A Level Economics 54: Monopoly

Market failure arising from monopoly firms occurs due to the significant market power they possess, which allows them to restrict output, charge higher prices, and limit competition. This results in an inefficient allocation of resources and a loss of consumer welfare. Let's explore the market failures arising from monopoly firms:

1. Higher Prices and Reduced Output: Monopoly firms can set prices higher than their production costs due to the lack of competition. Since they are the sole providers of a particular good or service, consumers have no choice but to accept the higher prices. This leads to reduced consumer surplus, as consumers pay more for the product than they would in a competitive market.

   Example: A pharmaceutical company holds a patent for a life-saving drug. As the only producer, they can charge exorbitant prices, making it unaffordable for many patients in need.

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3. Inefficient Resource Allocation: Monopoly firms may not allocate resources efficiently to meet consumer demand. Their focus may be on maximizing profits rather than producing the optimal quantity of goods or services that align with consumer preferences.

   Example: A monopoly internet service provider may invest less in network expansion and improvements since they face limited competition. As a result, consumers may experience slower and unreliable internet services.

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5. Lack of Innovation: Monopoly firms may lack incentives for innovation and improvement since they face no pressure from competitors. Without competition, there is less motivation to invest in research and development or enhance products and services.

   Example: A monopoly operating in the telecommunications sector may not invest in new technologies or offer innovative services since they already dominate the market.

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7. Deadweight Loss: Deadweight loss refers to the welfare loss experienced by society when resources are not efficiently allocated. In a monopoly, deadweight loss arises due to the underproduction of goods and services compared to a competitive market.

   Example: A monopoly producing widgets may restrict output to maximize profits, leading to an inefficiently low quantity of widgets produced and consumed.

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9. Rent-Seeking Behavior: Monopoly firms may engage in rent-seeking behavior, using their market power to lobby for regulations and policies that protect their position. This diverts resources away from productive activities and undermines overall economic efficiency.

   Example: A monopoly energy company may lobby the government to impose regulations that limit competition from renewable energy sources, protecting its market dominance.

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11. Inequitable Distribution of Income: Monopoly profits may be concentrated in the hands of a few, exacerbating income inequality and wealth disparities in society.

    Example: A monopoly in the media industry may control multiple platforms and generate significant profits, contributing to media ownership concentration and limiting diversity of voices.

Government intervention through antitrust laws, regulations, and competition policies is crucial to address the market failures arising from monopoly firms. By promoting competition, governments can encourage innovation, ensure efficient resource allocation, protect consumer welfare, and foster a more equitable distribution of economic benefits.

The revenge of Sukhi Lala

Jawed Naqvi in The Dawn


THE flag of Jammu & Kashmir, which was taken down from the Srinagar Secretariat over the weekend, carried the symbol of a plough. The Congress party’s election symbol in 1952 under Jawaharlal Nehru was two bullocks in harness — do baelon ki jodi.

In a monsoon-fed agricultural economy, both symbols represented the productive and political power of the peasant. In a 1958 TV interview with American journalist Arnold Michaelis, Nehru spoke of differences between the Muslim League and the Congress over land reforms, which the latter was committed to in independent India.

When Nehru became president of the All India States Peoples Conference (AISPC) at Udaipur in January 1946, he got Sheikh Abdullah elected vice president. They were both committed to land reforms, and AISPC, which was a Congress-backed body that worked to nudge princely states to become part of the future India, was equally determined to uproot feudalism after independence.

This was a quandary Jammu & Kashmir ruler Hari Singh faced. He resented Nehru and Abdullah as socialists, but may not have seen a great future for himself in Muslim Pakistan either. Moreover, the disputed Instrument of Accession he signed described him as ‘Jammu Kashmir Naresh ani Tibet Desh Adhipaty’ (Jammu & Kashmir ruler and sovereign of Tibet nation).

It got Sheikh Abdullah into trouble when he met Chinese premier Zhou Enlai in Algiers in 1965, an alleged indiscretion that prompted his arrest upon return. Gandhian pacifist Horace Alexander pleaded on his behalf with then information minister Indira Gandhi, who had sympathy for the Sheikh, but also a word of caution.

“What Sheikh Sahib does not realise is that with the Chinese invasion [1962] and the latest moves in and by Pakistan, the position of Kashmir had completely changed. The frontiers of Kashmir touch China, USSR, Pakistan and India. In the present world situation, an independent Kashmir would become a hotbed of intrigue and, apart from the countries mentioned above, would also attract espionage and other activities from the USA and UK,” Alexander quotes Mrs Gandhi as saying in early 1965.

It is a Hindutva canard that Sardar Patel muscled 560 plus princely states into joining India. Pressure mounted on the monarchs when Nehru declared in his 1946 presidential address at the AISPC that those princely states that refuse to merge with India and join the Constituent Assembly would be considered hostile states. This was the background in which Sukhi Lala had to earn his keep in a new India. Who was Sukhi Lala?

Sukhi Lala generically was the moneylender-land grabber in the 1950s movie Mother India. He also appears as the land shark-zamindar in Bimal Roy’s Do Beegha Zameen, and as decadent Hari Babu in Ganga Jamuna. Sukhi Lala played the stock markets in Raj Kapoor’s Shri 420, and sold adulterated medicines in Nutan’s Anari.

In Zia Sarhadi’s Footpath, Dilip Kumar underscored the evil of stock markets, derisively called satta bazaar in Nehru’s India. Indian peasants suffered Sukhi Lala’s greed and occasionally revolted violently against the excesses. Dilip Kumar’s Ganga and Sunil Dutt’s Birju would be jailed or killed in India today as Maoists.

Manmohan Singh called Maoists his biggest security threat, but offered no comment about why the peasants were committing suicide in thousands following his pro-Sukhi Lala economic policies in 1991. India’s finance minister recently flaunted the bahi-khata cover, the moneylender’s cash register, instead of the briefcase her predecessors carried with the annual budget proposals, perhaps signalling who rules India today.

Gandhiji had many Sukhi Lalas as friends who financed the Congress. He saw in them the future trustees of India. Nehru who was a better student of history took a different view of the business class his political guru was enamoured of. His election symbol of do baelon ki jodi captured an affinity with the peasants, Sukhi Lala’s prey from time immemorial.

Ironically, it was Gandhi who had dispatched Nehru to cut his political teeth among the rural masses of Uttar Pradesh. It was in Rae Bareli from across the Sai river that the future prime minister watched police shooting at unarmed peasants at the behest of the local Sukhi Lala.

Rahul Gandhi’s sharp criticism of Narendra Modi’s wily games in Kashmir deserves an assessment of his politics, which may not be unrelated to his much-discussed Nehru-Gandhi lineage.

The lineage in a nutshell is a challenge to Sukhi Lala. Nehru jailed the tallest of the business tycoons. Indira Gandhi nationalised their banks. Rajiv Gandhi directed them to lay off the backs of the Congress workers. Rahul may have a cleaner slate to work with after leading Lala acolytes in the Congress jumped the ship over Kashmir.

Look at it this way. Modi is sworn to make India a Congress-free country for a reason. But the developments of recent days have shown, like it or not, that there is no Congress party without the leadership of the Gandhi family. Think of the PPP without a Bhutto link or an Awami League without a Mujib association, marked variance from the Bandaranaike and Kennedy clans in the limited sway they held on their respective parties.

Now consider a vengeful possibility. A parliamentary act protects the family of the assassinated former prime minister Rajiv Gandhi with the highest grade of security of the Special Protection Group. Given the hatred whipped up against them by India’s new rulers in league with a conniving media, it would not be difficult to immobilise them (from a Srinagar visit, for example) by stripping them of their security in the name of economic prudence. Already a move is afoot, says The Hindu, to remove Manmohan Singh’s SPG cover.

On the other hand, such a move could spur the newly cleansed party to come into its own. The waters are being tested on both sides. Sukhi Lala is drooling.

Silicon Valley has been humbled. But its schemes are as dangerous as ever

Sex scandals, rows over terrorism, fears for its impact on social policy: the backlash against Big Tech has begun. Where will it end?


Evgeny Morozov in The Guardian


Just a decade ago, Silicon Valley pitched itself as a savvy ambassador of a newer, cooler, more humane kind of capitalism. It quickly became the darling of the elite, of the international media, and of that mythical, omniscient tribe: the “digital natives”. While an occasional critic – always easy to dismiss as a neo-Luddite – did voice concerns about their disregard for privacy or their geeky, almost autistic aloofness, public opinion was firmly on the side of technology firms.

Silicon Valley was the best that America had to offer; tech companies frequently occupied – and still do – top spots on lists of the world’s most admired brands. And there was much to admire: a highly dynamic, innovative industry, Silicon Valley has found a way to convert scrolls, likes and clicks into lofty political ideals, helping to export freedom, democracy and human rights to the Middle East and north Africa. Who knew that the only thing thwarting the global democratic revolution was capitalism’s inability to capture and monetise the eyeballs of strangers?

How things have changed. An industry once hailed for fuelling the Arab spring is today repeatedly accused of abetting Islamic State. An industry that prides itself on diversity and tolerance is now regularly in the news for cases of sexual harassment as well as the controversial views of its employees on matters such as gender equality. An industry that built its reputation on offering us free things and services is now regularly assailed for making other things – housing, above all– more expensive.

The Silicon Valley backlash is on. These days, one can hardly open a major newspaper – including such communist rags as the Financial Times and the Economist – without stumbling on passionate calls that demand curbs on the power of what is now frequently called “Big Tech”, from reclassifying digital platforms as utility companies to even nationalising them.

Meanwhile, Silicon Valley’s big secret – that the data produced by users of digital platforms often has economic value exceeding the value of the services rendered – is now also out in the open. Free social networking sounds like a good idea – but do you really want to surrender your privacy so that Mark Zuckerberg can run a foundation to rid the world of the problems that his company helps to perpetuate? Not everyone is so sure any longer. The Teflon industry is Teflon no more: the dirt thrown at it finally sticks – and this fact is lost on nobody.

Much of the brouhaha has caught Silicon Valley by surprise. Its ideas – disruption as a service, radical transparency as a way of being, an entire economy of gigs and shares – still dominate our culture. However, its global intellectual hegemony is built on shaky foundations: it stands on the post-political can-do allure of TED talks much more than in wonky thinktank reports and lobbying memorandums.

This is not to say that technology firms do not dabble in lobbying – here Alphabet is on a par with Goldman Sachs – nor to imply that they don’t steer academic research. In fact, on many tech policy issues it’s now difficult to find unbiased academics who have not received some Big Tech funding. Those who go against the grain find themselves in a rather precarious situation, as was recently shown by the fate of the Open Markets project at New America, an influential thinktank in Washington: its strong anti-monopoly stance appears to have angered New America’s chairman and major donor, Eric Schmidt, executive chairman of Alphabet. As a result, it was spun off from the thinktank.

Nonetheless, Big Tech’s political influence is not at the level of Wall Street or Big Oil. It’s hard to argue that Alphabet wields as much power over global technology policy as the likes of Goldman Sachs do over global financial and economic policy. For now, influential politicians – such as José Manuel Barroso, the former president of the European Commission – prefer to continue their careers at Goldman Sachs, not at Alphabet; it is also the former, not the latter, that fills vacant senior posts in Washington.

This will surely change. It’s obvious that the cheerful and utopian chatterboxes who make up TED talks no longer contribute much to boosting the legitimacy of the tech sector; fortunately, there’s a finite supply of bullshit on this planet. Big digital platforms will thus seek to acquire more policy leverage, following the playbook honed by the tobacco, oil and financial firms.

There are, however, two additional factors worth considering in order to understand where the current backlash against Big Tech might lead. First of all, short of a major privacy disaster, digital platforms will continue to be the world’s most admired and trusted brands – not least because they contrast so favourably with your average telecoms company or your average airline (say what you will of their rapaciousness, but tech firms don’t generally drag their customers off their flights).

And it is technology firms – American companies but also Chinese – that create the false impression that the global economy has recovered and everything is back to normal. Since January, the valuations of just four firms – Alphabet, Amazon, Facebook and Microsoft – have grown by an amount greater than the entire GDP of oil-rich Norway. Who would want to see this bubble burst? Nobody; in fact, those in power would rather see it grow some more.

The culture power of Silicon Valley can be gleaned from the simple fact that no sensible politician dares to go to Wall Street for photo ops; everyone goes to Palo Alto to unveil their latest pro-innovation policy. Emmanuel Macron wants to turn France into a startup, not a hedge fund. There’s no other narrative in town that makes centrist, neoliberal policies look palatable and inevitable at the same time; politicians, however angry they might sound about Silicon Valley’s monopoly power, do not really have an alternative project. It’s not just Macron: from Italy’s Matteo Renzi to Canada’s Justin Trudeau, all mainstream politicians who have claimed to offer a clever break with the past also offer an implicit pact with Big Tech – or, at least, its ideas – in the future.

Second, Silicon Valley, being the home of venture capital, is good at spotting global trends early on. Its cleverest minds had sensed the backlash brewing before the rest of us. They also made the right call in deciding that wonky memos and thinktank reports won’t quell our discontent, and that many other problems – from growing inequality to the general unease about globalisation – will eventually be blamed on an industry that did little to cause them.

Silicon Valley’s brightest minds realised they needed bold proposals – a guaranteed basic income, a tax on robots, experiments with fully privatised cities to be run by technology companies outside of government jurisdiction – that will sow doubt in the minds of those who might have otherwise opted for conventional anti-monopoly legislation. If technology firms can play a constructive role in funding our basic income, if Alphabet or Amazon can run Detroit or New York with the same efficiency that they run their platforms, if Microsoft can infer signs of cancer from our search queries: should we really be putting obstacles in their way?

In the boldness and vagueness of its plans to save capitalism, Silicon Valley might out-TED the TED talks. There are many reasons why such attempts won’t succeed in their grand mission even if they would make these firms a lot of money in the short term and help delay public anger by another decade. The main reason is simple: how could one possibly expect a bunch of rent-extracting enterprises with business models that are reminiscent of feudalism to resuscitate global capitalism and to establish a new New Deal that would constrain the greed of capitalists, many of whom also happen to be the investors behind these firms?

Data might seem infinite but there’s no reason to believe that the enormous profits made from it would simply smooth over the many contradictions of the current economic system. A self-proclaimed caretaker of global capitalism, Silicon Valley is much more likely to end up as its undertaker.

Crony capitalism a big threat to countries like India, RBI chief Raghuram Rajan says

MUMBAI: Reserve Bank of India governor Raghuram Rajan has warned against crony capitalism which he said creates oligarchies and slows down growth. 

"One of the greatest dangers to the growth of developing countries is the middle income trap, where crony capitalism creates oligarchies that slow down growth. If the debate during the elections is any pointer, this is a very real concern of the public in India today," said Rajan while delivering the Lalit Doshi memorial lecture in Mumbai on Monday. 

The last general election was fraught with allegations of the nexus between politicians and business groups.

RBI governor Raghuram Rajan (left) with finance minister Arun Jaitley. 

Rajan extolled the virtues of India's democracy before turning to its darker aspects. "An important issue in the recent election was whether we had substituted the crony socialism of the past with crony capitalism, where the rich and the influential are alleged to have received land, natural resources and spectrum in return for payoffs to venal politicians. By killing transparency and competition, crony capitalism is harmful to free enterprise, opportunity, and economic growth. And by substituting special interests for the public interest, it is harmful to democratic expression. If there is some truth to these perceptions of crony capitalism, a natural question is why people tolerate it. Why do they vote for the venal politician who perpetuates it?" 

Rajan continued by saying, "One widely held hypothesis is that our country suffers from want of a 'few good men' in politics. This view is unfair to the many upstanding people in politics. But even assuming it is true, every so often we see the emergence of a group, usually upper middle class professionals, who want to clean up politics. But when these 'good' people stand for election, they tend to lose their deposits. Does the electorate really not want squeaky clean government?


Finance minister Arun Jaitley (left), with RBI governor (second from left in front) during a meeting. 

"Apart from the conceit that high morals lie only with the upper middle class, the error in this hypothesis may be in believing that problems stem from individual ethics rather than the system we have. In a speech I made before the Bombay Chamber of Commerce in 2008, I argued that the tolerance for the venal politician is because he is the crutch that helps the poor and underprivileged navigate a system that gives them so little access. This may be why he survives." 

The governor's warning against crony capitalism and oligarchies is a reiteration of his statements four days before the Lehman Brothers collapse in 2008. In a speech at the Bombay Chamber, Rajan had highlighted that India had the highest number of billionaires per trillion dollars of GDP after Russia. While excluding NR Narayana Murthy, Azim Premji, and Ratan Tata as 'deservedly respected', Rajan had said "three factors — land, natural resources, and government contracts or licenses — are the predominant sources of the wealth of our billionaires. And all of these factors come from the government."

The beautiful game embodies everything that's bad about Britain

Unlike Germany's thriving Bundesliga, the Premier League is run for the super-rich, not fans

• 
• • Will Hutton
  • The Observer, Sunday 13 January 2013

Carson Yeung (fourth from left) poses with Birmingham's board of directors after acquiring the club in 2009. Photograph: Leon Neal/AFP/Getty Images

Birmingham City FC fans are in revolt. Their once proud club has not been well managed – to put it mildly – by "businessman" Carson Yeung, currently awaiting trial in his native Hong Kong, for an alleged £59m-worth of money laundering, and the process is not over yet. It is the degeneracy of British economy and society in a football microcosm – nothing to stop Cayman Island ownership, strange "sponsorships" and lush, anonymous director fees.

In Britain, there are no legal or governance structures that put football or the fans at the centre of a club owner's concerns. Rather, in keeping with the wider culture, football is "open for business". Market forces are deified as the only value worth celebrating and a business – even a football club – is no more than its owner's private plaything. The result is a moral and economic disaster – in football as in the wider economy.

Economists call this "rent-seeking" and those who don't know what the term means need only spend a few seconds surveying the history of the club since Mr Yeung, his son and third director Peter Pannu took it over in 2009. The club is owned by a holding company based in the Cayman Islands, but burdened by vast debts used by Yeung to buy it, now facing financial problems following the problems with Yeung's business affairs.

Their sole interest is selling off assets, chiefly good footballers in the transfer market, and now the club, to get their money back into the Cayman Islands – while paying large director fees for unnamed services. What they want is economic rent: a surplus created for doing nothing of value.

Britain is a rent-seeker's paradise, as many more football clubs other than Birmingham City can testify. We have created a looters' charter, with football as a playpen, within which the super-rich can do what they want. A recent flash point is the price visiting fans are charged for their tickets. (Manchester City fans protested at the £62 they were asked to pay for today's game at Arsenal.) If the price of admission, along with travel, is prohibitive, then the game is played to only one set of supporters in the stadium with one set of chants. The experience of a game shrivels.

For the rent-seeker, this is emotional sentimentality. Everybody now knows that market forces are both best and irresistible, a perfect justification for putting up ticket prices to whatever the market will bear. Christian Siefert, CEO of the German Bundesliga, told the Observer recently that football is one of the last areas where people are brought together: "We want to have our whole society as part of our football, in our stadiums", explaining why the owners of football clubs forgo the highest possible ticket prices. It is not a sentiment that Mr Yeung, or the many other foreign owners of British clubs, would share. Why worry about British society? We exist to be looted and privately mocked for our connivance in our own destruction.

Flexible and free markets, we have had drummed into us for 30 years, are the reason why Britain is now the world-beating economy that it has become and Germany and the European Union are in the doldrums. The Premier League, slavishly following these principles, is self-evidently, or so runs the line, the best football league in Europe. Pity the poor Germans and the daffy Herr Siefert, who worry about who owns their companies and football clubs, care about fan culture and invest in their young talent.

They don't welcome "wealth creators" such as Carson Yeung with no questions asked, and because German clubs reserve parts of their grounds for standing room only cheap tickets, they don't maximise the economic value of their sporting assets. Down that road lies ruin – or so a bevy of economic commentators and Eurosceptic Conservative MPs will rush to tell us.

But the German approach to football, as with their wider economy and society, is beginning to win admirers, not least among football supporters. There are three German sides in the last 16 of the Champions League this year and fuddy-duddy Dortmund played Manchester City, exemplar of British-style market forces, off the park. What's more, they care about their fans. It is a great club rather than a sheikh's passing whim. The Premier League is now considering something very German: capping the prices that clubs can charge visiting supporters. Football as a sport might just, in one tiny step, challenge the law of the market.

British football needs to go much further. German football clubs require that a majority of votes are exercised by fans. There can't be Carson Yeungs because they would be outvoted. German clubs invest in homegrown talent. Sixty per cent of Bundesliga players are homegrown compared with 39% of Premier League players.

The lessons go wider still. Eighteen years ago, I argued in The State We're In that it was obvious that Germany would outperform Britain economically, just as it is obvious that it will do the same – unless we reform ourselves wholesale – over the next 18. What is so depressing about today's economy is not just that we stand on the verge of a triple dip recession, but that, like our football clubs, so much of our economic base is organised around rent-seeking.

Nor do we seem to have learned much. There should be a vibrant debate about how to reproduce in Britain what evidently works in Germany. We need companies organised around long-term business purpose and to create a whole network of public and private institutions, law and practice that buttresses them. Yet the heart of the Eurosceptic, anti-EU case is that, instead, we need to leave to reinforce the market "flexibilities" and "freedoms" that have created such fantastic British success. Let the looting get more intense.

We are far gone. There is no majority in the Premier League for serious reform. Foreign owners are not going to vote to qualify their autonomy, allow more supporter voice or limit their capacity to compete by offering sky-high player wages. On the other hand, there is a growing argument for change – witness the possible concession on ticket prices.

It's the same with wider economic reform. The average size of a British manufacturing firm is 14 people: the majority of large firms and factories are foreign-owned. We have constructed an economy in which the rent-seekers and Carson Yeungs are the majority. It is very clear what needs to be done. The signs are confusing, but, as in football, maybe the grip of the looters is weakening as the evidence mounts of their vandalism. Here's hoping.

Robert Vadra - Rent Seeker or Entrepreneur?

Property empire was built on soft loans handed out in unusual circumstances, documents show

In February, as rumours of the ambitions of Congress president Sonia Gandhi’s son-in-law swirled amidst the heat and dust of the election campaign in Uttar Pradesh, her daughter Priyanka moved to scotch speculation about Robert Vadra’s possible political future.

“He’s a successful businessman,” the younger Ms. Gandhi said of her husband, “who is not interested in changing his occupation.”

Even though Mr. Vadra has increasingly emerged in the public eye, there has been little information on just how successful a businessman he is — and how his empire was built.

Last year, The Economic Times first wrote about his “low-key entry into the real estate business” with the help of DLF Ltd, India’s largest commercial property developer. And on Friday, Arvind Kejriwal and Prashant Bhushan of India Against Corruption (IAC) released documents which showed how Mr. Vadra has acquired land assets in and around the National Capital Region worth hundreds of crores of rupees, sometimes at prices below market value — funded by interest-free loans disbursed to him by DLF and other companies for no apparent reason.

Though the documents reveal no illegality or impropriety on the part of Mr. Vadra, they do raise the question of why DLF — which is a publicly traded company — would enter into multiple business transactions with him on terms that appear highly preferential. The company on Saturday issued a lengthypress release setting out its side of the story but questions of corporate governance remain and minority shareholders are likely to ask the company for the rationale behind its arrangement with Ms. Sonia Gandhi’s son-in-law and whether similar soft loans (or “advances” as DLF prefers to call them) and deals have been transacted with companies owned by other prominent individuals. The answer to the second question may help explain why a normally feisty Opposition has been remarkably silent on the DLF-Vadra connection since the story first broke in 2011.

In 1997, the year Mr. Vadra married Priyanka Gandhi, he incorporated his first, modest business — Artex, which dealt with brass handicrafts and fashion accessories. From 2007, there was a surge in his activities. Inside of a year, he founded five other ventures, spanning the real estate, hospitality and trading sectors.

Ms. Gandhi maintained a distance from these companies: in 2008, she dissociated herself from the sole business in which she was involved, aircraft charter firm Blue Breeze Trading.

From balance sheets and directors’ reports released by IAC and additional papers obtained by The Hindu, which relate to six group companies, it is clear that Mr. Vadra’s rise was meteoric. In 2007-2008, his companies started out with promoter funds of just Rs. 50 lakh.

However, the companies succeeded in acquiring 29 high-value properties by 2010, armed with loans and advances of Rs. 80 crore from DLF,… as well as Bedarwals Infra Projects, Nikhil International and VRS Infrastructure. These included a Rs. 31.7 crore acquisition of a 50 per cent share of Saket Courtyard by 2010, armed with loans and advances of Rs. 80 crore from DLF, as well as Bedarwals Infra Projects, Nikhil International and VRS Infrastructure.

These included a Rs. 31.7 crore acquisition of a 50 per cent share of Saket Courtyard Hospitality, which owns the 114-bed Hilton Garden Hotel in New Delhi; a 10,000 square foot penthouse, number B1115, at the DLF Aralias complex for Rs 89.41 lakh; 7 apartments in DLF Magnolia for Rs. 5.2 crore; apartments for Rs. 5.06 crore at DLF Capital Greens; and a DLF-owned plot in Delhi’s ultra-posh Greater Kailash II area for Rs. 1.21 crore. Though DLF’s press release said some of these prices were “completely incorrect,” the investment numbers are all stated in the balance sheets filed by Mr. Vadra’s companies with the Registrar of Companies.

Then, at the end of 2010, Mr. Vadra’s companies also picked up a bouquet of rural properties: 160.62 acres of agricultural land in Bikaner for Rs. 1.02 crore, and Rs. 2.43 crore for an additional 5 parcels of land of unknown acreage; land at Manesar, on Delhi’s fringes, for Rs. 15.38 crore; land at Palwal for Rs. 42 lakh, land at Hayyatpur, in Gurgaon, for roughly Rs. 4 crore; land at Hasanpur for Rs. 76.07 lakh; land at Mewat for Rs. 95.42 lakh; unidentified agricultural land for Rs. 69.09 lakh; and two ‘other real estate bookings’ worth Rs. 9 lakh.

From just Rs. 7.95 crore in fiscal 2008, Vadra’s fixed assets and investments grew to Rs 17.18 crore in fiscal 2009, jumping a staggering 350 per cent in a single year to Rs 60.53 crore in fiscal 2010, the year in which most of these properties were acquired with promoter funds of just Rs. 50 lakh along with interest of Rs. 255.46 lakh earned on advances and loans and zero group activity or profitability.

Despite the high market value of these listed assets (properties), though, the declared investment portfolio in Mr. Vadra’s balance sheets remained a meagre Rs. 71 crore at the end of fiscal 2010 with accumulated group losses of Rs. 3 crore.

Mr. Vadra’s companies did not respond to e-mails sent by The Hindu seeking clarifications on the details of these transactions. In particular, it remains unclear why DLF and other major corporations would have made him large loans, since this is not in the nature of their business. Nor did Mr. Vadra’s companies have any apparent prior specialisation in real estate business.

Financial wizardry

The financial information available from the balance sheets and directors’ reports of Mr. Vadra’s companies — Sky Light Hospitality, Sky Light Realty, Blue Breeze Trading, Artex, Real Earth Estates and North India IT Parks — raise hard questions about what business it is they actually do, and how this business is conducted.

Each of the companies has 268, Sukhdev Vihar, New Delhi, as its common address, and Mr. Vadra and his mother Maureen Vadra as directors. Mr. Vadra, the documents show, receives remuneration of Rs. 60 lakh per annum from just one company, Sky Light Realty. The payment, the company’s auditor states is “remuneration in excess of the limit prescribed under section 217 (2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules 1975.”

There are no other employee costs in the books, either to his mother or to others. However, in the documents, both directors “place on record their deep sense of appreciation for the committed services of executives, staff and workers of the company.”

Strangely, while assets balloon in each subsequent balance sheet, there is no account of the corresponding enhancement of visible business activity. For example, the balance sheets raise a current liability of Rs. 50 crore against the Manesar land, though it was registered for just Rs.15.38 crore in the same financial year, defying all commercial and financial prudence and raising doubts about whether this was an income rather than a current liability.

A senior chartered accountant told The Hindu on condition of anonymity, given the individuals involved, that masking incomes as loans/current liabilities in this manner is an unorthodox accounting device. “Using short term funding of this kind to create long-term assets defies financial prudence as it constitutes a high business risk, unless they are not really ‘current liabilities’ and are not payable in the short term, which means they are nothing but incomes which have been disguised,” he said. Vadra’s auditors consistently overlook this in all six firms, while accounting firm Khurana & Khurana in its Auditors Report for Real Earth Estates Pvt. Ltd. for the year 2010, actually opts to gloss over this by stating: “Based on the information and explanation given to and on an overall examination of the balance sheet of the company, in our opinion, there are no funds raised on short term basis which have been used for long term investment.”

The auditor’s accounting rigor comes into further question with its statement that according to the information and explanations given to us, the company has, during the year, not granted any loans, secured or unsecured to companies, firm or other parties covered in the register maintained under section 31 of the Companies Act 1956, excepting the advances under business obligation accordingly paragraphs 4 (iii) (a) (b) (c) and (d) of the order are not applicable. However, the balance sheet shows loans and advances of Rs 2.89 crore for the company in 2010.

Many such loans, which reflect as total current liability of Rs. 72 crore in the accounts, are invested in long-term assets like land. Curiously, no one appears to be pressing for the return of these loans — which are, according to the documents, interest-free.

Additionally, all of Mr. Vadra’s companies show interest income from fixed deposits, claiming tax deducted at source for this interest without accounting for the fixed deposits themselves in the balance sheets. The six companies’ profitability, which grew from zero in 2007-8 to Rs. 20.94 lakh in 2008-9 to Rs. 255.46 lakh in 2009-10, was not from any business activity in these companies but purely from interest on 23 elusive fixed deposits amounting to roughly Rs. 5 crore.

There are other unexplained gaps in the financial information. As of March 31, 2010, the group profit and loss account shows that only Sky Light Realty made a profit, and that too in one single year. Yet, while the others show losses, they continue to make investments. This profit of Rs. 244.98 lakh was despite a complete absence of business activity or liquidation/reduction of fixed assets, investments or other bookings. However, the accumulated losses of Rs. 3 crore from the other 5 firms in the RV Group’s 2010 balance sheet wipe out Vadra’s capital and reserves, raising questions about his ability to buy so many high value properties with zero capital.

DLF’s fortunes

Perhaps the key to the relationship could lie in DLF’s troubled fortunes since 2008 — the very time its dealings with Mr. Vadra acquired significant scale. According to a March 1, 2012 report by the respected Veritas Investment Research Corporation, DLF Ltd is an organisation under duress, with its management scrambling to consummate assets sales, rationalize its land bank and divest non-core operations.

Since a May, 2007 Initial Public Offering, which sold at Rs. 525 per share, the stock price declined by 46 per cent in March 2012 compared to a roughly 30 per cent gain in the Sensex over the same period with the stock presently trading at Rs. 241.80, a steep 54.13 per cent dip.

Veritas points to questionable related-party transactions, aggressive and conflicting accounting policies, self-enrichment and inability to deliver on promises, and a balance sheet stretched to the limit, with no free cash flow and no credible plan to de-lever its balance sheet. “If your investment decision incorporates management integrity, then bypassing DLF will be an easy choice,” the Veritas report states.

In addition, Veritas does “not believe the disclosed book equity and asset base of the company,” stating that via its dealings (merger) with DLF Assets Ltd (DAL), from FY 2007 to FY 2011, the company inflated sales by at least Rs. 11,236 crore and its profit before tax by Rs. 7,233 crore.

A slowing real estate market in a high inflation environment and over-exposure to Gurgaon — among India’s most speculative real estate markets — is further expected to create tremendous pressure on the company’s balance sheet. “In the end, we believe DLF will seek assistance from financial institutions to restructure its loans,” the report affirms, urging investors not to buy DLF stock. DLF dismissed the report as “mischievous and presumptive.”

Mr. Vadra himself has attributed his brass-to-gold success story to hard work—and a little help from “family” friends like K.P. Singh, the chairman of the DLF Group. However, Mr. Vadra has strongly denied taking any favours from DLF in the past. “I have a good understanding with DLF. Our children are friends, we are friends. They are seasoned businessmen. They are not daft… They don't need me to enhance them. They’ve existed for years,” he told The Economic Times in March 2011.

Indeed, in January 2002, he made his distaste for favour-seeking capitalism public, dissociating himself from his brother and father, alleging that they were promising jobs and favours using his name and association with the Gandhi family. His father responded by suing him for defamation.

Hard work Mr. Vadra may well have put into building his property empire. But the help he received from friends like DLF suggests at least a part of his success flowed from the willingness of others to bet on the outcome of his enterprise.

Stiglitz - Bankers must go to jail

Joseph Stiglitz tells Ben Chu that rogue financiers have proven that regulation must get
tougher

Ben Chu
Monday, 2 July 2012

The Barclays Libor scandal may have shocked the British public, but Joseph Stiglitz saw it
coming decades ago. And he's convinced that jailing bankers is the best way to curb market
abuses. A towering genius of economics, Stiglitz wrote a series of papers in the 1970s and
1980s explaining how when some individuals have access to privileged knowledge that others
don't, free markets yield bad outcomes for wider society. That insight (known as the theory
of "asymmetric information") won Stiglitz the Nobel Prize for economics in 2001.

And he has leveraged those credentials relentlessly ever since to batter at the walls of "free
market fundamentalism".

It is a crusade that has taken Stiglitz from Massachusetts Institute of Technology, to the
Clinton White House, to the World Bank, to the Occupy Wall Street camp and now, to
London, to promote his new book The Price of Inequality.

And kind fortune has engineered it so that Stiglitz's UK trip has coincided with a perfect
example of the repellent consequences of asymmetric information.

When traders working for Barclays rigged the Libor interest rate and flogged toxic financial
derivatives – using their privileged position in the financial system to make profits at the
expense of their customers – they were unwittingly proving Stiglitz right.

"It's a textbook illustration," Stiglitz said. "Where there are these asymmetries a lot of these
activities are directed at rent seeking [appropriating resources from someone else rather than
creating new wealth]. That was one of my original points. It wasn't about productivity, it
was taking advantage."

Yet Stiglitz's interest in the abuses of banks extends beyond the academic. He argues that
breaking the economic and political power that has been amassed by the financial sector in
recent decades, especially in the US and the UK, is essential if we are to build a more just
and prosperous society. The first step, he says, is sending some bankers to jail. " That ought
to change. That means legislation. Banks and others have engaged in rent seeking, creating
inequality, ripping off other people, and none of them have gone to jail."

Next, politicians need to stop spending so much time listening to the financial lobby, which,
according to Stiglitz, demonstrates its spectacular economic ignorance whenever it claims
that curbs on banks' activities will damage the broader economy.

This talk of economic ignorance brings us to the eurozone crisis and the extreme austerity
policies being pursued. Stiglitz is depressed. In 2000 he resigned from the World Bank and
launched an excoriating attack on the way it and its sister institution, the International Monetary Fund, handled the Asian financial crisis of the late 1990s. He condemned the IMF
for imposing brutal and inappropriate adjustment policies on bailed out nations – medicine
which, he argued, merely pushed nations further into crisis. "For me there's some nostalgia
here," he says.

Does he see any hope for the eurozone, I ask, or is it now heading, inevitably, for a breakup?
"It is a train that can still be stopped" he says. "But the relevant question is the politics in
Germany. Have they created in their rhetoric a dynamic that makes it difficult to stop? In
particular [German Chancellor] Angela Merkel's rhetoric that the crisis was caused by
profligacy. She's framed the issue as profligacy, rather than framing it as 'the European
system is fundamentally flawed' ".

The central argument of his latest oeuvre is that the huge inequalities of income and wealth
that have developed in the US and elsewhere in the West over recent decades are not only
unjust in themselves but are retarding growth.

"Every economy needs lots of public investments – roads, technology, education," he says.
"In a democracy you're going to get more of those investments if you have more equity.
Because as societies get divided, the rich worry that you will use the power of the state to
redistribute. They therefore want to restrict the power of the state so you wind up with
weaker states, weaker public investments and weaker growth."

It's an elegantly simple proposition. And one that logically points to a radical manifesto of
redistribution and higher taxation in the name of the general public good. Time will tell
whether this comes to be regarded as another manifestation of towering economic genius.
But, for now, crusading Stiglitz has one more weapon in his hands with which to batter down
those walls of folly