For India’s next entrepreneurial wave Citings

FAULT LINES
Private equity can unleash a new wave of entrepreneurship that will breathe fresh life into our businesses, Raghuram Rajan

and breed immense wealth creation for its start-ups and their investors, says Harshal J Shah T HE 2005 Jackson Hole
Conference was to be the
TUESDAY 31 AUGUST 2010 *

Avoid another scam
Let Telecom Consolidate, Not Profiteer
A CLEVER confidence trick is to repeat an errant act
in the name of undoing an earlier one. Telecom
could witness such a con, if the reported proposals go
through to let some of the new licensees be bought over
by others or to allow them to return the spectrum they
had been allotted while refunding the licence fees they
had paid. Before the recent auction of 3G spectrum, the
government’s policy had been to allot any mobile licens-
ee a chunk of 4.4 MHz of spectrum and to add to that al-
location if and when its subscriber base expanded be-
yond a number that could be serviced with the start-up
spectrum. So, in return for paying an upfront entry fee
of `. 1,651crore, an operator could get the licence to oper-
ate in all 22 telecom circles and 4.4 MHz of spectrum in
each circle. Since spectrum is scarce, a licensee company
would command a fat valuation, far in excess of the en-
try fee paid, when it was sold, in whole or in part. To pre-
vent such profiteering, a ban was imposed, on sale of a li-
censee company within three years of obtaining the
licence. Several licensees have not rolled out oper-
ations, on some ground or the other, and are lobbying to
be allowed to sell their companies to other operators or
for the government to take back the spectrum and re-
fund the entry fees. Neither demand is valid.
By squatting on scarce spectrum that an active oper-
ator would have used to spread the telecom user base
and generate new income for itself, users, investors and
the government, the non-performing licensees have
imposed a huge cost on the economy. They should be pe-
nalised, rather than rewarded. It is imperative that the
spectrum they sit on be deployed in service. The least
messy way is for the government to take the spectrum
back from the non-performing licensees and then per-
mit them to sell their business minus the spectrum. This
would migrate whatever little customer base they have
built up to a viable operator and prevent profiteering on
the basis of a scarce national asset allocated to them in
dubious circumstances. The reclaimed spectrum would
end the current spectrum crunch of serious operators.
W
HEN Sir Gordon Wu,
chairman of Hopewell
Highway Infrastructure,
was a student at Princeton
in the 1950s, he dreamt of Chinese super-
highways, when China was a poor,
closed economy. A few decades later, Wu
won the contract to build China’s first su-
perhighway between Shenzhen and
Guangzhou. While he had no financial
support, Wu was offered an incentive by
the Chinese government — the faster he
could complete the highway, the higher
his profits would be. Cutting through the
bureaucracy, bringing in the best of glob-
al technology and finance, Wu deputed
30,000 labourers who took only 26
months to finish a 72-mile superhigh-
way that today zips across the fastest
growing region in the world. By doing so,
China set in motion a positive preceden-
ce of regional economic development of
the scale and size, the world had never
seen before. Indeed, incentivised
growth, supported by proactive tax re-
gimes, can do wonders for a country and
its people. Similarly, today, India is in dire
need of a new wave of entrepreneurship
that will breathe fresh life into our busi-
nesses, and breed immense wealth cre-
ation for its start-ups and their investors.
There is no dearth of ideas in India, and
we have potential entrepreneurs in the
form of experienced middle manage-
ment, serial entrepreneurs and first-gen-
eration ‘jugaadu’entrepreneurs. Globally,
home-grown family-owned conglom-
erates and companies like Infosys have
kept the Indian flag flying high. However,
how many Infosys’ has India been able to
create in the last decade? How many Mi-
crosofts, Apples and Googles will India
create in the next decade? Who makes the
real capital gains from the growth of such
companies? Barring a handful of Infosys',
most examples of global-scale first-gener-
ation businesses are from an era long
gone. Also, I have yet to come across a
mass of middle-class Indians who have
participated in the entire upside of these
superstar stocks, from inception.
First, to kick-start this next wave of en-
trepreneurship, we need to put our own
capital to work — money should be a
means to improving our lives and not be
an end in itself. Most Indians have be-
lieved in capital preservation and hence,
have had to forsake a multiplier in the
form of capital growth. Among high net
worth Indians, wealth is passed down
generationally. This creates a disparity
between the rich and the poor, which on-
ly gets wider, while simultaneously curb-
ing our overall risk-taking appetite.
This is unlike the US, where by way of
estate taxes, the rich are encouraged to
take risk with their capital or to contrib-
ute to charity, instead of trying to pre-
serve it for the next generation. In spite of
this tax, for several decades our sharpest
minds went to the US, worked on inno-
vations that would change the world,
built immense first-generation wealth,
but unfortunately, never returned to
their homeland. This paradox exists be-
cause Indians have had scant opportuni-
ties for taking ideas, building mammoth
global corporations here in India, other
than those that were afforded to second
generation entrepreneurs.
Second, we should encourage the ma-
rriage of private companies with the pub-
Third, we should reengineer our legal last for the Federal Reserve
system so that it is conducive to speedy Board chairman, Alan Green-
reconciliation of pending disputes and
within a time limit. A Paperwork Reduc-
span and the theme, there-
fore, was the legacy of the
tion Act that does away with the red tape
that we see today in the public sector is al-
Greenspan era… I was asked
to present a paper on how the
so needed. This will make investments financial sector had evolved
easier, bureaucracy accountable, deci-
sion-making speedier, and profits higher,
both for, private and public sectors.
during Greenspan’s term.
The typical paper on the fi-
nancial sector at that time de-
Fourth, domestic venture capital (VC) scribed in breathless prose the
funds are subject to a cap on the amount dramatic expansion of finan-
they can invest in foreign start-ups at cial markets around the
10% of their total funds raised. Doing world. It emphasised the
away with this cap will mean access to a wonders of securitisation,
multitude of technologies from the which allowed a bank to
heavy R&D capital-invested West, which package its risky housing or
can be provided access to the huge mar- credit card loans together and
kets in India through Indian entrepre- sell claims on the package in
neurs. The Indian VC firms have a fair the financial market... In the-
shot at attracting higher returns for its In- ory, with the risk better spread
dian Limited Partners and to choose from across sturdier shoulders, in-
Indian and foreign ideas — why should vestors would demand a low-
GEETANJALI we curb their scope by erecting make-be- er return for holding the risk,
lic sector via public private partnerships lieve one-way economic barriers? allowing the bank to charge
(PPP). This ecosystem can harbour fresh Fifth, private companies are armed lower loan rates and expand
ideas and provide navigational skills aro- with a collective experience and war borrowers’ access to finance.
und regulations, and encourage people chest that is more than capable of creat- In preparation for writing
to take risks, while offering fair returns. ing Indian intrapreneurs’. These in- the paper, I had asked my staff
One such example is the US Small Busi- house entrepreneurs can be incentivised to prepare graphs and tables.
ness Investment Company. These SBICs to create small businesses out of divisions As we looked through them, I
are privately-owned and managed in- that enjoy management control from noted a few that seemed curi-
vestment firms. both the internal team and the mother ous. They were plots of differ-
ship. As the business grows, it can then be ent measures of the riskiness
W ITH their own capital and with hived off into a separate entity, thereby
funds borrowed at favourable creating a larger ecosystem of fresh tal-
rates through the federal government ent, capital infusion, market opportunity
of large US banks, and they
suggested that banks had be-
come, if anything, more ex-
based upon track records, SBICs provide and job availability. Incentivising our ex- posed to risk over the past dec-
venture capital to small businesses, a per- isting private companies to take on the ade. This was surprising, for if
centage of which are also minority and challenge of spotting and nurturing in- banks were getting risky loans
women-owned. Such SBICs can attract trapreneurs to generate newer streams of off their balance sheets by sell-
better returns on their capital with a fa- shareholder value is something that will ing them, they should have
vourable borrowing rate, start-ups bene- have far reaching consequences. become safer. I eventually re-
fit with access to capital, long-term loans, Indeed, we need more Gordon Wus — alised that I was committing
and expert mentoring, and the nation but we will need to spot them, incentivise the economist’s cardinal sin of
benefits as these businesses grow and their growth, pool in our existing re- assuming ceteris paribus, that
produce thousands of jobs. Tax revenues sources, both private and public, to create is, assuming that everything
generated each year from these invest- an environment where risk-taking else by the phenomenon be-
ments more than makes up for the cost of breeds and flourishes. This would set the ing studied, in this case securi-
the programme. Moreover, this form of right foundation for the next wave of en- tisation, remained the same.
financial inclusion affords opportunities trepreneurship in India. Typically, everything does not
to all those who have ideas, and yet, (The author is CEO, Reliance Venture remain the same.
would receive funding purely on merit. Asset Management )

Lax treatment of savings C H AT R O O M TH ROUGH TH E TH I RD EYE

Chance To Rationalise Taxation Missed
I T IS welcome that the Direct Taxes Code (DTC) Bill
seeks to harmonise the tax treatment of the New Pen-
sion System with that of other provident funds. Howev-
er, the raising of the tax exempt saving limit to
`. 1,50,000 from the `. 1,20,000 now (including a `. 20,000
window for infrastructure bonds that will close after the
current fiscal) is less than substantive. Saving in the
form of housing has been incentivised, in addition, by
exempting up to `. 150,000 of interest payment on hous-
ing loans from tax. Debt servicing of education loans,
too, retains its tax-exempt status without limit, which is
welcome. The DTC Bill has abandoned the rational and
innovative treatment of savings contained in the origi-
nal version. The NPS, as originally notified, would have
been exempt from taxation at the time of contribution,
exempt, again, from taxation during accumulation and
growth of the contributed corpus and taxed at the time
of withdrawal. This system, called Exempt-Exempt-
Taxed, recommended by several expert committees,
would have departed from the treatment of a saving
scheme like the Employee Provident Fund or the Public
Provident Fund, which are exempt from tax at all three
stages (EEE). The original DTC draft had opted for EET
on all savings. However, it also proposed, while doing
away with the distinction between long-term and
short-term savings, that no saving asset would be taxed,
only the income from that asset would be subjected to
tax. If the accumulated savings on maturity were to be
ploughed back into another saving instrument, the cor-
pus would be exempt from tax.
This is a rational way of taxation. But it obviously
takes more courage and political capital than the gov-
ernment thinks it fit to deploy to make such a significant
change in the tax treatment of savings. Thus, we are
back with another version of the government reserving
the right to decide which saving instrument would be
taxed, and which exempt, including within the class of
equity-linked savings.
Chateau Mango
A Wine By Any Other Name
Back to square one shareholders are owners, who
have paid a high rate of
■ THIS refers to your edit, ‘A
missed opportunity’ (ET, Aug
28). Knowledgeable investors
corporate tax on the
companies’ net profits. Taxing
dividends would amount to
buy stocks for long years and double-taxation. A lot of debate
the benefit of zero long-term on these lines was heard before
capitals gains made the markets taxes on dividends were
attractive. When the removed and dividend
government introduced that, it distribution tax introduced.
also brought in securities The capital markets grew
transaction tax. So isn't it a enormously after these
betrayal of long-term investors investor-friendly tax laws came
if they have to pay both STT and into effect. So why do you
tax on long-term capital gains? advocate a return to the past?
Also, the rationale behind SURESH RAJAN
not taxing dividends was based MUMBAI, AUGUST 30
on the philosophy that
It’s riveting
BLINKERS OFF ■ THIS refers to Vithal C
Nadkarni's ‘Submit and be free’
SALAM (ET, Aug 28). It is absolutely
riveting. It is amazing how your
columnist could bring home
the time-honoured tenet of
Saranagathi so close to
Janmasthami. The column
reminds one of Sri Sathguru's
precept on prayer. When the
Crocodile seized Gajendra, he
prayed: “Narayana Guru of all
beings, Pranams to you” and
not “kill the crocodile”. This
modern day seer prescribes the
perfect antidote for the
demonic ill of competitiveness
that preys on fiscal wellness.
ARUNA GANESH
CHENNAI, AUGUST 28
Letters to the editor may be addressed to
editet@timesgroup.com
Keynes, Hayek or both?
T O SPEND or save, what is the need of
the hour, is the question doing the
round of economics and other jour-
nals, print and online. ‘The austerity de-
GU EST COLU M N
SUMATI MEHTA
Convener’s liability
● THE rare Congress-BJP ‘constructive
cooperation’ to clear the nuclear liability Bill
in the Lok Sabha led to a few casualties. If
Mayawati, Mulayam Singh and Lalu Yadav
had to see their deal-making plans going up
in smoke, JD(U) leader Sharad Yadav found
himself in suspended animation. Sharad
Yadav loves his post — NDA convener —
and projects himself as the chief coordinator
of the opposition’s strategy. But when top
BJP leaders unilaterally carried out their
nuclear-negotiations with government
managers, Yadav found himself out of the
loop and worse, with no option but to sign
on the dotted line. At least the Left has had
the consolation of putting forth some valid
rejoinders, but poor Sharadji could not even
have that given the limits of his political
coordination and the burden of his
‘understanding’ of ‘non-socialist’ issues like
the nuclear-deal!
ntitative easing? Are there ways of making
credit move to deserving sectors, without
leading to irresponsible lending, as seemed to
have happened when crisis first struck?
Status rollback
● AS PARLIAMENT’S monsoon session
ends, some Congress leaders are pushing for
a course correction vis-à-vis Lalu Yadav. No,
they are not seeking any Congress-RJD
tactical pact for the Bihar polls. These
Congressmen, in fact, want the leadership to
roll back the ‘magnanimous act’ of allotting
Lalu one of Congress’ front row seats in the
Lok Sabha. Since the RJD has just five
members, Lalu was facing the prospect of
being humiliatingly shunted to the fifth row
in the 15th Lok Sabha when he pleaded
with the Congress to loan him a front-row to the Congress in the coming local body
seat to help provide him some notional polls — to win Congress hearts. But Murali’s
importance. Since the Congress had rejected move has, at least, made some Congress
his main plea for a cabinet berth in UPA-II, leaders in Delhi ponder what sort of meth-
party managers granted him his second ods another wannabe entrant, the much-
wish more as a pension for his services to projected ‘strategist’ called Amar Singh,
UPA-1. But now these Congress leaders might come up with if the green signal from
argue that Lalu “is misusing his undeserved 24, Akbar Road continues to be elusive.
seat” to create a ruckus in the House along
with Mulayam Yadav. So, they want Lalu to
be shown his ‘rightful place’ .
The Orissa search
● AS VEDANTA has helped the Congress
Existential agony find, finally, a credible issue to peddle in
Orissa, a search is now on for a dynamic
● DESPERATION can drive people reckless, state leader who could help the PCC take off
but this one has hit the Gandhian path. K from the Rahul Gandhi push. Though
Muralidharan, former Kerala PCC chief and incumbent PCC chief K P Singh Deo
son of K Karunakaran, is now threatening continues to be liked by 10, Janpath, he is
to stage a fast-unto-death in front of the proving to be too laid-back to lead from the
Congress HQ in Kerala if the high command front. Another aspirant Srikant Jena has
continues to reject his attempts to ‘return shot himself in the foot by trying his ‘Third
home’. He has fixed March 8, the date on Front-like bargaining tricks’ for a cabinet
which he completes his six-year suspension post. Many AICC leaders say the man to
from the Congress, for action. He has, after watch is Lok Sabha member Bhakta Charan
all, done everything possible — ‘selflessly’ Das, a former socialist and Dalit leader, who
quit as NCP state president, pleaded with all has impressed some influential Congress
AICC leaders, apologised to all PCC leaders leaders with his political perspective on the
and even extended unconditional support roadmap for the party in the state.
Chelsea Clinton’s
wedding dress

T HERE is no doubt that the fermentation of the hum-

ble grape has given rise to a very enduring industry;
but can the same be true for every fruit? The effort to
take the word wine out of the ambit of the grape has met
with limited success, with rice, elderberry, plums and
even dandelions gathering their cognoscenti. So it may
not be surprising that Indian scientists are now trying to
press mango into that genre too. Whether scientists can
‘formulate’ wine is a point that can be debated both phil-
osophically and metaphorically — since some of the
greatest wines have been the result of serendipitous
happenstance rather than by deliberate endeavour —
but there is the more basic question of whether there
should be a mango wine at all. With the UPA govern-
ment fixated on the aam aadmi, it was only a matter of
time before the eponymous fruit received viniferous at-
tention. Indeed if the scientists of the Central Institute of
Subtropical Horticultural Research in Lucknow succeed
in making ‘wine’ out of viscous mango pulp, they can
provide a brand new option in the low alcohol range in
these health-conscious times. The technical matter of
taste and terroir has to be dealt with. New World wines
list grape varietals along with the name on the label, not
only so that the buyer has an idea of what to expect —
spicy or mellow, dry or sweet — but also from where. So
pioneering tasting notes will have to be made to decon-
struct the three debuting varieties from ‘Domaine Uttar
Pradesh’, Langra, Dussehri and Chausa.
Of course, the fact that this entirely swadeshi wine
would be in no danger from foreign producers clamour-
ing for duty reductions — a cacophony that has long
marked the imported versus local wine and spirits dis-
course here — should be welcome. And if made well, In-
dian mango wine may just be able to go abroad and cap-
ture new markets in nations that also love the fruit, as far
afield as Brazil and the Philippines.
bate’, is followed by ‘the deficit debate’,
which in turn is followed by the Economist
inviting experts to discuss the same issue.
The views are as multifarious as the debates,
but the issue being discussed is perhaps the
most significant policy issue facing the
world economy today, as Nobel laureate,
Paul Krugman, an avid and outspoken par-
ticipant in the debate wrote recently.
Received wisdom, in the form of eco-
nomic theory, has relatively little to offer.
There is the brilliant Keynes advocating def-
icit spending to boost sagging demand and
depressed business expectations. But there
is also the no less brilliant Nobel Laureate,
Friedrich von Hayek pointing out that while
the main deficiency during recessions is in-
vestment, the world’s troubles are because
of imprudent borrowing and lending by
public authorities, who mortgage budgets
of the future and tend to drive up the rate of
interest. According to Hayek, the right way
to help revival is to abolish old habits of lav-
ish expenditure, and abolish the restrictions
on free trade and free movement of capital.
Economic theory has two apparently dia-
metrically opposite views, responsible per-
haps for the present day policy conundrum.
How does one proceed?
One needs to start with asking several
questions, answers to which will automati-
cally begin to untangle the apparently en-
tangled issue.
Firstly, there is a set of questions related to
the context.
What is the nature of the particular econ-
omy in respect of which prescriptions are
being made? Is it an open economy or a
closed economy? Is it a free-market econo-
my or a planned economy, and if so to what
extent? Is the nature of the economy likely
to change with the answers to the basic
question being debated, and how will that
impact the fundamental impulse to pro-
gress, which has been the bedrock of pro-
● Economic theory has two apparently
diametrically opposite views, responsible
for the present day policy conundrum
● Should we dig holes to create a
Keynesian stimulus or follow Hayek’s
urging towards restraint and discipline?
● The critical issue facing the world is the
need to restore and rebuild institutional
credibility and trust
gress in that economy? What is the current
level and nature of unemployment in the
economy? How will this be affected by the
decision to spend or save?
A second set of questions pertains to the
specific fiscal parameters of the particular
economy. What has been the level and na-
ture of past deficits and government and pr-
ivate debt, which determines the present sc-
ope for incurring deficits? What has been
the level of past economic growth? Does th-
is limit the prospects for future economic gr-
owth? What are the likely fiscal multipliers?
If positive in overall terms, which are the sp-
ecific sectors where they are highest? How
will the impact of fiscal deficits be shared as
between the domestic and external econo-
my in a flat, and yet not quite flat world?
There is a similar set of questions with resp-
ect to the potential for monetary policy effe-
ctiveness. What is the level of interest rates?
Of inflation? Other possibilities of qua-
In addition to this not quite brief list of que-
stions related to overall context and fiscal and
monetary health, questions related to co-
nfidence parameters, of both business and
consumer, need evaluation. These core in-
dicators in respect of economic fundamentals
are inevitability linked to credibility of go-
vernance and other institutional structures.
In the case of the US economy, credibility of
the Treasury, Federal Reserve, SEC and other
regulators would be the relevant gauge.
For UK, it would be the corresponding
economic and financial institutions and
regulatory agencies. Credibility of these in-
stitutions has got eroded over a period of
time, and needs to be rebuilt laboriously
and patiently, in order to enable economic
policy to succeed. Public spending will en-
able digging out of the economic hole, pro-
vided the concerned agencies spend on
programmes, which lead to construction of
worthwhile assets, and create jobs in fields
where unemployment exists. But if such
public spending only leads to throwing
greenbacks or other bills into bottomless
pits, no private sector or other agency will
be able to dig them out, and generate confi-
dence to rebuild the economy out of its pre-
sent recessionary stance.
The critical issue facing the developed
and developing world alike is the need to re-
store and rebuild institutional credibility
and trust. This is the magic wand, the Midas
touch, or the missing element in the puzzle,
which when in place, will ensure automati-
cally that the right answer is found in each
individual context — to spend, to save, or
just wait for natural impulses of progress to
find their way. Keynes and Hayek, would
then be not on different streets, nor would
Wall Street and Main Street or Fleet Street
for that matter! Truly a utopian vision, but
one worth working towards.
(The author is a civil servant.
Views are personal.)
A LETTER in a recent issue
of Time magazine
thanked the editors for
having the courage to print the
cover image and story about the
mutilation of a young girl’s face
by the Taliban in Afghanistan.
The unfortunate girl who was
caught fleeing the home of her
abusive in-laws had her nose and
ears sliced off by her husband
while the brother-in-law held
her down. She was
left bleeding and
unconscious on a
mountainside. The
reader ended by
saying: “We get so
wrapped up in to-
day’s water cooler
gossip in our celeb-
rity-centric society
(Mel Gibson’s ra-
nts, Heidi Montag’s COSMIC
surgeries, Chelsea
Clinton’s wedding
UPLINK
dress) that we forget about the
real issues affecting this world.”
Now, while a perverted vision
of some abusive fourth century
frontier justice that horrifically
mutilates and degrades women
for attempting to assert their dig-
nity is in no way conscionable,
it’s interesting to note the com-
ment made vis-à-vis ‘real issues’.
Because the irony is that our per-
ception of such things usually re-
fers to front page stuff, not some-
thing that’s buried inside or
never mentioned at all.
So what actually makes water
cooler gossip a not-so-real or un-
real issue? A celebrity undergo-
ing a liposuction procedure is
news for a great deal of people.
But the way we teach ourselves
to deal with this phenomenon is
by according it lesser importance
in some cosmic scale of things. As
if God who tracks the fall of each
sparrow somehow relegates the
event to a lower pedestal than
the fall of the Roman Empire. Al-
so, by this token, the absolute
obliteration of a mosquito by
squashing its entire body parts to
a smear of pulp on
our skin can some-
how never be
equated with a
poacher carving a
living rhino’s horn
out of its head and
leaving it to die a
bloody death. In
fact even the idea of
such a heinous
comparison is in-
sane, laughable
and absurd. Enor-
mity, visibility and in-your-face
action apparently matters; not
the loss of a life.
The young novice, new in the
monastery, was in a hurry for per-
sonal illumination. On the second
day he mustered the courage to go
up to the Master who was deep in
meditation and waited at his lotus
feet till he opened his eyes before
asking what he needed to do in or-
der to gain enlightenment. He was
told to sweep the yard and wash
the utensils in the kitchen. Four-
teen years later the man was still
doing the same thing. And no, he
was not the new Master in the
monastery now.
■ MUKUL SHARMA