politician when he says that his trust is clean.

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Most of the debate in FDI in retail is limited on how it will affect the small retailers. As small retailers are rarely represented or allowed to express their views in these debate most articles in mass media say there is no impact on small retailer. But this focus on kiranas or small retailers also prevents the real issue of how foreign retail will change or alter Indian manufacturing from coming to the fore.

How global supply chains can lead to loss of jobs in the long run is not even being discussed ?

It is important to understand that the entry of foreign retail means the entry of global supply chain in India. Inspite of the misinformation being spread by  Ashok Mallick here.

Global retailers will not help farmers or manufacturers to adapt to global supply chains. Labeled by trade unions and left organizations as the “Chains of Greed” these supply chains work to source the cheapest . They won’t help an Indian apple producer in Himachal Pradesh to adapt to the requirements of European consumer or the regulations for exporting there. Indian agri exports do not succeed as farmers use too many pesticides and banned fertilizers. Moreover over a period of time the ground water has so much  banned chemicals that it is difficult for Indian agriculture produce to get approval from US or European food authorities. So its a myth that Indian agri produce will get a global market and foreign retail will help or can help.

Similarly Indian manufacturers whether they are cutlery makers or hand tools manufacturers will not be able to compete against Chinese manufacturers on pricing. And this is what global FDI chain will bring into India. Yes there will be some manufacturers who will adapt and become better at pricing.  The small manufacturers  who do not have the capacities or the resources to cut prices will slowly go out of business. The impact on manufacturers is already taking place in small towns across.

Small retailers have already started sourcing their requirements from cash and carry store whether it is Walmart, Metro or any one of the Indian retail firms. This means that the small retailers are not buying from local manufacturers anymore. Cash and carry stores have taken the role of wholesalers as they are able to provide really low prices due to their volumes. These low prices are achieved by pitting and pushing suppliers globally. Only Chinese suppliers are able to survive and service these retailers. The reality emerging is that Cash and Carry stores have become the largest wholesalers for Chinese products into India.

The flow of cheap Chinese imports and the resulting death of manufacturing will be given a further boost by opening up of the foreign investment in retail. The loss of jobs in retail will be combined with the loss of manufacturing job and will change the contours of Indian economy. According to the Economy Policy Institute just one global retailer Walmart caused the loss of 133,000 manufacturing jobs in US by sourcing goods from China. This job loss was not noticed as the US economy was growing. This job loss is for the period of 2001 to 2006 and has obviously increased as exports from China to US have increased.

UNI Global an organisation representing trade unions shows its impact across several countries. http://www.uniglobalunion.org/Apps/UNIPub.nsf/vwLkpById/870AFFCDCFFA1EE7C12579C00054892D/$FILE/FDI_REPORT.PDF

Large retailers like Walmart also reduces the overall employment per se even within the retail sector for every two employees that Walmart hires three jobs are lost in retail industry. According to a study done by a German think tank  http://www.ilsr.org/wp-content/uploads/2011/12/neumark-study.pdf .

It has been consistently proven in several countries including Mexico that the obsession with lower prices leads  big retailers like Walmart to first force local suppliers to reduce their margins. And then force them to either shift their manufacturing to China or shut down. This study by Colorado University shows how manufacturing in Mexico was severely impacted by Walmart http://spot.colorado.edu/~kellerw/IJKT_012609.pdf.

Therefore what we should worry about is that in the long run as large foreign retail takes over, Indian economy and the job engine will change forever. Are we ready for this future: When uneducated youth who were employed in the manufacturing or kirana stores will no longer have jobs ?


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Who will benefit from FDI in retail–alternative view

The market is rejoicing over Indian government’s decision to open up FDI in retail. It’s cited as a sign of the beginning of reforms era. Most pink newspapers look positively at this move. Though there are some alternative views too http://www.firstpost.com/business/the-murky-truth-behind-upas-big-bang-friday-reforms-456864.html/2

FDI in retail will have several consequences in the long run. One of the side affects of the FDI in retail is the power it will give state level bureaucrats and politicians power over MNC retail companies. The retail firms will now have to shift their lobbying efforts from central government to state governments.

The establishment of a retail outlet comes under the Shops and Establishment Act which is under the purview of the state government. The UPA government has rightfully not tampered with this and left the option of allowing foreign MNCs to state governments. Therefore the opening of the FDI in retail is partial and limited to states like Punjab, Haryana, Maharashtra, Rajasthan etc, where Congress is in power.

This partial opening up also affects existing organized retailers who were hoping to receive FDI stimulus. Existing retail companies may have to restructure their business. the restructure will imply they will have to divide retail outlets in FDI compliant states in one company and the non compliant in another. And they can  sell equity only in the former as foreign retail majors cannot invest in retail outlets in states which have not approved FDI.

While for unlisted retail firms this segregation would be easier, companies like Shopper’s Stop or Pantaloon will find it difficult and time-consuming to do this. Hence the unlisted multi brand retail firms like Spencers may attract FDI while listed will have to wait. Indian promoters like the Biyani group struggling with  high debt cannot raise quick money through stake sale.

As mentioned earlier the states which are opposing FDI in retail now become the focus for the lobbying efforts. Take for instance BJP ruled states of MP and Chattisgarh, where the CMs have opposed the FDI as a larger percentage of their support base of shopkeepers or shop owners. But it is not just the traders or shop keepers who will be adversely affected the biggest impact will be on manufacturers who are not price competitive with Chinese companies.

Manufacturers who are not price competitive will go out of business very fast as MNC retail will plug-in Chinese supply chain into their Indian retail outlets. Foreign retail firms have enormous buying clout in China because of their global volumes, they will leverage this to attract value buyers. And this has happened in several countries including neighboring Thailand where domestic industry has been severely affected by the entry of Foreign retail.

Garments, non branded packaged goods are some of the industries which will be the first one which will see the price pressure. Once MNCs start getting goods from China, Indian retailers will have no choice, but to do the same to match prices. And this will accelerate the shift of manufacturing from India to China.

White label or store labels  shall be procured from Chinese manufacturers, and this will in turn have an impact of domestic brands as they will come under price pressure. HLL, P&G and Godrej Consumer will be some of the companies who will face pressure on their margins as global supply chains start pumping into India. Global retail Giants like Walmart have 80 per cent of their suppliers are based in China.


Unfortunately Firstpost still does not get it http://www.firstpost.com/business/kirana-vs-wal-mart-busting-the-big-myths-of-big-retail-459490.html#disqus_thread

The Kiranas will not shut down because a Walmart will come out in the corner. Kiranas business will be affected as a Walmart will be able to offer everything cheaper included branded products from large wholesalers.

The evidence is already there in the form of buying shift taking place in the large cash and carry stores of Walmart in Punjab, MP and even in the outskirts of Delhi. Retailers are going and stocking up from these cash and carry stores as the prices they can get here they can’t get from the traditional wholesalers. Therefore, Walmart has already started controlling the supply chain where it is present.

And don’t forget Bharti Retail has created a smaller format to fit into a city and small markets too with the Easyday brand. This brand can easily be acquired by Walmart whenever it wants.


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No need for a banking license, bank to bank transfers now through mobile

There are interesting developments underway at the National Payment corporations of India. http://www.governancenow.com/gov-next/egov/npci-tie-airtel-money-soon

NPCI is an interesting organization as it handles transaction between banks in real-time. It has created an infrastructure for settlement of  payments or transactions between bank . This is parallel to the RTGS or payment settlement systems owned by Visa or Mastercard.

Now, NPCI has signed on most of the banks and they are connected to its system, the interesting addition is Airtel the mobile company. Airtel as we know it has tried to expand Airtel Money for a long time. The biggest challenge was there was not many takers for a service which allowed for transfers between Airtel subscribers. Not many people trust their money on to a mobile wallet of  a telecom company.  When it comes to keeping or transferring money banks rule the roost in a consumers mind.

Now with Airtel Money joining the payment systems as the MD & CEO of NPCI says, it it going to change the dynamics of  several systems. First of all it will directly affect the transfer system or outstation cheque system of banks. Second, it offers a very bright revenue stream for the telecom sector which has struggled with low ARPUs, shrinking subscriber base, and high cap ex cost.

Integrating the telecom network  with the banking network will also help in financial inclusion in a way not envisaged earlier. It also fulfills another crucial leg of UIDAI which has waited for this to happen. Interesting changes are underway..

More on this later….

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Business Bhaskar New year edition 2012

business bhaskar new year edition 2012

The PDF above gives the front page of the Business Bhaskar. Another innovation done by the Business Bhaskar editorial team on presenting difficult concepte visually.

The objective here was to present all the things wihich would shape the world and affect a readers life. The front page was therefore devoted to the concepts while the inside pages, took one issue and delved into its detail.


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Sunday Dainik Bhaskar article in Hindi

FDI article Dainik bhaskar anchor highlights

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