World
Unrestricted imports from China will affect Indian industries

Protection of domestic industry is vital to India’s survival; and this is possible, when strong steps are taken to eliminate avoidable imports from China, in particular

 

According to the press reports available, the Indian Met Coke Manufacturers Association (IMCOM), the industry is facing a serious threat to its very existence due to the increased and continuing imports of met coke from China.

 

At present, met coke from China is subject to an import duty of only 2.5%, which is nominal. In the past, suppliers from China had to pay 40% export duty, till December 2012, when it was withdrawn completely, making it attractive for importers to buy from China. Even after paying the 2.5% import duty, imported met coke from China works out to be about $40 (Rs2,400) cheaper than the domestic supply.

 

The Indian steel industry needs about 35 million tonnes of coke per year, out of which about 20 to 25 million tonnes are met from captive capacities leaving a balance of 10 mt.

 

The installed capacity of merchant met coke is said to be 10 mtpa but the actual plant utilisation is said to be only 30%-35%, due mostly to cheaper imports from China.

 

This information was made available, when Gujarat NRE Coke Ltd held a two-day event, called "Global Steel 2014" with the theme "Steeling Recovery". Arun Kumar Jagatramka, Secretary of IMCOM as well as CMD of Gujarat NRE Coke Ltd, while attending the meet, made a pointed reference to the plight and precarious financial implication of the under-utilisation of installed Indian capacity due to this unrestricted imports. He further, pointed out that this is likely to cause tremendous financial strain and is a potential threat to the domestic coke industry, as it has large bank exposure to the tune of over Rs15,000 crore. In fact, he claimed, that many units are in the process of debt restructuring as a result.

 

 

Should the government accede to this request, they may also seek IMCOM's assistance that domestic met coke manufacturers should also be persuaded to reduce their margins to be in the market and actively resist the Chinese supplies, provided there are no quality issues.

 

We may continue to look at the state of affairs of the steel industry, due to this Chinese aggressive selling. In a publicity campaign carried, recently, by the All-India Steel Rerollers Association, they have given detailed methodology used by the Chinese manufacturers in "wrongly classifying the imported reinforcement bars in the Alloy Steel Category to gain benefit of the subsidy and thereby marketing at a discounted price in India". It may be noted that Government of China offers a 13% subsidy on export of Alloy Steel Bars and levies an export tax of 15% on reinforcement bars exported by Chinese manufacturers. This collusion of efforts by vested interest parties is detrimental to steel manufacturing industry in India.

 

This has been done by circumventing the standards and current imports do not conform to Bureau of Indian Standards (BIS) thereby having an adverse impact on the Indian industry. It is not, therefore, in our interest to continue the import of reinforcement bars from China.

 

In the case of power equipment, for instance, the Heavy Industry Ministry has taken up the issue with the Finance Ministry and are mostly likely to raise the subject again in the Inter-ministerial meeting on the Budget and request that import duty on power generation equipment should be raised to 10% from current 5% and that the countervailing duty be brought to nil. Such a move, if approved by the government, would directly benefit domestic manufacturers like BHEL, Larsen & Toubro and Bharat Forge. They may go even one step further that those who wish to import power generating equipment need to obtain a "no objection" certificate from domestic manufacturers.

 

The only good news, at the moment, comes from NMDC, a state owned successfully operating mining enterprise, that it is planning to open new iron ore mines both in Chhattisgarh and Karnataka, next year, and these will enable it to increase the production to 50 million tonnes, from the current level of 30 mt, in the next 5 years.

 

The other development concerns the acquiring of coking coal assets in Mozambique, according to Narendra Kothari, CMD of NMDC.

 

Protection of domestic industry is vital to our survival; and this is possible, when strong steps are taken to eliminate avoidable imports from anywhere, particularly from China, where our balance of trade is against us in billions of dollars!

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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COMMENTS

Dr Anantha K Ramdas

2 years ago

Thanks for the comments. I think the Finance Ministry, in cooperation with the Commerce Ministry must determine the list of those items that are being imported from China on a large scale, which can easily made in the country. In fact, lot of these goods were made in India before but our small scale and medium scale are shutting down because of these cheap imports.

After listing out these, the Ministry must also direct the banks not to open Letters of credit for such banned items, under a notification from the government.

Unless we stop this wholesale import of items that can be made in India and gainfully employ our own countrymen/women we are heading for serious trouble.

China not only wants to sell expensive high speed trains but also cheap toys, marbles and the like! One day somebusybody will wake up and say, let's import "chinese noodles", as these are their signature products! It is very much like saying "idly, dosa and samosa" are very Indian (of course they are), we will be eating chinese noodles, soon, if something is not done!

Madhusudan I. Mistry

2 years ago

Countries like Australia, does an exercise on continuous basis to allow immigrants either temporary or permanent in view of the shortage of certain category or based on the actual requirement basis. Similar way,we need to scrutinise the necessity of our imports judicially to ascertain the actual need. The plethora of chinese toys and other articles enter our country and draining the much sought after foreign exchange. I fee small unnecessary leaks should be mended on war footing basis. Also our imports are far more xceeding our exports to china and one way is to increase our exports to china is called for but at the same time unnecessary exports need to be strictly curbed. Imports need to be checked at different levels and they should be properly vetted to eradicate unnecessary and useless imports. Or here the bribe & corruption are also making the way to justify the unrequired & undesirable imports? This also need to be looked into seriously.

TIHARwale

2 years ago

Should we pay for inefficiency of our industries and industrialists who enjoy public finance and indulge in asset stripping there by unduly enriching themselves at the expense of honest tax payers. Don't we see our people illegally mined huge iron ore deposits and even exported because or check posts, customs etc are highly compromised. More than 30% of food grains are allowed to perish for want of proper storage. So if our resources are not enough we should allow FDI in power, infrastructure etc

Narendra Doshi

2 years ago

Our own people's voice of industrialists should be duly considered before blind Chinese imports only on economic aspects.
Ramdasji, once again a timely perspective from you, only if it gets acted upon by all the concerned stakeholders.

Asset reconstruction business at crossroads

ARCs will come of age only when the legal process turns highly efficient

 

The 15:85 structure introduced by Reserve Bank of India (RBI) in August, raising asset reconstruction companies’ (ARC) minimum security receipts (SR) subscription to 15%, for acquisition of non-performing assets (NPAs) from banks, restored parity between NPA acquisition cost and the estimated recovery (see here). As expected, barring few tactical acquisitions by the ARCs for consolidation, the NPA acquisition by ARCs has come to a standstill. Why? The erstwhile 5:95 structure provided capital protection often exceeding 100% to the ARCs from the management fee. Hence, the ARCs could bid aggressively for asset acquisition and realise fair returns with back-ended recovery even when the total recovery fell substantially short of the acquisition cost. Though the resultant losses on SRs impacted the banks, the transactions suited them since those resulted in back-ended provisioning by the banks. Under 15:85 structure, the capital protection to ARCs is limited, and hence ARCs have to seek NPAs at a significant discount to the anticipated recovery, entailing upfront provisioning by the banks.


Overall recoveries from NPAs average around 25% of the secured loans outstanding.

 

Hence, for 20% return over a 5-year horizon under 15:85 structure, the ARCs tend to quote an average of less than 20% of outstanding loans for NPA acquisition. Based on RBI provisioning norms, such deals require provisioning in excess of normal if the asset has been non-performing for up to two years. This tends to deter the banks from selling early NPAs, and limits the transactions only to the loss assets. But is this happening?


Regulatory hurdle


According to RBI guidelines, the banks are required to sell the NPAs at a (reserve) price, which should not be generally lower than net asset value (NPV) of estimated net realisation from the account. This is not workable since this does not leave any margin for the ARC, barring exceptions. No wonder the banks have not been able to offer even loss assets at reasonable price to the ARCs under 15:85 structure.


Based on identical acquisition cost and 5-year back-ended recovery profile with 15:85 structure, reasonable returns to ARCs require high recovery ratios i.e. ratio of overall recovery to the acquisition cost. For 20% pre-tax internal rate of return (IRR), with management fee (1.5% pa) linked to SR value, the recovery ratio is 148% (see “A” in the figure). With management fee (1.5% pa) linked to recovery, the recovery ratio is 153% (see “B”). For all-cash acquisition, the recovery ratio is 182% (see “C”). It is evident that the 15:85 structure has resulted in fairly-efficient NPA price discovery, though the price discovery in all-cash acquisition is the most efficient. However, the acquisitions are not materializing owing to the regulatory constraint.


In the SR structure, the maximum recovery and hence the distribution is limited to the outstanding dues. Hence, if the stressed account turns around, a limited upside flows to the SR holders if in the portfolio, the recoveries leave surplus after paying for the expenses, management fee, SR redemption and yield if any. The ARCs are allowed to convert a part or whole of debt into, up to 26% of total equity. Such conversion can potentially provide significant upside to the ARC in case of all-cash acquisition. However, such upside tends to be nullified since the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 requires restoration of the management back to the defaulter after turnaround by the ARC.


Efficient legal process - A must for maximizing value


Owing to legislative loopholes, judicial pronouncements, and very tardy legal process, the DRTs, which adjudicate the Recovery of Debts Due to Banks & Financial Institutions (RDDBFI) Act 1993 and SARFAESI matters, take years to dispose of the cases. The recovery by ARCs, therefore, continues to be highly back-ended to which scenarios A to C relate. However, if the recovery is front-ended, ARCs’ returns increase substantially, and for 20% return, recovery ratio is just 122% (see “D”). Thus, banks can expect significantly higher valuations only with front-ended recovery. This, however, requires highly efficient legal process.

 


Way forward


RBI should withdraw the current NPA pricing methodology, which does not leave margin for the ARCs. The banks should sell the NPAs mandatorily to the highest bidder without reckoning the imprecise reserve price. Loss on sale to the ARCs should be allowed to be written off in three years, for the next five years. This will also catalyze all-cash transactions. ARCs should also be allowed 100% equity through conversion and exercise of pledge of shares if any.


ARCs will come of age only when the legal process turns highly efficient. Hence, for speedy clearance of the backlog of about 45,000 cases in DRTs with defaults exceeding 1.45 lakh crore, the government of India should urgently increase the number of current 33 DRTs and appellate tribunals adequately, and introduce e-governance in all the DRTs and tribunals / courts. The system should be backed by adequate judicial manpower and amendments to RDDBFI and SARFAESI acts, including section 15 of SARFAESI act, to allow permanent management change. The recovery suits must be disposed of within the statutory timelines, and any laxity should invite strict penalty. Adjournments sought by the parties should attract prohibitively high fee so that the defaulters’ cannot adopt delay as a strategy.


The UK bankruptcy code is creditor-friendly, where over 50% of the distressed companies are sold as going concerns and over 40% of the companies are liquidated piecemeal. The liquidation process gets concluded in less than 1½ years and delivers to the lenders, recovery of about 75% with recovery cost of just 15% of the asset value. Overall, 75% of the distressed assets undergo bankruptcy and the balance is restructured, reflecting the lenders’ preference for restructuring viable businesses. Speedy resolutions under UK’s bankruptcy code show that the speed of judgments induces discipline among the borrowers. The government of India needs to appreciate merits of speedy adjudication and take immediate corrective action before it is too late.


(Rajendra M Ganatra is Managing Director & CEO of India SME Asset Reconstruction Co Ltd-ISARC. He had over 25 years of experience in project finance, asset reconstruction and financial restructuring. The views expressed in above article are personal)

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COMMENTS

Suresh Kumar Sinha

2 years ago

An excellent article by a financial services veteran on a very relevant topic of the Day --Suresh Kumar Sinha,Deputy General Manager(Retd.),Indian Bank.

V M DAHAKE

2 years ago

Author has hit the nail on the head by commenting on the impediments in the legal system which have nullified the good intentions in introducing DRTs and SARFAESI and bringing ARC business to near naught. Legal process could be expedited, simplified and made more efficient by creating adequate infrastructure more so when it would be self financing in this case and boost economy.

KAIALSH SINGHAL

2 years ago

d/s
arc companies makeing sale of assets without taking the future responsibility like provident fund , excise duty on machinery which also auctioned, service tax liability , vat/cst liability -- how buyer will get rif off these problems

Sunil Karunakaran

2 years ago

The sequel to the earlier articles on the subject by the writer is once again superbly analytical. Apart from highlighting the challenges confronting the ARC business post the recent regulatory changes, more importantly remedial measures have been suggested to retrieve the situation.

Somdutto Bose

2 years ago

Read your article. Very compact. However, in my opinion, the world we live in does not allow changes easily. The half baked socialist approach of India has resulted in a confused welfare state which is neither here nor there. Our banking is a closed system with a strong government presence. Therefore while change is constant and eventually many things will change, expecting the restrictions cramming your operation to go soon may be unrealistic. And here, it is not only the pseudo socialism but the genuine problem of corruption. Call me cynical but I feel that we really have not evolved or perhaps we evolved much earlier and are now in the degeneration part of the cycle. It can be said not without reason, that considering the level of corruption, that if the restrictions are unilaterally lifted we may misuse the same as has happened too many times in the past.

As for the legal system, now that is one sad case. You see we have simply continued with what the British left for us. Innovation is no longer there. We have made some minor changes here and there, otherwise its just another monolithic government machine, where there is no real checks and balances or performance yardstick which you have also mentioned. But due to our legacy issues, we are coming with some serious baggage. Yes, we desperately need to increase no. of court including DRT. But that would mean finding more Judges and POs. Where do you get them ? Or if you do, what about quality ? The disparity between small towns and big cities are known and is a major drawback here. The small town guys are the once primarily interested but as seen recently with UP, english is a serious issue with them. So, when the higher courts are english based and lower are vernacular, recruitment is an issue.

I think our country is too complex to have any major changes if realistically contemplated. Rather, it would have to be small changes. Yes, it would be slow and woefully inadequate but there is no other option. RDDB and SARFEASI has happened. Not quite what expected but its there. It would be like that only because of our social structure and strong regionalism which magnifies the problem.

Its for this I sometimes feel that there is some merit in the totalitarian form of government where things happen once it is decided upon. Whereas we have a mockery of democracy. I once asked a Chinese how they dealt with the mutli culture issue which must be there, the country being larger than India. He explained that once there was an emperor Qin (from which the word Chin has come). He decided that there would be one written and spoken language and simply wiped out all opposition. While it is debatable whether he was great or a monster in view of the age old argument of end justifying the means, it is better than what we have here, where I cannot understand what my next door neighbor is saying!!!

REPLY

Rajendra M Ganatra

In Reply to Somdutto Bose 2 years ago

While I applaud the incisive comments from a legal luminary like you, I am distressed at the abysmal and yet deteriorating state of affairs. Luckily solutions are available and if not implemented, the country will soon face not only economic, but also administrative crisis. It is time the government took governance seriously.

Rameshwar Singh

2 years ago

Congratulations for a very detailed analysis by Shri Rajendra Ganatra. However what I feel that at the outset why the loans are given where the proper feasibility is not done and what is the security obtained from the promoter. The promoter and sanctioning authority should be held responsible for the wrong projects. The rules should be so stringent that one has to think twice before doing anything wrong for misusing the public money.
The mention of UK bankruptcy act needs to be taken seriously and Govt of India under the leadership of Shri Narendra Modi should bring some changes to protect the public money from being misused.

us poojary

2 years ago

Well thought out article.My observation is that the latest guidelines by RBI may be to dissuade Banks from outright sale of non performing assets to ARCs as has been observed recently.
Your suggestions are apt for amending certain clauses in the SARFAESI act so that the defaulters do not take for granted the loop holes in the law to their advantage. Strict instructions should be given to the DRTs not to grant stay beyond a point and to deliver quick judgements. Otherwise there are cases in DRTs languishing for more than a decade. To accomplish this suitable measures such as increasing thfe presiding officers in good numbers in DRTS and adding more DRTs should be the immediate agenda for the Central Govt.
Once again congrats for a nice article.Please keep it up.

REPLY

Rajendra M Ganatra

In Reply to us poojary 2 years ago

I agree. Number of DRTs has to be thrice the current number. No. of DRATs has to grow manifold. The government can always create a new stream of quality POs through UPSC. There are feasible solutions whose execution will happen only when the government becomes serious about governance.

Rajendra M Ganatra

In Reply to us poojary 2 years ago

I agree. Number of DRTs has to be thrice the current number. No. of DRATs has to grow manifold. The government can always create a new stream of quality POs through UPSC. There are feasible solutions whose execution will happen only when the government becomes serious about governance.

Ramesh Kubde

2 years ago

This is a well researched article, which gives insight into ARC's business. The banks are yet to realize full impact of RBI's new guidelines. Sooner the banks realize this, there would be a meeting point for banks and ARCs. The importance of expediting legal process is well known to everybody and it is expected that the new Govt. will take immediate steps to strengthen the legal system.

REPLY

Rajendra M Ganatra

In Reply to Ramesh Kubde 2 years ago

Yes the government has to take very urgent steps to impart efficiency in the legal system. It is already very late, and soon it will be too late, otherwise.

G Sampath Kumar

2 years ago

A brilliant article by the author elucidating an insight into the ARCs business after the implementation of 15:85 structure. The article exemplifies the capital protection enjoyed by ARCs, how the legal process has to rationalize and throws up the challenges ahead for a lucrative ARC business. Congratulations to the author.

Yerram Raju Behara

2 years ago

We do not have a Bankruptcy Law. The existing laws are either inefficient or hostile to recovery processes. The legal reforms presently under progress hopefully would adequately address this issue. Second, we have an archaic BIFR (Bureau of Industrial Funeral Rights, as I prefer to call) and we have DRTs not so well equipped to handle cases that knock their doors either speedily or efficiently. This DRT structure also needs to be looked into for adequate support systems and number of judges to handle the cases with speed.
ARCs is an extended arm. These ARCs as author suggests should be allowed the leeway to function on viable and efficient lines but with accountability to deliver results. From one window of NPA shifting to another window does not render the economy any good.

REPLY

Rajendra M Ganatra

In Reply to Yerram Raju Behara 2 years ago

I entirely agree. It is indeed a bad idea to shift NPA from one window to another without fixing the malady of PSU bank mismanagement. In my previous articles in Moneylife, I had mentioned that overseas, ARCs/AMCs were set up as special purpose vehicles to fix systemic meltdown. Only in India the ARCs are set up as perpetual entities.

Public Interest Exclusive
7 ways the government played a role in the Bhopal disaster

Why mindless government policies, regulations and populism must take as much blame for Bhopal disaster

 

Exactly 30 years ago, in a factory in Bhopal, water entered the tank E-610, which held 42 tons of Methyl Isocyanate (MIC). MIC is a highly toxic compound with a very low boiling point and can only be stored in stainless steel or glass containers. On reaction with water, MIC violently releases toxic gases, which is what happened in the Union Carbide plant in Bhopal. It instantly started producing the toxic gases, which killed more than 2500 people, leading to the worst-ever chemical disaster ever.

 

How could Union Carbide, which had Safety First as its motto, be so irresponsible? How come there weren't any eyebrow raising accidents at Union Carbide's Sevin plant in Virginia? Kamal Pareek, a young Indian engineer sent to America for training, marvelled at the work ethic and comprehensive safety mechanisms in place at Union Carbide's Virginia plant that was similar in design to the Bhopal plant.

 

“It was a pleasure working with those American engineers. They were so professional, so attentive to details, whereas we Indians often have a tendency to overlook details. If they weren't satisfied, they wouldn't let us move on to the next stage. For weeks on end, we made a concerted effort with our American colleagues to imagine every possible incident and its consequences.”

- Five past midnight in Bhopal by Dominique Lapierre and Javier Moro

 

 

While fingers have rightly been pointed at Union Carbide for letting this tragic accident happen, what is astounding is how the government of India completely escaped the series of ideologically-tainted decisions over several decades that are equally responsible for the disaster.

 

Union Carbide Corporation started its operations in India in 1934. Starting with importing and selling batteries, they eventually set up a battery manufacturing plant and became a household name under the brand Eveready batteries, powering torches in the remotest villages of India in an era when villages didn't have electricity but housed 86% of the population. Why did Union Carbide have to set up a plant that involved such toxic chemicals in the first place? The fact is, apart from poor corporate decisions at different stages, it is a series of government policies that led to the plant being set up here, causing losses and ultimately the disaster which ended up killing 2500 people in a densely populated area.

 

1. Government’s Industrial Policy

 

With India's independence in 1947, the whole industrial and business atmosphere changed. Through the Industrial policy resolutions of 1948 and 1956, Jawaharlal Nehru, as the Prime Minister and de facto Chairman of National Planning Commission, laid out the pattern of a socialist economy, espousing the middle path between public and private enterprise, allowing government to interfere and encroach without restraint, on the freedoms of private industry.

 

To add to this, the Congress government was inspired by the Swadeshi philosophy of Gandhiji, and curtailed foreign investment in India and insisted on ‘technology transfer’, without considering the capabilities of local talent in handle such advanced technologies.

 

Where technology is available in India, it must be preferred to foreign technology (regardless of the quality). All technology, once imported into India, is Indian technology. It should not be paid for beyond a period of five years. - Industrial Policy, 1948

 

 

As a result in 1956, following the Companies Act enacted that year, Union Carbide Corporation was forced to sell off 40% of its holding in its Indian subsidiary, of which most was bought by Indian government through public sector banks and companies and it became Union Carbide India Limited (UCIL). At the time of the accident, the Government of India was holding at least 25% of it.

 

2. Food Shortages

 

In 1957, Union Carbide Corporation (US), after three years of research created the pesticide SEVIN (brand name of Carbaryl). DDT, then the most popular pesticide had become harmful to humans. UCC invented SEVIN at a serendipitous moment and to prove its harmlessness to humans, photographs flashed in newspapers of UCC's scientists tasting a few granules of SEVIN.

 

MIC is one of the main ingredients of SEVIN. It is awe-inspiring what human genius is capable of, producing a totally innocuous substance from such a deadly toxin. SEVIN's huge success in rescuing Egypt’s cotton crop in 1961, which averted an economic disaster for the country, catapulted it to worldwide popularity.

 

In the 1960's India was reeling under food shortages and Lal Bahadur Shastri had to call upon all Indians to fast once in a week. Under Public Law-480, the United States, through Red Cross, donated 870 metric tons of SEVIN to assist India's quest for self-sufficiency in food production in their Green Revolution. Taking this as an opportunity, UCIL expanded its operations into agricultural sector through pesticides. After taking relevant permissions from the Indian government, UCIL initially only imported technical grade SEVIN from UCC, diluted it with local inert agents, packaged and then sold it across India.

 

3. Forex Crisis

 

For importing SEVIN, UCIL was required to pay UCC in US dollars. However, there was a severe “dollar shortage” in India at that time. Added to that, the Indian government's protectionist policies did not look favourably on UCIL's dependence of imported SEVIN and pressured the company to produce it locally.

 

The dollar shortage issue is not some unknown or unexplainable phenomena. It’s a case of an economic fallacy that governments in India have been indulging in since independence. They believed that prices should be fixed by government diktats. In this case, Indian government arbitrarily fixed the exchange rate, thus over-valuing the rupee vis-a-vis the US dollar. This move depleted Indian foreign exchange reserves.

           

In essence, even though UCC had operations in 38 countries, Bhopal’s was its only SEVIN plant outside the US. Had it not been for these governmental controls and convoluted policies, there wouldn't have been any need to establish this high-risk plant in India. Indeed, smart countries now don’t want polluting industries in their own backyard.

 

4. Government Conditions on Manufacturing

 

Based on the Planning Commission’s demand projections, which themselves are based on faulty statistical models of the National Sample Survey Organisation, UCIL applied for government’s permission to set up a plant to produce 5,000 MT of SEVIN every year in Bhopal, India.

 

While the government gave its permission to set it up, it also gave itself an important role to play by imposing a host of conditions. SEVIN, the trade name for the insecticide Carbaryl is produced by reacting α-naphthol with MIC in a process called Carbamoylation. Broadly, this required an α-naphthol manufacturing unit, a MIC manufacturing unit and a Carbamoylation unit.

 

However, UCC was not keen on building an α-naphthol manufacturing unit because the only major use of α-naphthol was the manufacture of SEVIN insecticide. Also SEVIN had been in the market for over 12 years. Insects slowly adapt themselves to insecticides, making them ineffective and thus UCC planned to replace SEVIN within next five to eight years. Their research and development department was already in possession of several replacement molecules. None of them required α-naphthol. UCIL, therefore, thought it was unnecessary to build an α-naphthol plant when it could just import it for a fraction of the cost.

 

However, the politicians and the bureaucrats thought otherwise and political decisions came to replace rational business and scientific decisions. They insisted UCIL develop a local technology to manufacture α-naphthol. Lack of indigenous expertise meant the plant never came to be built and thus the fiasco ended with millions of dollars being burnt to no avail.

 

5. The Tyranny of FERA-localise

 

In 1974, to assert the idea of ‘Indianisation’ even more, the Indira Gandhi government enacted Foreign Exchange Regulation Act. This act would further curtail foreign investors and their equity in Indian subsidiaries. It even restricted and controlled the employment of non-resident and foreign nationals in India. As a result, UCIL had to kowtow to the government every time they needed to keep a foreign expert at the plant.

 

Under this act, a new set of rules were framed to decrease the share in the equity of foreign holders. This led to UCC decreasing its holding from 60% to 50.9%. Because of the tyranny they unleashed, most foreign companies shut their Indian subsidiaries. Nearly 40% of the companies shut their Indian operations between 1973 and 1980. This included companies like IBM and Coca Cola, which were forced to reveal their trade secrets.  Today, we have our PM Modi, going from pillar to post to attract foreign investments, but back then they harassed and drove them away. How times have changed.

 

UCIL was permitted to import the design of the plant from UCC but all the aspects of construction of the plant were mandated to be indigenous. UCC was kept at an arm’s length during detailed designing and implementation. Hence, UCC, in its design transfer agreement legally absolved itself of all responsibility in case of any mishap. Had there been no out-of-court settlement, this disclaimer would have been in prime focus and UCC could have gotten away without paying even a single penny in compensation.

 

6. Changing the Rules of the Game

 

In the late 1970s, the Indian government gave incentives to small manufacturers to produce second-grade, less effective fertilisers, which they sold at half the price of SEVIN. Parallelly the government also gave farmers subsidies to buy these fertilisers. All this resulted in selling of less than 1,000 metric tonnes of SEVIN, while the Bhopal plant was designed to produce 5 times that amount based on the Planning Commission’s projections. 

 

7. Political Populism

 

When land was first allotted to UCC for establishing the SEVIN plant, there was none of the slums or the shantytowns in the area. As time passed and city grew, the people moved to settle in the precincts of the factory. Disregarding UCIL management’s complaints, the local governments regularised those slums by giving out pattas (ownership rights) for the sake of votes, with promise of water and electricity connections. When opposition parties in the assembly questioned the safety of the people living in the slums, the relevant minister was complacent in his reassurance.

 

The most shameless aspect of this fiasco was the passage of The Bhopal Gas Leak Disaster Act, 1985, which conferred on the central government, which held nearly 25% equity in the UCIL, which micro-managed UCIL, the powers to sue UCC on behalf of the affected people. While UCC paid 750 crores to the victims in an out-of-court settlement, the government escaped all moral and financial responsibility.

 

As these points show, the Bhopal factory was a living proof all that’s wrong with centralised planning. Under this system, governments make but take no responsibility. While corporates are absolves from the discipline of market forces. As Robert Bidinotto who through his New York Times article in 1985 first brought to light the government’s direct hand in the tragedy wrote:

 

Under (India’s) industrial policy, business and government are seen as "partners" in joint ventures to promote "national goals." What does business bring to such a "partnership"? Basically, every creative element: vision, ideas. effort, know-how, capital. What does government bring to such a partnership? Basically, every coercive element: favours, dispensations, subsidies and other "carrots" for politically approved businesses, on the one hand—and on the other, prohibitions, regulations, punitive taxes and other "sticks" against politically unpopular businesses.

 

 

Ironically, the Bhopal operation was never profitable for UCIL. In 1984, the plant incurred a loss of USD 4 million, resulting in skilled workers leaving for greener pastures. Even the existing employees’ started losing morale. The final link between UCIL and UCC was Warren Woomer. He was a fine engineer who had trained Indian engineers at the Virginia plant and was appointed as the workers’ manager who was responsible for the safety of the plant from 1980, when the MIC plant started operation, to 1982. In 1982, as per FERA Indianisation policy, he was sent back by the Indian government, after which UCIL gradually lost interest in running the plant and started contemplating on shutting it down.

 

Even with respect to the original Virginia plant design of which the Bhopal plant was Indianised, a lot of automation was bypassed under the pretext of creating jobs, which left room for human error. Also the government asked the UCIL to end all the foreign collaboration with the UCC as soon as possible. The interim extension given by the government for UCC-UCIL collaboration was to end in January 1985. The accident happened in December 1984.

 

After the event, there was a lot of talk about Industrial Safety Standards. To paraphrase Thomas Sowell, the most basic question is not what the best safety standards should be, but who determines them. Should it be the government? The same government, which kills hundreds of people every day on the roads that it designs so badly and maintains even worse? In a control and command economy such as ours, governments, run by technically illiterate bureaucrats and politicians, have no idea of what is safe. Yet they mandate and manage each aspect of the industry, makes decisions for the individuals while keeping people in dark. And the government can never correctly estimate the ramifications of its own market distorting policies under changing the rules of the game.

 

In a freer market scenario, the onus is on the factory to run safely. There will be a market for a third-party service which specialises in safety standards to certify such plants. Like any other governmental institution, such a certifying third-party too can be bribed, but they will soon be out of the business. On the other hand, if you bribe a politician, his accountability is only to the mob, whose votes he will buy with the same bribe money. The vicious cycle continues.

 

It is not profitable for a factory to be unsafe. Just like many Indian technical experts left the Bhopal plant in exasperation, an unsafe company will find it hard to retain employees and face lawsuits, compensations, etc. No company wants it. Not being safe is an existential threat for the business in itself.

 

For decades, Indianisation / protectionism denied consumers best quality goods and spoiled its producers by eliminating the best in the business. It is profitable for foreign investors to employ local work force if they are capable of doing the job. Even if there is no capable work force, it is again in the interest of the foreign investors to build institutions to train local people, if you give them the freedom. Only if people are allowed to collaborate and exchange ideas across borders, do we get best possible solutions. Else, one will eventually have to settle for a second rate. In business, as in education, if you want excellence, privileges will not work. Only competition will.

 

Ideas, when given life, become events. They are not born in isolation. Far too often, we limit our vision to what we see and hear and don’t make any effort to trace back to the ideas behind the events. An abstract germ of an idea can lead man to land a robot on a comet or it can lead to a disaster.

 

Here is one such idea.

 

“I believe, as a practical proposition, that it is better to have a second rate thing made in our country, than a first rate thing that one has to import.” – Jawaharlal Nehru (From a speech in the 1950s)

 

This philosophy, and its unfettered application, must take as much blame for the Bhopal disaster as Union Carbide.

 

(The authors can be reached at twitter.com/ravithinkz and twitter.com/paynchom )

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COMMENTS

MOHAMMED ASLAM ANSARI

2 years ago

Whether it is Union Carbide or Government Of India responsible for the Bhopal gas tragedy I stopped buying Eveready products since that day. In those days social media access was not easy therefore I could spread my movement only up to my nearest contacts which could not create any impact. I wished a total boycott but couldn't spread my message.

REPLY

M S Prabhakar

In Reply to MOHAMMED ASLAM ANSARI 2 years ago

The point that this article makes is that although the popular perception is that Union Carbide was the sole culprit of Bhopal disaster (the then makers of 'Eveready'), how mindless Indian government policies, regulations and populism must take as much blame for Bhopal disaster.

So the pertinent question to you is: How have your actions tried to make our government more accountable?

neel

In Reply to M S Prabhakar 10 months ago

dear sir ,

when the bhopal gas tragedy happened american lawyers were flockign to india to enlist clients as in the general population affected to represent them in tort action in american courts for which the damage payout would hve been according to american standards BUT the indian govt and the politicians sensing huge dollars compensation directly to the affected population passed the said Bill in parliament and that alone is the reason why the out of court settlement was peanuts the out of court settlment should have never happened there should have been a full trial in america and not india neel [email protected]

rajivahuja

In Reply to M S Prabhakar 2 years ago

A very pertinent question.

SAMUEL WARBAH

2 years ago

Technically illiterate bureaucrats and politicians manage each aspect of the industry.
Has it really change now?

SuchindranathAiyerS

2 years ago

These are seven lessons that Indian "governance" has not and probably never will learn. There are the other matters of post disaster culpability too. Such as deliberate insouciance in the matter of compensation and the aiding and abetting of Union Carbide's executives to flee due process of law by the Congress politicians, police and bureaucrats of the day.

bharati

2 years ago

Indians always blame themselves and their govt, especially with 20/20 hindsight and constantly dilute their case.

Surely you don't expect a flawless perfect govt?

Even well meaning govts do only whatever is practical based on the best they know at the time; it is like blaming hydel dams today!

The blame is squarely with UnionCarbide, now Dow. They have had other disasters where they have helped victims far more.

Narendra Doshi

2 years ago

1.EXCELLENT EYE OPENER FOR ALL STAKE HOLDERS.
2. All my previous commenters have views which I also support.
3. ML may please give details of the authors to this article.
4. ML may also forward this viewpoint to appropriate PRESENT authorities so that we have a safe future.

Mahesh Kumar Tennati

2 years ago

In India, there is no value of life. Governments are only interested in vote bank politics and hardly care for development. No wonder, we are still developing country and will remain so even after 200 years, and will watch a TV Show on completing 230 years of worlds most lethal industrial tragedy. Unless the pervert addiction to making money at any cost is removed from our mindset, nothing can change.

REPLY

rajivahuja

In Reply to Mahesh Kumar Tennati 2 years ago

The politicians are the root of evil.

AUROTTAM KUNDU

2 years ago

And this article gives me reason enough to put Moneylife on my daily To-Visit list of websites.Kiran and Jilla,what an article ,Sirji!!

rajivahuja

2 years ago

Thank you for showing how the Indian Government particularly Nehru ,IG were responsible for laying the seeds of this giant disaster. This shows that the govt turned a blind eye to an man made disaster.

M S Prabhakar

2 years ago

Great article with a fresh perspective to the tragedy.

As a professional who has worked in another US multinational in India for over 31 years, I can't agree more. Safety and environmental standards are never static and they keep evolving continuously. So also do technologies.

I remember an incident in the organization I worked for. Following the Bhopal tragedy, our US parent decided to phase out emission of volatile organic compounds (VOCs) globally over a period of 7 years starting from 1985. This meant that by Jan 1, 1992, we had to have in place an alternate technology to the huge amounts of hydrocarbon solvents that we were emitting then. Our US parent offered all help in identifying and validating a suitable technology. However, the local management was always reluctant to change, citing compliance with local requirements. During December 1991, the company group chairman, a French national, issued ORDERS to local management to comply by December 31st or face closure and associated consequences. The plant manager rushed to Pune the same day and hurriedly negotiated with Thermax for a VOC incinerator for installation before Dec 31st. It eventually proved to be a sub-optimal technology option and extremely energy inefficient for the purpose.

The epilogue was that the product line on which VOC incinerator technology was implemented had to be closed down within a few years due to uncompetitive costs. The local managers kept blaming the Americans for being adamant and not "realizing local market conditions". The plant manager (who was a mechanical engineer from Union Carbide) was shifted to R&D to develop "market-appropriate products", because he championed the cause of Indian "Jugaad" technologies. Not even a single product that he "developed" using "Jugaad" tech succeeded in the local market. A few years back, US decided to close down the local R&D set-up that he was heading.

E>S>Shridhar

2 years ago

I thank Ravi Kiran and Shamant for writing this article. Very informative and logical. They could also have touched upon judiciary for not acting on Inspector of Factories&Boilers, Inspectorate of explosives or at least taking their statements.They went scot free and probably were incompetent too.
Next time a similar plant comes up our pollution control board inspectors and inspector of statutory safety,welfare bodies are properly trained on mandatory safety aspects of the plants
E.S.Shridhar

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