Wrong antidote, Mr PM: Bring in farm and labour reforms

Why is prime minister Manmohan Singh behaving like a Congress politician from the 1960s and 1970s? His advice to India Inc. to keep its profit motives "within the bounds of decency" and also his exhortations on curbing the pay of senior executives are gratuitous, misconceived and naïve.

Business Today has always been a big fan of the Prime Minister and the policies he ushered in as Finance Minister under P.V. Narasimha Rao. So, it is with some anguish that we note that Singh's latest prescription will leave Indian business resembling neither fish nor fowl. Profit is the life-blood of any business; and profit maximisation its Holy Grail. Related to this issue is the one relating to pay. Salaries are a function of demand and supply. At a time when India Inc. is grappling with a major talent crunch, it is just fair that go-getters and big achievers get paid commensurate with their output. Placing arbitrary caps on the reward system will only lead to distortions and corruption.

To ask industry to step back from its legitimate goal in the name of corporate social responsibility is to abuse both economics and sociology. It is also a tacit admission of failure on the part of the government to deliver the benefits of 9 per cent-plus growth to large swathes of the population. It penalises achievement-if implemented, the Prime Minister's mantra will not lift the poor out of their misery; it will only add to their numbers by pulling more people down into their ranks.

Corporate India must chase profits; it is this money that gets funnelled into profitable avenues as investment and generates the next cycle of growth; it is the tax on this money that fills up the government's coffers-and finances the higher allocations for infrastructure, education, healthcare and the National Rural Employment Guarantee Scheme (NREGS).

Having said that, BT wholeheartedly supports Singh's call for inclusive growth. The reason why it's not happening is not higher corporate profits or ever-increasing executive pay. The reason why the poor are still languishing is simple: the government has not done anything on farm reforms, so the vast majority of Indians who depend on it are denied the benefits of progress; it hasn't done anything on labour reforms, so 93 per cent of the workforce that remains outside the organised sector is held to ransom by the 7 per cent that makes up the country's organised labour force; and it hasn't done anything on financial sector reforms, that are critical for efficiently channelling India's savings into profitable sectors. But these may prove to be politically unpopular, at least in the short term.

Singh is an acclaimed economist. He should know that there are no short cuts to inclusive growth. He, and the government he heads, will do well to address the structural deficiencies that hinder inclusiveness instead of taking the populist route to economic oblivion.

Fatalistic Nation

That human beings have little control over death or accidents is a well-known fact. But there's something man can do, and does, to try to mitigate the fallout of, say, a breadwinner's death or a devastating fire. It's called insurance. It's a financial tool that won't bring the dead back, but it does make the living easier for the dependents left behind. World over, it's a popular way of protecting your future. Yet, in India, people's attitude towards insurance is rather interesting, if not baffling. A study conducted by the National Council of Applied Economic Research (NCAER) for Max New York Life throws up several remarkable facts not commonly known to marketers of insurance.

To begin with, just a quarter of all households in the country have life insurance (see our special report on insurance starting page 117). An insurance-owning household has 5.4 members on an average of whom 1.4 are wage earners, making Rs 95,156 and spending Rs 51,316 a year. As can be expected, the percentage of urban households that owns life insurance is double that of rural households (19 per cent). But here's the interesting thing: the households that do own life insurance in rural India tend to be more affluent than their urban counterparts. The NCAER study, not yet finalised, puts the comparative annual income numbers at Rs 1,33,832 and Rs 1,13,190 for rural and urban households, respectively. In contrast, 81 per cent of rural households own non-life insurance, compared to 62 per cent of urban households. The average face value of policies among policy-owning urban households is Rs 1,39,059 compared to Rs 1,00,928 of rural households.

There are several significant linkages that determine penetration of insurance among households. These are socio-economic factors such as age, education, and income. Take age, for example. The household most likely (30 per cent) to have a life cover is the one that has slightly older chief wage earners-people between 46 and 55 years of age. Go 10 years below 46 (36 to 45) or 10 years above 55 (46 to 55), the percentage of households that have a life cover is identical at 25 per cent. The level of education also plays a role in a household's approach to insurance. Therefore, an impressive 58 per cent of households where the chief wage earner is at least a graduate, own life insurance. But below that affordability, and not education, is a decisive factor. In other words, to improve insurance penetration in the country, policymakers first need to focus on education and then livelihoods of people.

Mixing Business With Politics

Now, you are on your own: Maran (L) with Karunanidhi

Politicians and businessmen have always made cozy bedfellows, not just in India but across the world. For confirmation, one just has to look at the cash for peerage scandal raging around outgoing British Prime Minister Tony Blair, allegations that the US's Iraq misadventure was instigated by the big oil companies that back us Vice President Dick Cheney, the corruption scandals that routinely bring down governments in Italy and Japan and the crony capitalism that fuelled the growth of South Korean chaebols.

The close, and often dubious, ties that link Indian politicians and big business in this country are no secret. Several top business houses-everyone knows who they are, so we won't take names-owe their rise and continued dominance to their relationships with leading politicians. The lavish lifestyles of some of the latter leave little doubt about the true nature of their ties with Big Business. The system worked just fine so long as Indian politics, at the Centre and the states, was dominated by the Congress and its offshoots. But now, following the rise of regional parties, such relationships have become fraught with danger.

Close ties with particular political formations can boomerang on promoters when rival parties come to power or when promoters fall out with their political benefactors. Anil Ambani's troubles (over his power project at Dadri and the SEZ at Noida) with newly anointed Uttar Pradesh Chief Minister Mayawati and Kalanithi Maran's fallout with great uncle M. Karunanidhi over younger brother Dayanidhi's political ambitions-and its impact on his Sun TV media empire-are just two cases in point.

These and other instances of crony capitalism should have no place in the new, emerging India where merit is slowly replacing family and other connections as the determinant of success. But it will take time for the old order to change completely. The obvious point from which to start cleansing the system is election funding. What India needs are transparent and equitable laws governing the funding of political parties. The Tata Group has made a small beginning in this regard. It's time to enlarge the scope of this experiment across the entire spectrum of India Inc.

Is anyone listening?