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TRENDS: LEADER Skating On Thin Ice Despite the finance minister pooh-poohing the downgrade of India's credit rating, the reality is that the country's financial markets are closer than ever to the edge.
That the economy is fast slipping into a black hole is a truism today. Some banks-especially the three weak banks (United Commercial Bank, The Indian Bank, and Dena Bank)-most domestic financial institutions (DFIs), some cooperative banks and the capital markets are all gasping for breath, and looking to the government for a bailout. If the Ketan Parekh episode exposed the hollowness and the machinations of the Indian capital markets, the UTI's decision to freeze the sale and purchase of its best-selling Unit 64 was a clear indication that India's largest mutual fund player had virtually learnt no lessons from the earlier crisis barely three years ago, when, because of mismangement, corruption, and government interference, it needed a Rs 3,000-crore bailout. Now, several other chickens are coming home to roost. The rapid financial deterioration of the DFIs-the Industrial Finance Corporation of India, the Industrial Development Bank of India, and the ICICI-because of fudging of bad loans, mismanagement, and political interference, has resulted in non-performing assets of nearly Rs 18,000 crore. So what does the government (itself cash-strapped) do to get out of the financial mess? Organise another bailout package for each of the DFIs, beginning with the IFCI. Thus, it is not surprising that the country has seen six bailouts in the less than two months-Madhavpura (Rs 800 crore), UTI (Rs 1,400 crore), IFCI and the three weak banks (Rs 2,500 crore). What is worse is the fact that there is a sinking feeling that the present round of bailouts is unlikely to be the last. Explains Ravi Trivedi, Executive Director, Pricewaterhouse Coopers: ''The long-term cost of adopting the soft-option-of going in for a bail-out package-can actually far exceed the upfront cash costs, especially since the government has failed to design packages with the necessary checks and balances needed to guard against such instances being repeated.'' But there is a bigger systemic danger involved. Every time the government tries to help a corporate or the capital market from getting into a bear hug through investments from one of its institutions, it only manages to make the donor institutions sick and thus, in turn, becomes a candidate for 'bailout package'. It is well-known that it is the finance ministry that asks the UTI to buy stocks when the markets are down. The comeuppance: a sick UTI today has just been rescued by the government. Similarly, to bailout IFCI, the PSU banks have been forced to lend below market rates, thus ensuring that the banks never make any money from these loans. It doesn't take a financial wizard to realise that what losses will do the health of these banks, who already are saddled with expensive deposits that they are not able to deploy profitably. Indeed, the situation facing the country is ironic. While on the one hand, domestic interest rates are going down-the State Bank of India, the Bank of Baroda, and the Bank of India have all cut rates-on the other the country's credit rating, which should be positively impacted by cheaper capital, has been downgraded. Such a situation could be a pointer to possible stagflation-a stagnant economy faced with an impending risk of an import-led inflation. That's what led to the Asian contagion a few years ago. In India's case, the situation is much worse because much of the financial sector is still owned and managed by the government and its instrumentalities. There is another negative side to it. Private Indian entrepreneurs have always viewed the DFIs as lenders of capital for all their long-term projects and the stockmarkets as sources of cheap equity capital. Now, with both these supply sources drying up, India Inc., which is already facing the brunt of one of the worst possible slowdowns, will have no recourse to cheap funds. What it means is that the road to all future expansion schemes too would now be blocked, impairing fresh investment and growth. And once the foreign institutional investors start withdrawing money from the market, India's prized catch-the NRI deposits-too will want out. That will adversely affect India's $43 billion of forex reserve, and India's rupee. And that's a downward spiral that all of Sinha's optimism may not be able to stop. By Ashish Gupta COUNSELLING When Ramesh Kumar (not his real name) was handed the pink slip at Tata Engineering recently, he also got a series of appointments with a range of counsellors. To make the downsizing easier on its people, the auto major was offering a complete trauma management package to those asked to go. That included not just psychological counselling, but also investment advice, and help on outplacements. That's exactly what some of the other, better corporates in India are trying to do. Tata Steel, Thermax, Bajaj Auto, and Alfa Laval all are investing time and money in helping their retrenched employees come to terms with job loss. Says V.K. Verma, Chief of hr at Tata Engineering: ''Some of the employees have been with us for years. So, we owe it to them to make their exits less traumatic.'' Adds Charulata Kashyap, a clinical psychologist, who has handled such cases in Pune: ''We make them look at the positive side of it, and encourage them to do things they always wanted to but couldn't.'' That's parting still, but with less pain. By Roop Karnani ADMINISTRATION
Mandarins in andhra Pradesh's it department are working overtime these days on what they call the first-of-its-kind integrated hardware policy to be released in September. The idea: lure companies to Hyderabad's 4,000-acre hardware park. Videocon International signed up for space at the park last month, and plans to roll out computer peripherals, CTVs, and refrigerators in another six months. Then, there is Team Asia (which makes semi-conductors) and Catalytic Software. The park's USP: just like in Singapore and Malaysia, it is located near the city's proposed international airport. Says J. Satyanarayana, 45, the state's it Secretary: ''The idea is to facilitate quick movement of goods to the international markets, and to facilitate easy import of it equipment needed for R&D.'' There is also a proposal to declare the park as a special economic zone for easy entry and exit of products. Now, the wait begins. -E. Kumar Sharma ENTERTAINMENT
Take a handful of patriotism, a pinch of romance and melodrama, and stir it up in a celluloid box office against the real-life backdrop of Agra Summit. What do you have? If it's now that you are talking about, then probably Gadar-Ek Prem Katha. The Sunny Deol and Amisha Patel starrer-which deals with the 1947 partition travails-has raked in a staggering Rs 70 crore in the last nine weeks it has been playing in theatres. That makes it only the second-biggest hit after Hum AapKe Hain Kaun, which racked up Rs 140 crore. Says Amod Mehra of Entertainment Business Network: ''In Mumbai, Gadar is running to packed houses.'' That's in India. Abroad, too, an entertainment-hungry diaspora is lapping up Hindi flicks. Even before it was released, Yaadein (a Subhash Ghai movie) raised Rs 22 crore from just music rights, product placement and domestic distribution. As Ghai puts it, ''The coming of age of second generation Indians, more contemporary story lines and international production qualities have all helped make Hindi movies popular abroad.'' While the US and the UK are the biggest markets, there's audience in the Middle East and South East Asia too. And nobody more than Bollywood likes happy stories. -Abir Pal PHARMACEUTICALS
It could well boil down to a battle between Indian pharmaceutical companies and that black-suit-briefcase-in-hand-army in the US-the attorneys. The issue at hand is a $34-billion opportunity that will knock on the doors of pharma companies as drugs that pull in that much every year go off patent in the US during the next four years. Indian players, who have made their fortune almost exclusively from generic drugs, are already licking their chops. However, it has also opened a new career path for US attorneys, called lifecycle management. Simply put, the jargon stands for taking advantage of the loopholes in the statutes to keep generic drugs off the market. Companies that will pay the legal fees realise that strategies such as evergreening more than justify the cost of litigation. Thus, even as the big boys of the Indian pharma industry grapple with issues like research, risk, and rewards, they are building up capabilities to deal with regulatory issues. Says Cameron Reid, who heads the generics division of Dr Reddy's Laboratories: ''We have built core competency in regulatory affairs, which is critical to survival as it is what makes or breaks you in the US market. We also built core competency in patents and understand and write most of our patents.'' Court battles are already underway. These involve not only the big guns like Ranbaxy, which is litigating with GlaxoSmithKline over Cefuroxime, but also smaller fish like Barr Labs, which is fighting with Eli Lilly over the latter's best-known product, Prozac. These are battles worth fighting. The drugs going off patent by 2005, number close to 40-some of them truly blockbuster (See Blockbusters Going Off Patent). Fine, their prices will come down once they go generic-analysts put the potential drop in the region of 20 per cent of the patented prices-but it'll still be quite a market at over $6.5 billion. The market appears more attractive once you take into account that over 60 per cent of the generics sold in the US is imported. And the companies best placed to cash in on the situation are Indian. For, few countries can beat the cost-effective manufacturing conditions that India provides. The labour costs here are estimated to be 80 per cent lower and infrastructure costs 40 per cent cheaper than those in the West. But the passage to the US won't be easy. Already, debates have started in the US on the issue. This will intensify as Indian companies move in and those already there, consolidate. Ranbaxy, whose US subsidiaries have already broken even, intends to file 12 abbreviated new drug application (ANDA) in the US every year initially. Dr Reddy's had no generic sales in the US till December 2000. But it has already filed 14 ANDAs of which four have been given final approvals. ''Our goal is to try to find a patent challenge and to get into the market earlier than anyone and in the worst case along with everyone else,'' says Reid. -Suveen K. Sinha
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If denial and foolhardy optimism could
win economic battles, then finance minister Yashwant Sinha should be
wearing the emperor's crown by now. He's done precious little to kickstart
the economy after the budget, except to say that things will be fine by
the year end. He's washed his hands off the US 64 fiasco, although the
backdoor to his office opened at UTI's in Mumbai. And now he's calling
international credit rating agencies dumb. Had he been a Mahathir
Mohammad-a man who in his 20 years at the helm of Malaysia, upped per
capita income from $4,200 (Rs 1,97,400) to $8,137 (Rs 3,82,439)-Sinha
could have afforded to cook-a-snook at international investors. But he
isn't one. And the country whose finance he handles, is closer than ever
before to an economic crisis. ''The downgrade,'' as a Delhi-based
financial analyst with a multinational bank explains, ''is only the first
warning signals of the deep financial crisis that is plaguing the nation
today. And if those signals are not heeded, the problems can quite easily
spin out of control.''
