Citizens' Issues
Gurgaon unrest: Speed money helps a few, honest players feel the heat

The labour unrest in Haryana’s industrial belt has affected all players, but minor businesses like auto-ancillaries find that taking the straight route is not getting them anywhere. However, some palm-greasing with a wink and a nod can get you places, despite the slowdown

“Every time the media makes one more loud noise about the anti-corruption movement, the price we have to pay goes up, and that’s about everything the anti-corruption movement has achieved for us,” this writer has heard such identical statements (in different words) from about five different entrepreneurs in the NCR (National Capital Region) area, who he knows well.
The ongoing slowdown and labour unrest in the Gurgaon-Manesar industrial belt in Haryana (Moser Baer workers at Noida are also on strike now) is beginning to have a domino effect in nearby Rajasthan, Punjab and Uttar Pradesh also, with ancillary units and other industries feeling the slowdown.

Orders have been curtailed and the complete commercial cycle (pre- and
post-manufacture) has started slowing down, such is the extended reach of the Maruti Suzuki and now Honda-Hero behemoths. There is a whole range of dynamics that come into play when such a major event takes place, like a complete shutdown of India’s largest car manufacturer’s facilities.
For example, despite the Maruti shutdown, there appears to be no shortage of discounts and deals in almost all makes and models of cars on the showroom floor. Likewise, the resale price of second-hand cars continues to head down, without any resemblance of an upward correction. At the same time, what is jokingly called the ‘Bellary Effect’, is now being reflected in small but significant realities—wider availability of trucks for local transport, a bit of a drop in the daily wage rates for casual labour and most of all, yet another perceived emigration of unskilled and semi-skilled labour out of the industrial belts back to the villages. Festival-linked holidays do play a part, but the buzz is that many are simply packing up, selling out, and going back.
Likewise, smart money, which was busy flipping real estate in the Gurgaon area for the past two years, is apparently quickly looking around for possibilities in Delhi again. This has also got to do with the whole “General Power of Attorney (GPA)” sale ruling, which is bound to open up yet another area of opportunity for descendants of people who sold on GPA years ago, and which has also made all but original allottees in most cases start losing sleep over whatever they have purchased. But mainly, if some sources are to be believed, the exit or stay in the Gurgaon story will depend largely on Maruti Suzuki.
Which, in turn, will also depend on the realities of the “squeeze” that the industry, and industrialists, are facing in Haryana. And that is what this article is going to try to bring out, without revealing identities.
Early warning signals are beginning to surface from friends who run small- and middle-sized units, with time on their hands. Two specific gentlemen, who both make an industrial raw material which is found in a variety of end-products found at home and offices nationwide, are taken as examples for this article.
Both of them are not the sort who inherited any sort of fortune, beyond the houses they live in and a decent upbringing and education, and have literally fought their way up into what can be now called the ‘well-above upper middle-class’ category to reach a level of financial security and comfort as well as worldview which matches the best anywhere. Their factories run like well-oiled machines, plant & equipment are constantly upgraded, and product lines as well as work practices are what are known as “best in breed”. Manpower is kept satisfied, support staff are on contractual hire from reliable and well known sub-contractors who deal with MNCs, and they have both also become known brand names to their customers. They have a good reputation—and a need to maintain quality.
But there is one big difference—one of them runs with total adherence to every possible regulation because he also has oversees linkages which demand this as a precondition, the other has more of a domestic clientele so perforce he operates without much ado also on the cash “black” economy, whenever required.
Both import a fair amount of their raw materials. And as of now, they have only one unit each, based on the fond hope that the promised arrival of GST (Goods & Services Tax) will obviate the need for them to set up multiple units all over the country. And both have to depend on the road network, as well as transport options to move their products, which are transported in bags and do suffer a degradation in quality if they get delayed in transit beyond a point for any reason. These goods are not perishable, but all the same, if they are not delivered in time, then the hard work they’ve done in building up reputations for quality start suffering.
And these get reflected in the quality of the end-products at your and my home. Look around, from plastic bottles to the high-end plastics used for electrical fittings. In a way, you and I, before we get holier-than-thou as part of the corruption chain—where and how did you buy that last bottle of “mineral” water or electrical socket, plug and switch, did you take a full and proper invoice for it?
So, back to the topic at hand—how does corruption impact them?
1)    There is a vast variety of sales tax laws and rules to be followed, from despatch to transit to destination. The person working on cash seems to have a well-oiled network working for him, and the current anti-corruption as well as labour problem issue don’t seem to impact his costs much, what was an added cost factored into things has gone up, but the smooth flow is maintained. The gentleman who on the other hand insisted on documentation and adherence being letter-perfect is now being reminded of laws and rules, which he did not know existed and is beginning to see shipments getting held up at despatch, transit and destination. For both of them, the largest problem as far as corruption is concerned is, without a doubt, the issue of sales tax of various sorts.
However, both were vehemently of the opinion that it was sales-tax issues which caused them the largest headaches, and therefore also presented the largest opportunity for actually not adhering and therefore finding short-cuts. Even where total adherence was sought to be achieved, the sheer complexity of issues pertaining to inter-state movements made it impossible for them to adhere—and avoid corruption—and therefore ended up passing the onus of the actual corruption to a variety of via medias like transporters or other sub-contractors. It is worse now that “earnings” have come down due to reduced dispatches. So, demands have gone up, thus increasing the per shipment rate.
This was also, therefore, the root cause and starting point of the issue of corruption as applied to unrecorded production. Whether it pertained to raw materials entering or finished goods or intermediates leaving, the chain of the parallel economy were as explained to me, born out of sales-tax related issues in their opinion—and the sooner GST was introduced to try and resolve things, the better—especially since both wanted to grow past a point too. The interesting point here is that due to reduced business, there is lower tax being paid, but the off-record contribution levels for infringements are rising. This is causing greater grief to those who adhere, than to those who have built up “personal relationships” over the years.
2)    The next in line was excise and therefore also the related issue of service tax—since it came under the same people. As manufacturers, service-tax adherence was not difficult, also mainly because it was heavily computerised and online. Likewise, the basic issues of excise tax adherence were largely resolved due to online payments and reporting. Where there was evasion, which was blamed on the above-mentioned sales tax, means had to be invented to circumvent—but by and large, excise was not considered to be a problem.
However, with production and therefore despatches being curtailed, the set “monthlies” which existed were suddenly looking huge for the manufacturer who was working the second economy. On the other hand, the manufacturer who did not pay a paisa in the past—continued doing so and was not really impacted on this account. Interestingly, both of them had good things to say about the excise department, lately.
What was a problem was where some physical activity by junior staff was required. For example, sealing or unsealing of excise-bonded containers, requiring the services of a specific person with the requisite tools. Alternately, where there was some amount of possibility of co-sharing of the initial sales tax related evasion, then a squeeze was resorted to. However, by and large, for the manufacturer who chose to be totally honest, excise tax issues were not a reason for corruption. For the manufacturer who was riding in the black economy, however, it was now an added cost.
3)    Likewise, income-tax had over the years become reasonably well settled, and if books were in order, then there was no need to go further than the various returns required. For both the manufacturers, adherence to income-tax was easier than it was, say, a decade ago. However, at the same time, they did feel that despite computerisation, it had become extremely complicated too—requiring both of them to hire and pay good money to external service providers. Also, siphoning of official funds into personal income, in the “white” stream, was not really needed anymore.
What was becoming an issue during this slowdown was that income-tax apparently relied on a model where growth was a given attribute. Any slowdown leading to a drop in income or profits, which caused issues in the first case of the liquidity sort, also invited the attention of the income-tax authorities for scrutiny—which led to its own share of problems in terms of time and energy. This was a real worry—how could they continue with legitimate growth, when the market was collapsing around them, and the customers were demanding more and more ‘off-the-record’ kind of transactions?
Here the manufacturer whose turnover was more “black” than “white” appeared to be better-equipped to deal with matters, since he already knew the ropes. The manufacturer on the “only white” route who was already under pressure to buckle under and join the “black economy” route, was in a bind—what could he do? Also, growth due to one simple fact—people would continue to need some plastics, was going to be met increasingly by off-book transactions now, as margins continued to get squeezed, and that was again cause for worry in an industry where going legit was considered to be the smart thing to do till a few months ago.
4)    On the labour and other HR-related fronts, the manufacturer who was more generous with cash disbursements which by definition were tax free had a better relationship in this time of recession, as compared to the manufacturer who did everything by the book—in other words, the staff were paying tax on everything. It is not out of place to mention that both of them had their staff covered under the requirements of ESI and EPFO—but still, an envelope of unaccounted cash at the right time seemed to hold a higher value than a taxed perquisite paid into the bank.
This pressure on account of the onset of inflation was being felt more by the manufacturer in the “white” line and again, he was at a loss on how to handle the realities of increased costs of living, and effects of inflation at the employee end.
The bigger question, however, was this—what tactic should they adopt for the future, should they move towards a full-white regime or is it time to scale back to the partly white and increasingly black methods?
The jury was not out on this one. The gent in the full white was ready to throw in the towel, the gent with the black & white view was of the opinion that the near to mid-term future was all about increasing the black components in business. Nothing worked better during recessionary times and high inflation, apparently, than the parallel economy. This, apparently, is not supporting corruption—this is all about business efficiencies, best product for the lowest price, and more equitable lives for employees.
So what do our readers think, what do our industry leaders think, especially since the leaders’ views on corruption are different?
Again, as explained by my friend—industry leaders are threatened because they inherited their businesses, and have not really been challenged by a new lot in the past, since Independence and even before. However, this new breed of first generation businessmen is as good—if not better—than the established inherited business families, at playing both games. That is, show a clean track record but actually mix both black & white economies well for optimal results, and tweak the percentages of black & white as per the overall economic picture.
That’s what’s happening out there in Gurgaon. And the friend who has the pure shining white is seriously considering selling out. To the other gent.
Will he take his payments in full white or a mix??



K B Patil

5 years ago

The roots of this problem lie in the fact that Anna Hazare is a simple man with a distaste for politics. I, like many others feel that the fight for a Lokpal is not enough to make the common man's life better. What is needed is sustained pressure on the government to enforce accountability on the lower bureaucracy. The government does not even acknowledge the need to enforce discipline and is happy with the status quo. People like Kapil Sibal and Chidambaram do not even seem to know how miserable the common's live is (particularly in getting work done in a government office) and that is the problem.



In Reply to K B Patil 5 years ago

Well put, KB Patil ji, thanks - so it is our duty to spread the reality of ground level truths.

Governance is otherwise deaf, and the consuming middle class is slowly brain washed, but we hope things will improve!!


5 years ago

Extremely well researched and analysed. However, as the article voices, the fact is that having abundance of channels, there is greater awareness and more coverage, however, the causes of the problem remain unresolved. This is not giving any better comfort to those seeking to invest in manufacturing units in India even as there is a huge underutlisation of SEZs and as it is manufacturing sector has not grown as it should have been to create both products and employment.


5 years ago

Good article and indeed a dilemma to every businessman, who wants to be honest but also needs to survive.So a 'practical' business guy would perhaps keep his records etc clean and neat and still pay some speed money to get clearances and quicker assessments, since time saved would be money and reputation gained for most of them. When the environment becomes more conducive for cleaner and dirt free operations, they would migrate gradually to full white operations. When would this be is a million-dollar question!



In Reply to SANarayan 5 years ago

Dear SANarayan ji, thank you for writing in.

The dilemna here is this - the level and amount of corruption seems to have gone past a point of no return for some, and the situation is such that time is of the essence, alternate options are easily available, and most of all - rising property prices make a departure very viable from a business point of view.

Bajaj's plant at Akurdi is a good example. Shut down, pay people not to work, relocate.

Today, if a large percentage of the production is aimed at exporting, then why not simply relocate outside too, is an option.

Humbly submitted/vm

Weak rupee to wipe gains from easing crude oil prices, says report

A depreciating rupee is pushing import costs further, raising inflation in domestic fuel prices which are linked to international prices. Inflation, now at 9.7%, remains higher than RBI’s comfort zone for the past 18 months

Inflation remained stubborn at 9.7% in September 2011, compared to 9.8% in August. There are little signs of a decline in core (non-food manufacturing) inflation, which at 7.6% in September has now remained above the RBI’s (Reserve Bank of India) comfort zone of 4.5%-5%, for the past 18 months. As a result, there might be another 25 basis points (bps) hike in the RBI’s mid-year monetary policy review on 25th October, says a recent CRISIL report. For any gains from the recent decline in international crude oil prices to reflect in lower inflation, the rupee will have to appreciate to 47 per $1 by December 2011. These are the observations the CRISIL report.

Inflation in the fiscal year so far (April to September 2011) stands at 9.6% compared to 9.9% during the same period of 2010—indicating few signs of moderation. Inflation for July 2011 has also been revised upwards to 9.4% from 9.2% reported earlier.

Food inflation stood at 8.8% in September 2011 compared to 9.1% in August. Despite good rains, there might not be much downside to food inflation due to substantial rise (in the range of 7% to 14%) in minimum support prices of principal food-grain commodities in 2011-12, which set the floor for market prices.

Primary articles’ inflation declined to 11.8% in September, compared to 12.6% in August. This was enabled by a sharper decline in non-food articles, namely fibres and oil seeds. Fuel inflation rose to 14.1% in September, from 12.8% in August, reflecting the impact of petrol price hike during the month as well as higher prices of aviation turbine fuel, bitumen, furnace oil and other lubricants.

Despite some softening of global crude oil prices in recent months, crude oil prices in September 2011 continued to be higher than a year ago. In addition, a depreciating rupee is pushing import costs further, raising inflation in domestic fuel prices which are linked to international prices. If the international oil price remains at the current level of around $85 per barrel till December, which represents around 5% annual decline in price, then the rupee will have to appreciate to 47.0 per $1 in order to reflect gains from lower oil prices into inflation.

Core (non-food manufacturing) inflation remained worrisome at 7.6% in September 2011 compared to 7.7% in the previous month. Given that core inflation remains much higher than RBI’s comfort zone of 4.5 to 5%, CRISIL expects a 25bps hike in the mid-year monetary policy review on 25 October 2011.

Despite a fall in crude oil prices since April 2011, they continue to remain higher than a year ago. In addition, the rupee has sharply fallen against the dollar, by 16%, compared to a year ago. Although this is currently adding upward pressure on the imported component of inflation, it is expected to be a transient phenomenon—the impact of which is unlikely to sustain until March 2012.

The second-round pass-through of exchange rate depreciation into retail prices would be limited as firms would find it difficult to raise prices because of slowing private consumption growth.

For 2011-12, minimum support price (MSP) for paddy has been hiked by 8%, for jowar by 11.4% and for arhar, moong and urad by 6.7%, 10.4% and 13.8% respectively. This, in conjunction with relatively low growth in production, especially of pulses, will put upward pressure on market prices, going forward. First advance estimates of food-grain production for 2011-12 have placed production growth for paddy at 7%, for jowar at 0.9% and arhar and urad at 0.3% and 0.6% respectively. Production of moong is expected to decline by 30.2% in 2011-12.


India Inc may reduce overseas borrowing

Amid the sovereign debt crisis in euro zone economies, domestic companies are finding it difficult to raise money overseas. The risk of rupee depreciation and the lack of a natural hedge are other factors restricting corporates, Indian Overseas Bank CMD M Narendra said

Mumbai: Indian corporate houses are less likely to raise funds through the external commercial borrowing (ECB) route in coming days, despite the Reserve Bank of India (RBI) relaxing overseas borrowing norms, as Western banks are less willing to taking positions in emerging markets, reports PTI.

The falling rupee has reduced the appetite of corporates for ECBs, as they fear a higher repayment burden. ECBs are already in tight supply, with swap rates pegged at London Interbank Offered Rate (Libor) plus 4%.

RBI data shows that external commercial borrowings by Indian corporates dipped to $3.71 billion in August from $4.16 billion in the previous month.

The trend is in sharp contrast to the first quarter, when domestic firms borrowed $8 billion compared to $5.3 billion in the year-ago period, on the back of the low interest rates then prevailing in European economies.

“In the light of the lingering euro zone debt crisis, all European banks have less surpluses to lend to overseas corporate houses. Also, the spread has widened in the recent times, making fund-raising more expensive,” Indian Overseas Bank chairman and managing director M Narendra told PTI.

At present, the going rate for ECBs is the Libor—which is the international benchmark rate for loans—plus 4%.

Some experts feel that risk aversion is another factor that will lead to a decline in ECB borrowing.

“In uncertain environments, European banks are risk- averse. So, they are less likely to take exposures to corporates in emerging markets, making it difficult for Indian industry to raise money through foreign banks," Crisil chief economist Dharmakirti Joshi said.

He added that the recent relaxation of the ECB norms may help the situation to an extent. “The easing... will help in repayment of overseas borrowing obligations like foreign currency convertible bonds (FCCBs) and hordes of small savings that are due for redemption. But how it is going to help overseas borrowing will depend on the external environment, particularly in Europe.”

Another reason for the falling appetite for ECBs is the cash pile that leading corporates are sitting on.

“A lot of people have enough cash, so they are not in a borrowing mood,” Axis Bank president for corporate banking Nilesh Shah said.

Last month, the RBI increased the ECB limit under the automatic route by 50% to $750 million per year from $500 million earlier.

However, amid the sovereign debt crisis in euro zone economies, domestic companies are finding it difficult to raise money overseas.

The risk of rupee depreciation and the lack of a natural hedge are other factors restricting corporates, Mr Narendra added.


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