Modi's Gujarat - No model state

Christophe Jaffrelot in Indian Express : Fri Sep 06 2013,

In Gujarat, growth relies on indebtedness. And relegates development.

The Gujarat pattern of development has often been arraigned from the left because of its social deficits. Indeed, the state's social indicators do not match its economic performance. With 23 per cent of its citizens living below the poverty line in 2010, Gujarat does better than the Indian average — 29.8 per cent — but it reduced this proportion by less than 10 percentage points in five years. This poverty reduction rate has something to do with the wages of casual workers. According to the 68th round (2011-12) of the National Sample Survey Organisation (NSSO), Gujarat has among the lowest average daily wages for casual labour (other than in public works) in urban areas: Rs 144.52, when the national urban average is Rs 170.10. This kind of poverty goes with malnourishment. One of the social indicators where Gujarat shows the most dramatic lag is the hunger index — only about 43 per cent of children under ICDS in the state are the normal weight, according to an Indian Institute of Public Administration report.

These indicators are aggregates. Their break up is particularly enlightening. The urban/rural divide is pronounced in Gujarat. This is evident from NSSO data, including estimates of the average monthly per capita expenditures (MPCE). The urban MPCE was 49 per cent higher in towns and cities than in villages in 1993-94. Fourteen years later, the urban MPCE was 68 per cent higher. In 2011-12, the difference stabilised at 68.1 per cent. Certainly, the operationalisation of the Narmada dam has improved circumstances for some people living in rural areas, but only in part, because the canals have not reached the fields, especially in Saurashtra. This has happened not only because of bad planning, but also because the supply of water to cities (including industry) was prioritised. Second, cash crop farmers have been affected by the low level of agricultural prices. Cotton is a case in point: prices did not go up, whereas inputs became costly because of inflation. Third, prime agricultural land has been given to industry and the latter's activities have affected the natural environment. In Mahua, where the Nirma group had been given 3,000 hectares for mining activities and a cement factory, BJP MLA Kanubhai Kalsaria objected that the water tank the villagers depended on would be badly damaged. He was sidelined and subsequently, he resigned from the party to fight the government's policy.

Among the rural groups that suffered from the state's policy, Adivasis are a case in point. According to a World Bank report, between 1993-94 and 2004-05, the share of those who lived below the poverty line increased from 30.9 per cent to 33.1 per cent — 10 percentage points below the national average. The Modi government has been criticised for not allocating to Adivasis and Dalits funds in proportion to their population. While the former represent almost 18 per cent of the state population, they were allocated 11.01 per cent of the total outlay in 2007-08, 14.06 per cent in 2008-09, 13.14 per cent in 2010-11 and 16.48 per cent in 2011-12. Moreover, actual expenditures were even lower. The same was true of the Dalits, who represent 7.1 per cent of the state population and who were allotted 1.41 per cent of the total outlay in 2007-08, 3.93 per cent in 2008-09, 4.51 per cent in 2009-10, 3.65 per cent in 2010-11 and 3.20 per cent in 2011-12.

Generally speaking, Gujarat has not spent as much as other states on the social sector. In a report, the Reserve Bank of India showed that Gujarat spends less than several other states in this area. Take education — in 2010-11, Gujarat spent 15.9 per cent of its budget in education, when Bihar, Chhattisgarh, Haryana, Kerala, Maharashtra, Orissa, Rajasthan, Uttar Pradesh and West Bengal spent between 16 and 20.8 per cent. The national average was 16.6 per cent.

While these criticisms from the left are well known, those on the right, especially the liberals, could also have indicted the Modi government for its lack of financial discipline. The Gujarat growth pattern relies on indebtedness. The state's debt increased from Rs 45,301 crore in 2002 to Rs. 1,38,978 crore in 2013, not far behind the usual suspects, Uttar Pradesh (Rs 1,58,400 crore) and West Bengal (Rs 1,92,100). In terms of per capita indebtedness, the situation is even more worrying, given the size of the state: each Gujarati carries a debt of Rs 23,163 if the population is taken to be 60 million. In 2013-14, the government plans to raise fresh loans to the tune of Rs 26,009 crore. Of this amount, Rs 19,877 crore, that is 76 per cent, will be used to pay the principal and the interests of the existing debts. Gujarat would fall into the debt trap the day this figure reaches 100 per cent.

This fiscal crisis has been caused by several factors. First, many Gujaratis who are supposed to pay taxes don't, whether they are at the helm of companies or ordinary citizens. In 2010, the total amount from taxpayers in Ahmedabad, Surat, Baroda and Rajkot alone was Rs 7,555 crore. This was more than the annual tax collection of Bihar at the time.

Second, the exchequer has been directly affected by the business-friendly attitude of the Modi government. To woo investors, it has indulged in tax deductions and low interest rates, and sold land at throwaway prices. Take the example of the Nano factory. If K. Nag's biography of Modi is to be believed, the Gujarat government made unprecedented concessions to Tata Motors, including the sale of 1,100 acres of land at Rs 900 per square metre, when its market rate was around Rs 10,000 per square metre, a Rs 20 crore exemption on stamp duty levied on the sale of land, a 20-year deferral in the payment of value added tax on the sale, and loans amounting to Rs 9,570 crore against an investment of Rs 2,900 crore (330 per cent of the investment) at 0.1 per cent interest rate over 20 years. Most of the big companies investing in Gujarat — Adani, Essar, Reliance, Ford, Maruti, L&T and others — have been offered special conditions, especially under the SEZ framework.

Certainly, to attract investors is a good way to prepare for the future and heavy debts are not a problem if these investments generate tax revenue. But how productive these investments will be remains to be seen. Many of them are at least partly speculative. The SEZ Act allows the owners of large SEZs (above 1,000 hectares) to use 75 per cent of their superficy for non-industrial purposes (for the smaller ones, up to 50 per cent of an SEZ can be devoted to non-processing areas). SEZ owners have been quick to indulge in real estate speculation and to lease at market price land that they've bought at throwaway prices. Interestingly, the corporate sector is not covered by the RTI. We wonder why.

Those on the right, who overlook the fact that the Modi government is more business-friendly than market-friendly (surprisingly, for liberals), claim that the way Gujarat is attracting investors is good for development. But it is only good for growth. For development, investing in education would make much more sense.

The writer is senior research fellow at CERI-Sciences Po/CNRS, Paris, professor of Indian Politics and Sociology at King's India Institute, London, and non-resident scholar at the Carnegie Endowment for International Peace express@expressindia.com

An Ethical Financial Analyst

Financial analyst Neeraj Monga

 

The Cable Guy

Financial analyst Neeraj Monga’s reports have India Inc in a funk

Anirudh Bhattacharyya

The Canadian newspaper report, boldly headlined ‘Yellow Pages strikes back at analyst’, is framed and prominently displayed in a corner office of the Toronto-based firm Veritas Investment Research. The Financial Post article refers to a July 2006 report from Veritas, titled ‘The Count of Yellow Pages’, that was quite unambiguously bearish on the Yellow Pages Income Fund, even though at the time it was the second largest trust in Canada with a market capitalisation of over $8 billion. That didn’t prevent Veritas analysts Neeraj Monga and Chris Silvestre from arguing that “past performance is no indicator of future results. We believe that ypg is the poster child of this adage”.

The Bull Buster Age 40 Place of Birth Udaipur Work Executive vice-president and head of research at Toronto-based forensic accounting firm, Veritas, whose candid reports on prominent Indian firms are making headlines. Hobbies Monga enjoys cooking, especially experimenting with recipes. He likes Bollywood films (Dil Chahta Hai is a favourite) and listens to old Hindi music (especially Mohd Rafi). Has most recently read the biography of Steve Jobs. Loves travelling to sunnier climes. Family Wife Dimple is a homemaker. Children: Sanjana, 5, and Arjun, 1.

In the Financial Post article, Yellow Pages CEO Marc Tellier had fired back that 11 of 12 analysts had “buy” recommendations on the company. Now, almost six years later, the stock which was then trading at nearly $16 barely touches double digits—in pennies—on the Toronto Stock Exchange.

India-born Monga, executive vice-president and head of research at Veritas, has written a bunch of reports since then, and those involved in the inner machinery of BSE 100 stocks will certainly be paying serious attention to his work. After all, his reports on Reliance Industries and Reliance Communications (exactly five years from the day the Yellow Pages report was published), and then on UB Holdings and Kingfisher Airlines and, most recently, on DLF, have generated tremors—and headlines.

As Monga points out in an interview at his Toronto office, this isn’t about ulterior motives and targeting Indian companies: “Ultimately, it’s about two things, governance and vision. There are very few visionary people out there, mostly in North America, creating businesses from scratch. In India, some of the biggest companies are trying to rip other people off.” That’s just the sort of candid language that has roiled the usually placid waters of equity research aimed at Indian corporates. For instance, the DLF report summarised: “If your investment decision incorporates management integrity, then bypassing DLF will be an easy choice.”

There’s more to come: Veritas established a research unit focused on India this January. Led by Monga, the unit expects to deliver between 6-8 reports in 2012 itself. As a frequent visitor to India, Monga is aware of the terrain: “India, in general, as a nation, has been led by rhetoric rather than fact. So I decided perhaps we can inject some facts into the debate.” Clearly, he has forceful views and is unafraid about presenting them. “Generally information coming out of India and/or China has been pretty...” Monga pauses and contemplates the apt word, “untrustworthy.”

‘Brothers In Arms’: Jul ’11 What Veritas said “We find no credible evidence of ‘values’ and ‘integrity’ in RCom’s financial statements or those of its former parent, RIL.” RCom’s response “A malicious and motivated report containing baseless allegations, masquerading as research.”

Monga’s Indian critics may well blame his father for preventing the son from taking on a career as the local cable guy, possibly in West Delhi’s Vikaspuri. His sister Parul, who works in Toronto as a trader with the Western Ontario Financing Authority, recalls that in the early ’90s, just as the Indian economy was being liberalised, Neeraj, still pursuing his BA at Delhi University’s Rajdhani College, launched a cable business. Running cables from their home vcr, he piped Bollywood films and music, children’s programmes and Pakistani serials into the residences of neighbours in that cluster of Delhi Development Authority flats. Within two years, the enterprise had gone from an initial 10 subscribers to over 500. “He was the very first guy to start the process. He had the vision, but Dad wanted him to focus on education so he sold the business,” she says.

“There are a lot of companies in India which are overvalued because people don’t really understand the numbers.”

 

Monga went on to secure an MBA from the University of Indore, worked briefly in India, before taking a loan from Dena Bank for an MBA at the Richard Ivey School of Business at the University of Western Ontario. Robert Fisher, who taught Monga here, remembers a student who was able to “analyse complex situations quickly”. Fisher, who now teaches at the University of Alberta’s business school, hired Monga for summer employment. That, though, wasn’t the sort of blue-chip internship his students coveted. Fisher says Monga did “incredibly well” to “overcome that barrier” and snagged “the best offer relative to any other student of his MBA class”. That was at Bain & Company, the same firm where Mitt Romney, now the frontrunner to become the Republican Party’s presidential nominee in the US, also worked before forming Bain Capital.

 Monga lasted about a year there. Fortunately for him, Michael Palmer, a veteran of Bay Street—Toronto’s equivalent of Wall Street—was planning to set up Veritas, which would concentrate on forensic accounting. Palmer, now president at Veritas, says, “The concept was started in 1999 at the peak of the dotcom bubble. We thought there was a lot of dishonest accounting going on out there.” Veritas came into being in 2000 and Neeraj Monga was its first employee. The research wing now has 17 staffers.

‘A Pie In The Sky’: Sep ’11 What Veritas said “We believe that kair’s book equity has been wiped out although audited financials pretend otherwise.” Kingfisher’s response "Very surprisingly, we never got a copy...but they widely disseminated their report to the media which leads me to be suspicious."

The research into Indian equities was Neeraj Monga’s initiative. While Palmer supported the idea, several of Veritas’s partners were sceptical and a degree of persuasion was required before the project was green-lighted. Palmer believes this new venture for Veritas is a need: “I think the Indian markets are at about the same stage as the North American or world markets were when we started Veritas in the first place. There are a lot of companies in India which are overvalued because people don’t really understand the numbers.”
The kernel for the debut analysis, on Reliance, came much earlier. Monga, who had followed the telecom sector, was viewing a presentation on the spinout of Reliance Communications from Reliance Industries: one slide stuck out as anomalous, but he presumed someone in India would comment on that. But there was not a peep for five years. “Ultimately, when I said we can write about India, we went back to dig deeper into that presentation,” he says. The question was how the Ambani family shareholding had gone from 38 to 63 per cent in the change of Reliance Communications ownership, which as Monga saw it, defied logic.

The next report featured another “easy choice”. As Monga says, “Airlines are generally not good business. We just said we’ll look at the annual report of Kingfisher. As soon as we opened the first annual report, we knew something was not right. So we read five years’ worth of annual reports and we figured out this is an effectively insolvent organisation.” In fact, Monga argues that Kingfisher should be delisted from the BSE for flouting Indian accounting standards. For the most recent report, again the real estate sector was another easy choice with DLF the 800-pound gorilla therein. “Anybody who has any experience of India knows the Indian real estate market is rife with underhand dealings,” Monga explains.

Now obviously there’s been a blowback against Veritas’s analysis. A spokesperson for Reliance Communications described it as a “malicious and motivated report containing baseless allegations, masquerading as research”. Lawsuits have been threatened—though not served. Monga isn’t perturbed, though his wife Dimple is, somewhat. The couple is raising two young children, five-year-old Sanjana and one-year-old Arjun, at their house in midtown Toronto. As Dimple Monga says, “Sometimes I’m a little apprehensive that there might be a negative response. I feel these companies can take it very personally.” But she remains supportive of her husband’s crusade to reform accounting practices in India.

‘A Crumbling Edifice’: Mar ’12 What Veritas said “Claims made by management about its ability to execute were fanciful.” DLF’s response “...is presumptive and mischievous as the analysts have never contacted the company to seek any information or clarification.”

Monga, though, is frank that this is not “social service”, as some in India may deem it to be. That’s a reality Palmer underscores: “We’re not doing it out of the goodness of our hearts, we think it’s a legitimate business opportunity and a product which is really needed in India right now.” Veritas’s clients pay a steep rate for access to the firm’s reports, starting at $50,000 in the first year and climbing. The firm certainly wants to broaden its base of clients to India, where it still doesn’t have a footprint, other than working with a consultant.

While its research is sold to institutional investors, some based in Singapore and Hong Kong, Veritas wants organisations like lic and Employee Provident Fund of India to subscribe. “They’re obviously the stewards of the savings of India’s small investors. They have a fiduciary duty to look out for their clients and if we can add value to the investment diligence process, then ignoring us is not in their interest.... It seems to me those managements are sleeping at the wheel,” observes Monga.

Nor is Monga daunted by rumours of the Indian market regulator, SEBI, imposing new regulations on independent equity research. Since Veritas doesn’t yet sell its research in India, it doesn’t need to be registered with SEBI. It is, however, registered with the Ontario Securities Commission and has a chief compliance officer. Still, he believes any such SEBI measure is a “good thing”. He also shrugs off accusations of being part of a bear cartel, retorting that those who are bullish aren’t taken to be “part of the bullshit cartel”. Coincidentally, his office, just off Bay Street, is also next to a bucolic sculpture of placid urban cows, called The Pasture, a counterpoint to the Raging Bull that defines New York’s Wall Street.

Monga shrugs off bear cartel accusations, retorting that those bullish aren’t seen as “part of the bullshit cartel”.

 

Clearly, Monga has figured out that Veritas’s research may just be pointing to a large, systemic disorder in India. That dire warning is delivered in Monga’s typically outspoken style: “After our telecom report, everyone said, ‘But the entire sector is in trouble.’ Then, after the Kingfisher report people said, ‘Ahh, but the airline sector is in difficulty, why single out a specific airline?’ After our DLF report, I am reading stories that the entire real estate sector is in a downtrend, and therefore DLF is no different. The power sector is also in trouble. Then how come ‘India is a dynamic and growing economy’?” He’s also clear about the “change” Veritas is targeting. “In India, dealings with ‘related parties’ are the norm, and most ‘related party’ dealings are a means to siphon funds from the publicly traded entity for the benefit of majority owners. We will highlight this.”
Unlike those of his ilk, Monga maintains a work-life balance, usually returning home by 6.30 pm. Cooking or watching Bollywood films are favourite forms of relaxation. The prospect of a slew of reports flowing from Veritas this year may just keep India’s corporate behemoths from relaxing though, unused as they are to any sort of intense scrutiny.