Subsidized Profits

A business cuts prices if it is not able to sell its goods or services at the price of its choice. The realty sector has been facing just this prospect for the past few months. The speculators are out of the market and the first home buyer cannot afford the high premium that realty companies could charge when interest rates were low and credit was easy. Since last September the world of finance is teetering on the edge of a precipice as each day brings more bad news. Nobody is quite sure what the value of assets is and this has meant a consequent drying up of credit. To give an analogy: Satyam was regarded as one of the best IT companies around that is till it became clear that for the last several years its books were being sytematically cooked to reflect healthy growth year on year. Now no one is quite sure how much the company is worth. In this light how much would you pay for Satyam? You have no credible information of the true worth of the company. Its accounts are tainted. So the company’s credit worthiness is under a big question mark. The same scenario is being played out in the realty sector.

In the last few years not a single day passed without news of a few thousand acres bought, a new township being built, another cluster of malls, multi-million homes on easy credit, auction of land at prices that would send Donald Trump scurrying for cover. Overnight real estate brokers turned into developers. Just 6 months on UNITECH the second largest realty company in India is on life support system. DLF is battling a shrinking market. Jaypee even went as far as offering luxury cars with flats. But are they reducing prices? Yes. Reluctantly. DLF Chairman, KP Singh told a national daily that “Prices have already reduced by 15 – 20 per cent. There is no further scope for reduction at a time when input costs are so high. Price cuts are not sustainable at this point,” No further scope? What if you still cant sell after the 15 percent reduction? He wants the Goevrnment to take steps that will help HIM sell the flats. Why should the Government bail him out? Would DLF share its profit with the government? Of course not. Will he accept independent regulation of the sector (just like the telecom sector is regulated by TRAI). No. His contention is that the realty sector is highly regulated. How? No one knows and the kind reporter not wanting to seem ungreatful to get an interview with the reclusive magnate chose not to. So what does KP Singh want? He wants the government to reduce interest rates (regulation for the banks but not for DLF). He wants the entire EMI offset against taxable income (a subsidy for his prospective customers who will then buy his overpriced homes).

How quickly the lovers of economic jargon forget the principle of demand and supply. How irrational. Never mind that KP Singh’s prescription will increase the budget deficit that the industrialists so glibly talk about on TV panels at budget time. How quickly the chapter on demand and supply is forgotten. If the houses are not selling for the asking amount DLF has to just reduce prices (and thereby their profit margin) to a level at which buyers interest will rekindle.

But these are extraordinary times. And extraordinary times demand extraordinary proposals. Here’s one from KP Singh to the government: buy DLF’s unsold, expensive homes and sell them at subsidized rates to the public. How convenient. In good times ask the government to vacate sectors to the private sector and in bad ask them to step in to bail out the private sector. In other words private profits, public losses. What a winning combination.

It is said that the character of a man is best known in times of adversity. I think the same standard can be extended to a business. KP Singh is not the only practitioner of this form of creative capitalism. Ratan Tata went subsidy hunting as his “dream project” stood on the threshold of pulling out of Singur. Finally settling on Gujarat since it met all the terms that had been offered by West Bengal and went  beyond.

The world’s cheapest car comes at a big price, like all subsidies, most of it with hidden. Unlike a subsidy on Kerosene or grain for the below poverty line families the subsidy to Ratan Tata is to enable him to maximise his profits. Before the project moved to Singur Tata Motors Limited (TML) had negotiated with the Uttarakhand and  Himachal governments’. And like a good bargainer TML came to West Bengal asking its government to better the offer.  Clause 6 of the agreement between the West Bengal Industries Development Corporation and TML states: “The parties also discussed mutually to finalise the package of incentives required in order to enable GoWB to fulfill its commitment to match in equivalent financial terms the fiscal incentive foregone by TML in Uttarakhand.” Sample some of the highlights of the deal with West Bengal outlined in their classified agreement. This document was released by WBIDC only after TML started threatening to pull out of Singur. TML immediately moved the West bengal High Court and got an injunction against the release of the documnet after which it was pulled off the WBIDC web site. Here is what it would cost the people of West Bengal (and now the people of Gujarat) to deliver Ratan Tata his dream of the cheapest car in the world.

(1)      100% exemption from Excise Duty for 10 years.

(2)     100% exemption from Corporate Income Tax for first 5 years and 30%
exemption from Corporate Income Tax for next 5 years.

(3)    WBIDC will provide Industrial Promotion Assistance in the form of a
Loan to TML at 0.1% interest per annum for amounts equal to gross VAT
and CST received by GoWB…This benefit will continue till the balance amount of
the Uttarakhand benefit is reached on net present value basis, after which it shall be
discontinued. The loan with interest will be repayable in annual
installments starting from 31st year of commencement of sale from the
plant.

(4)    WBIDC will ensure that the loan under this head is paid within 60 days of
the close of the previous year (on 31st March) failing which WBIDC will
be liable to compensate TML for the financial inconvenience caused @
1.5 times the bank rate prevailing at the time on the amount due for the
period of such delay.
(5)   WBIDC will provide 645.67 acres of Land to Tata Motors Ltd on a 90
year lease, on an annual lease rental of Rs. 1 crore per year for first 5
years with an increase @ 25% after every 5 years till 30 years.

(6)    The West Bengal Govt. will provide to TML a loan of Rs. 200 crores
bearing @ 1% interest per year repayable in 5 equal annual installments
starting from the 21st year from the date of disbursement of loan. This
loan will be disbursed within 60 days of signing of this Agreement.

(7)    The West Bengal Government will provide Electricity for the project at
Rs. 3/- per KWH. In case of more than Rs. 0.25 per KWH increase in
tariff in every block of five years, the Government will provide relief
through additional compensation to neutralize such additional increase.

If this is not crony capitalism what is? Is this what Private-Public participation means -Private profits public losses.

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