Elementary lesson: Let competition prevail

Think of some of the biggest problems the average Indian faces every day. Water, electricity, quality of household-oriented services, and education would probably top your list. Apart from the fact that they affect the quality of your life, these problems have something in common: They are all areas where government regulations and policies, either directly or indirectly, keep things from improving. Take water, for example. Only the city municipality may supply piped water to your homes. And we know what the problem with this monopoly is: It's inefficient and corrupt. Most neighbourhoods, including the affluent ones, don't get water round the clock. Residents must get up at ungodly hours to stock up on water, and then spend money purifying it because the municipality isn't, well, too finicky about water quality.

Most investors, including the venture capitalists featured in our cover story this issue, would love to invest in water, provided they could earn a viable return on their investment. But there are two reasons why at present they won't: One, regulations don't allow them to and, two, they won't be able to compete with the bootleggers in the market-the tankers that supply water to various neighbourhoods. Ever wondered where this water comes from? Mostly, from farms outside of the cities. How are these "farmers" able to ship water on fuel (trucks need diesel, right?) and still sell the water at rock-bottom prices? Because the most important input in the farmer's water business comes free to him: Electricity. Any other vendor who pays for electricity will not be competitive against such farmer-suppliers. Still, it is reasonable to expect that consumers will be willing to pay for convenience. If good quality piped water could be made available round the clock, there aren't too many households that will complain about higher prices. What we need is a government policy on viable user charges.

How many times have you been unhappy with the quality of household plumbing, electrical or masonry work? Possibly every time you've had something repaired. Why don't we have plumbers or electricians who bring with them the right implements to the job and know exactly what the problem is? Because there are no institutes that train them formally. In the US, for a hairdresser to be employed at any salon (including the ones at Wal-Mart), she/he needs to be certified. Met any certified hairdressers in India? Not unless you go to Keune or a salon chain like Habib's. In July this year, Javed Habib is reported to have raised money from private equity investors. So, clearly, there's a lot of investor appetite in consumer services. All that the government needs to do is to amend policies and just get out of the way of such investments.

Don't Ban PNs Yet

India's enforcement directorate wants participatory notes (PNs) probed, but the Finance Minister P. Chidambaram would rather have them do no such thing. Guess what? Chidambaram may have a point. First of all, it's not the first time that PNs have raised the hackles of authorities. The Reserve Bank of India and sundry other government committees have off and on have asked for a ban on this stock market instrument, which is used by unregistered foreign institutional investors (FIIs) to invest in Indian stocks. The concern has been that PNs are opaque and can be used to launder money, since these instruments are transferable and, therefore, allow the original investor to hide under multiple layers of supposed investors. The fear at present is that money belonging to Indian residents is being "round-tripped" through PNs. So far, there is no hard evidence to prove that there is any merit to this suspicion. Therefore, to put a blanket ban on PNs may not be the most sensible move.

A good 40 per cent of the FII inflows come through PNs (the figure used to be a high of 50 per cent in May 2006). So, one can imagine the effect a ban will have on the stock markets. One of the reasons why FIIs take the PN route is that hedge funds aren't allowed to invest in Indian stock markets. Another is that registering an FII takes time. Since 2004, 446 FIIs have registered with SEBI (Securities & Exchange Board of India) to take the total number to 963. But there are many more in the queue. In fact, when an FII invests through PNs, its costs are double that of direct investment. It would be retrograde if the authorities were to ban PNs because SEBI's registration process is slow. More importantly, the money coming through PNs is not entirely hedge fund money. The Indian authorities may also want to take a cue from the Securities Exchange Commission (SEC), which has started registering hedge funds. Yes, what the regulators should insist on and enforce is the know-you-customer (KYC) rule. No regulator in the world typically asks FIIs to reveal the identity of the ultimate beneficiary of PNs, but given that there's a lot of investor interest in India, perhaps SEBI can instruct the FIIs to keep it readily available at all times. Some of the concerns over money laundering may be valid, but the Indian regulators must not do two things: One, paint every foreign investor with the same brush and, two, make it difficult for foreign equity investment to flow in and out.

The Eternal 800

Maruti 800: The ace up Suzuki's sleeve

There aren't too many cars in the world that have been around for more than two decades, outlived eight Prime Ministers and sold 2.5 million units, despite getting a facelift only thrice. But Maruti Udyog's small car, the 800, is no ordinary deal on wheels. It's the car that made motoring affordable to thousands of Indians, and became the symbol of middle-class India's new affluence when it was launched late 1983. While the 800 no longer sells in as many numbers as it used to-12,000 units a month in the heady years of 2002 and 2003-it still finds 6,500 buyers a month, making it the fifth largest selling car in the country. Critics of the car have been writing its obituary for years now, but the 800 shows no signs of driving into the sunset. Recently, when Maruti Udyog (where Suzuki of Japan is now the clear owner) decided to lay to rest one of its previous best sellers, the Zen, it still steered clear of the 800.

At less than Rs 2 lakh a piece, the small car is by far the cheapest vehicle money can buy in the country and, as figures show, still the first car for many buyers. But the reason why Suzuki has kept the car rolling may be strategic: Tata Motors is expected to roll out an ultra low-cost car sometime in 2008. Dubbed the Rs 1-lakh car (Tata Motors' Ratan Tata has been at pains to clarify that it may not actually cost Rs 1 lakh but slightly more), it is expected to do all over again what the 800 did 22 years ago. Except that this time around, the Tatas may be drawing their customer base from two-wheeler owners. At any rate, Suzuki will need a car to counter the Tata threat. And 800 is clearly the ace up Suzuki's sleeve. Not only are the capital costs associated with the 800 fully depreciated (think dies), but there's a decent profit buffer of 6-8 per cent that Suzuki may not mind sacrificing in the name of competition. So, it's possible that India's new Rs 1-lakh car may come face to face with India's oldest modern car that, far from being laid to rest, gets a new lease on life as another Rs 1-lakh car.