ACHIEVE 12 % GROWTH JUST BY PAYING ON TIME

Yes! It is as simple as that.

As I have mentioned in my earlier posts Indian Government's central tax collection is Rs 15 lakhs Crore. This tax collection becomes the Capital at the hands of the Government to build the nation. So this tax becomes our Nation's income. This money is used to build roads develop urban and rural infrastructure pay Government staff salary Defense salary police salary  etc.

If we want to grow the nation the most important thing is to see how this income of the country will grow.

It is obvious that tax is collected when people buy and sell goods ( indirect tax-sales tax and service tax ) and when people make profit/income ( direct tax or income tax).

So if people buy and sell more the tax collection would increase and this would increase the national wealth.

People will buy and sell more under 2 conditions

1) If their income level increases

2) If they have cash in hand ( through availability of  car loans home loans credit cards etc)

Now our country is plagued by a strange disease which I would try to explain below.  Just by treating this one disease I challenge that  our economy can grow at a minimum addtional rate of 4%. The growth rate can hit 12 %.  The good news is that the treatment of this disease is not going to cost money. It only needs the will to do by the Government and the public.

Now to the malady!

Imagine that we are paid salaries on credit. That every month there is an entry in our personal books of accounts that salary is paid but no money actually comes into your bank account. Imagine at the end of the year the income tax department asks us to pay our tax based on  all these book entries but the income tax department does not give us credit.. One  has to pay them in cash even though one never got any money into the account in the bank. On top of that the bank deducts interest on home loan and car loans every month in cash from the account but still we are not receiving our salary into the account in cash. Imagine further that we are also supposed to pay sales tax and service tax and that this tax also has to be paid in cash but we do not still get any credit in your account from the company we are employed with. Imagine further that we have to import or buy some goods every month for sustenance and that these principals ( from where you import your goods ) also do not give any credit but ask for the entire money in advance. How to manage. No Money actually coming in- there are only book entries for income. But all expenditures to be done in cash.

Obviously you would say quit this job and take something else but suppose the population of the nation is very huge and number of jobs are comparatively less and all other jobs are also more or less like this only. There could be one way out of this that you develop such a skill that no one else has and that which can bring about solid growth to the company. Imagine we somehow developed that skill and go for interviews. The company says " great !... but even though we can get more revenues by this skill of yours but since those revenues will also be on books( as our customers will not pay the actual money) we do not need your services if it is on payment basis!!!!!!!###***

You will be surprised if I tell you from my 15 years as entrepreneur that this is the story of Indian Businesses serving Indian Customers specially in the Infrastructure segment which accounts for major revenue deployment. The Indian PSUs do not make payment to the Large corporate on time and the large corporate do not pay the  small companies and MSME sector on time. The smaller companies who would have taken loans from the banks end up becoming Non Performing Assets  first and later on the large corporate also end up in the same  boat. The NPA levels in the banks rise and everyone comfortably puts the blame on the malpractices of the businessmen who took the loans.

Further the taxes, salary and imports have to be done by paying money and not credit. The businessman is held personally liable to pay the salary& taxes by various government statutory bodies but if he asks for his money on time from the customer the customer asks him to go to the judiciary knowing fully well that it is a long and protracted process.
Though the company managers think that they have used OPM ( other people's money as taught in MBA courses) to do business successfully and earn profit by using other's money- in reality they have not earned anything as whatever they think they have earned is also on PAPER. The side effect of this thinking is an economy starved and  choked of rotation of funds which deprives- the nation of income in the form of taxes and corporate their profit in real  tangible money form.

For example on a  3400 Crores annual Turnover Tata Projects Limited ( which takes up construction of governemnt steel plants power plants etc) has a customer outstanding of 2600 crores vendor outstanding of 2400 crores on a 2600 crores purchase figure and a bank loan of 1500 crores. This means that they could not collect more than 75% of their outstandings and did not pay their vendors their due monies. Since TPL are corporate with deep pockets those vendors would have got badly affected and would have turned NPA. 

Source (http://www.tataprojects.com/AnnualRep201415.pdf)

Take the case of BGRESL a company doing around Rs 3500 crore turnover annually in the energy sector. Their customer receivables is 2700  crores,which shows that more than 75% of their booked outstandings is not pad to them.Obviously they have a huge outstanding of 1000 crores to be paid to their vendors which exceeds half of their purchases.

 Source( http://www.bgrcorp.com/financials.php)

Now another case .. the great Larsen and Toubro!!  This infrastructure giant has a vendor outstanding of Rs 24000 crores on a net purchase of 30000 crores. On a turnover of around 57000 crores their outstanding with the customer is 24000 crores where as the figure should be around 12500 crores assuming that they are giving 3 months credit to their customers. It is obvious that neither are they receiving payments like their foreign counterparts nor are they making payments to their vendors. Source  .. ( http://investors.larsentoubro.com/upload/Quarterly/FY2015QuarterlyQ1-28072014.pdf )

The disease is more pronounced in the builder segment.  This segment has a record of not paying for years and if you up the ante for recovery they would simply terminate the contract and revoke the bank guarantee of the vendor and get the job done from another vendor without paying the earlier vendor.

Ok.. I have done enough diagnosis but a parting case before I conclude the diagnosis part. We from our company have been doing 2 small projects with a Government steel plant for the last  10 years. We have completed our supplies and erection and part of the commissioning long ago but out payment of more that 30 percent is held up with the steel plant in case of both the projects. Every six months they ask us to renew our Bank Guarantees and insurance and for the last ten years we have spent more than 20 % or the project costs just on renewing Insurance and Bank Guarantees. The customer has a huge rank and file with GMs DGMs Engineers etc but no one is able to understand that by making our due payments the project would get closed. By holding our payments  due to their over protective behaviour they have put a hold on the rotation of funds and thereby deprived the Government  and the nation of the taxes which this money would have generated if it was in circulation.

From the foregoing discussion it is clear that we as a Nation are not rotating our funds fast . Every rotation would generate 25 %  indirect tax  and at least 3-5% Direct Taxes for the nation. But our PSUs and corporate  do not pay on time and stop the rotation of funds. Our Builders do not pay on time and stop the process of rotation and there by prevent the nation from getting tax revenues.

My simple thumb rule to straighten this is that every one rupee deployed should generate minimum two rupees as indirect taxes.

In our economy one rupee deployed is not even generating 25 ps taxes. The sole reason for this is delayed payment by the PSUs and Large Corporate to the smaller companies thereby choking the fund flow. If there is no flow of funds how will there be tax generation.

The above coupled with a skewed interest regime ( http://accelerate-india-growth.blogspot.in/2016/07/why-india-can-never-grow-and-compete.html ) and a non-sonorous banking system is a sure shot recipe for degrowth in spite of all the efforts by the Government.

I am sure every small entrepreneur and every senior Government and private employee in the infrastructure business would appreciate acknowledge and endorse the prevalence of this epidemic in the Indian business environment.  I would only appeal to the patriot in each of us to understand and respond to the fact that delayed payment results in choking of the economy and stops rotation of funds thereby stopping and affecting the collection of taxes which is the income of our country. The Thumb rule is one rupee stopped for one year will lead to a tax loss of 2 rupees for that year.

I am not stopping by this appeal. Below I am putting up a few lines on some immediate policies that the Government of India should adopt to systematically eradicate this disease from our economy.

1.  In the first year impose 30 % additional tax on all the companies doing a turnover of above 1000 Crores on the amount they delay to pay to their vendors for more than 45 Days. In the second year impose the same rule to all companies doing a turnover of above 100 crores and in the 3rd year standardise this across all companies and firms
2. We need to understand on what grounds the companies hold vendor payments. The grounds are as follows
1. Companies are worried that the vendors would collect the supply payments and run away without completing the job and hence they tend to withhold the payments. 
2. Companies enter into complicated contracts with unclear ambiguous and contradictory clauses and using these clauses they delay the payments of the vendors. Smaller vendors are not able to appoint costly lawyers and hence are weary of the legal processes and give up on the recoveries
3. Simplify Payment Terms and remove retention and bank Guarantee clauses where ever possible.There is another crucial part to contracting that we need to look at to bring simplicity to achieve faster  rotation of funds in contracting. Contracts can be majorly divided into 2 parts. 
1. The core technical part( which uses some high end manufactured /patented item by a party ( for eg the core part of a stee plant blast furnace, the core part of a boiler  or sinter plant drive. software or custom manufactured hardware etc  ) which is not freely available in the market and there are no ready equivalent substitutes. These core technology parts are generally supplied by big companies and multinational giants. Since these are core technology the customer is not at a liberty to seek alternatives if the manufacturer is not "tied-up" with him. In this part of the contract a there should be a good retention amount  clause supported by a proper performance guarantee clause to safeguard the customer interests. In the non core technology part it should be reverse 
2. The Non Core part  There are essentially 3 major parts on contracting 
1. Civil Structures: Both Minor and Major. This includes right from building a compound wall to erection of buildings roads etc. Most of this job is fairly straightforward with standard prices and procedures. After giving an advance against Bank Guarantee the payment can be made on prorata completion of the structure. There should be a 50% payment against supply 35% against erection and 15% payment on finishing. There need not be any retention clause as the jobs are fairly straightforward. Just for the sake of continuing the old habit retention can be kept at 1.5 -2%.
2. Mechanical Structures: This includes erection of structures pipelines and any other mechanical items with structural steel etc. Payment terms should be 65 percent against supply and 35 % against erection. For the sake of old habit there can be a 2.5 % retention.
3. Electrical installations: mainly cabling 60 % against supply 40 % against erection. No retention : ( PL note electrical panels using plcs drives etc fall in the core tech category)
4. Simplify and standardize contracting procedures at a National level : The larger companies and PSUs use many complicated and creative clauses ( like LDs, Milestone Payments, Penalties, Billing Approvals Procedures etc) in their contracts which are used as tools to stop/delay payments of the vendors. Since India is hugely dependent on the contracting and engineering industry to steer it's growth the Government should lay out a simple clear  contracting procedure for the non core technology part of the contract with proper guidelines for quick judicial settlement by internal arbitration between parties in case of a dispute. In the non-core technology area the parties should have freedom to exit the contract if they are cash strapped or are not interested to continue further due to whatsoever reasons. The quitting party should be given a quick settlement after doing a material and work reconciliation. The guidelines should ensure that both- the speed of work and speed of rotation of funds should not suffer. Companies should be disallowed from adopting any other contracting procedures/ clauses or payment terms in deviation to that set up by the Government. This will bring lesser load on the Judiciary and save us valuable money without making our talented manpower languish in court disputes and lengthy judicial processes.

In the overall context of things the Nation will benefit greatly if everyone starts paying everyone else on time. The PSUs and the large corporate should be specially brought under strict policy and statutory guidelines to make payments on time. I would still be understating if I say that this has the potential to increase the growth pace by around 4 %. More than anything else this will bring huge cheer to the businessmen and corporate who have been toiling day and night endlessly to recover payments. 

As I always say- I may be wrong am open to being pointed out and being corrected. Kindly nourish me with your ideas. 

According to me this problem is a penchant of the Indian Business scenario and if tackled along with strong reduction of interest rates as I have mentioned earlier can make a perceivable difference. If you agree with my views I request you to send the link or the article to your contacts and help me spread the message. 

Thanking you in anticipation,

Glories to Our Nation

Prasad Parasuraman
Bangalore

WHY INDIA CAN NEVER GROW AND COMPETE WITH DEVELOPED NATIONS

What I am going to write below is the most important thing that I have ever wanted to say to everyone- general public, bankers, politicians , policy makers   to every entity that can think.  No it is not a jargon on ethics morality or spirituality but it is about something much more practical which affects each of us every day. Money .. more specifically INTEREST RATES IN INDIA.

How do we all define a great life in India ?  Rather than great- say best life in India. What is every working individual's ( a Businessman's or employee's ) dream.  I think we can summarize it as follows.

 1) Have a great EMI free house to live in

 2)Have a solid bank balance  which will generate enough interest every month to take care of our monthly needs with some extra scope to increase our savings after expenses on a couple of good vacations every year..

I am more than sure I have summarized the financial target/dream of more than 95% of the people.

Will you be shocked if I tell you that most of the western world's inhabitants do not, or better putting it, CANNOT think about it this way specially when it comes to the second point.

In the developed countries THEY DO NOT GET the kind of INTEREST RATES that we get in India and hence just having a good bank balance ( deposited at a great interest rate ) to get regular monthly income cannot be an option. They have to further think on how to invest and grow their savings by putting EFFORTS. Generally they would have 2 options, one- acquire real estate( which has good appreciation potential and give it on rent)  or second - invest in stocks ( in stock exchange or fresh equity in new companies).
Having relatives abroad I have often observed how meticulously they think about how to invest their money so that it grows either in real estate or in stocks. I have seen them think and work on remodeling the houses in order to attract higher rents , talking about various aspects to understand industry and governance which would affect real estate or industry performance. This automatically leads them to assess their leaders and their policy as that will have a direct impact on stocks and industry and therefore the real estate prices. But in India we are impervious to that. Whether the leadership takes a good decision or a bad decision the Indian's saving keeps getting its regular monthly interest irrespective of industry performance. Whether the NPA levels rise or sink whether the stock market performs or not whether the reservation seats outnumber the number of available seats whether Andhra  Pradesh splits into 2 or 23 whether Mr Sahara spends the rest of his life behind bars or  the best Indian Product called Kingfisher Beer meekly goes into  foreign hands without the least defense or from anyone by a little amount spent on politicians- the savings continue to get interests without fail.  And Most Importantly because the interests on those savings have to be paid the businesses have to continue to pay atleast 5 % more interest on the borrowings than that is paid to the depositor as the bank managers and the banking system has to sustain itself by paying their salaries and their establishment charges .......

.....And just because they get higher and SAFE returns on putting money on interest the Indian public does not invest in companies and businesses and stock exchanges.... And just because we do not invest in businesses our companies perennially face equity shortage and because public does not invest in business only people with lots of money can do business.  So that allows only the rich to get into business  and the poor to remain poor and the middle class to always remain middle class by getting their perennial 10% interest.

The  biggest irony is that banks invest on the collateral security ( the properties that the entrepreneur brings in like his house, his inherited house etc) of the entrepreneur and not on the capability, talent and qualification of the entrepreneur. The banks are not wrong. They are more worried on how they would pay the depositor's interest and recover the money given to the entrepreneur rather than the success or failure of the business itself.

Whereas in the developed economies,  people have to search out good talented entrepreneurs to invest their money to make it multiply, they have to locate good policy makers and politicians to run the nation so that the nation grows and becomes a better place  to live in. A nation where money multiplies and then everyone gets THEIR DUE OF THE MONEY MULTIPLICATION PROCESS. The entrepreneurs have to be more accountable to the society because they know that the public and the nation looks forward to them for multiplying their monies. The social systems automatically reorient themselves to suit growth and development of businesses  as they directly impact them. The nations have to look at the quality of goods produced, assess them and give feedback to the manufacturers and product designers so that they all  collectively improve the product experience which in turn  improves the products/services. These improved products which are now armed with customer feedback have better chance to  would sell in the outside ( international) market and earn revenue/fame  for the nations so that their stocks' performance would improve in the stock exchange.

Whereas in India it is exactly opposite. For us politicians and corporate and municipalities are a topic of entertainment and TIME PASS as their performance hardly impacts what interest we earn out of our savings. 

Take a scenario where we earn only 2-3% on interest on our savings. That would impel us into thinking and working on how to multiply our money. If returns on invested amounts would be 2-3 % businesses would get money at 4-5 % making them more efficient. Since 2-3% is not very attractive public would think of investing more in real estate or setting up businesses or INVESTING IN BUSINESSES. Automatically on the one hand money would be available at lesser interest to businesses- small and large and on the other hand businesses would start getting more equity from small investors. Remember in India one rupee from one individual is 120 Crore rupees. So businesses would be full with debt at lesser interest and equity. They would make more ground breaking products and put more efforts on product development which is in modern-era-business the most important but most costly and most resource ( money ) intensive. Currently Indian Industry does product development on either the personal money of the entrepreneur ( which has to be limited unless you are a TATA or somebody like that) or with monies borrowed at 15% net ( which is very costly)from the banking system by pledging the entrepreneur's personal assets . Hence the zeal of an enterprise to invent and innovate is highly dampened. From the above it is a logical  deduction that higher interest rates  not only throttle and poison the industry but they are actually a burden on  the enterprises.  

 Keeping the product's quality and user experience on one side for a moment even if we assume that there was enough money to make good fantastic products equivalent to Apple, Google, Siemens, Porshe, Ferari... and imagine for a moment that the whole world market started equally accepting Indian products like Japanese or German Products, even under this condition if our businesses would source money from the Banking System at 15% net how would they be competitive against German Japanese and American Companies who get access to public funds at 2% or lesser for local and export businesses. So it is obvious that due to the interest rates Indian businesses are not at a level playing field compared to their foreign counterparts. No wonder when Jet Airways or any other company struggling with a high debt is sold there are no Indian takers. Only foreign companies who can source funds at lower interests can acquire these debt laden assets. So the cycle is obvious. All Indian companies will become debt laden and be acquired by foreign companies or if they are not acquired like Kingfisher the entrepreneur's personal assets that are pledged with the banks would be  auctioned and the government and public will applaud the honesty of the system and celebrate the downfall of the entrepreneur like a "Ravan Dahan". We will eternally take pride in begging ( excuse me for the harsh word) for FDI as Indians wont invest in businesses and would invest the money in banks who give fixed interest and safe returns without any effort.  (To just put up another tertiary but important angle here- since the system is showing it's non viability the banks have started actually concentrating on earning money by RTGS/NEFT/ATM charges and credit card payment default interests).

I CAN WRITE A VOLUME OF HOW THE HIGH INTEREST REGIME COUPLED BY A APED BANKING SYSTEM ( READ MORE HERE)  AFFECTS OUR GROWTH IN MULTIPLE WAYS BUT I THINK IT WOULD SUFFICE IF I TELL THE FOLLOWING:

I HAVE BEEN AN ENTREPRENEUR ( first generation without deep pockets of course! who totally depends on the banking system for funds)  FOR THE LAST 15 YEARS.

MORE THAN 50 % OF MY  COMPANY'S NET ANNUAL EXPENSES IS BANK INTEREST AND BANK CHARGES. IF I COULD HAVE SOURCED FUNDS FROM THE BANKING SYSTEM AT  THE RATES IN WHICH MY COUNTERPARTS IN OTHER DEVELOPED COUNTRIES GET THEN I CAN GUARANTEE THAT OUR COMPANY WOULD HAVE BEEN ONE OF THE GOOD ASSETS  GENERATING FANTASTIC TAXES FOR THE NATION AND FANTASTIC RETURNS TO THE INVESTORS. OUR POSITION WOULD HAVE BEEN MULTIPLE TIMES BETTER THAN WHAT IT IS NOW. 

So on the one hand I salute Indian entrepreneurship which puts humongous efforts to survive and grow in this one sided and uneven environment tolerating all the hardships and on the other side I humbly urge the government and policy makers just to interview any 50 entrepreneurs out  of the thousands of  NPA accounts that the banks have now and ask them if they would have become NPAs if the interest rate was 2-4%. The direction for further action would be as obvious as the sun after that.

In writing all this above I may be wrong. But if anyone has any explanation to justify the high interest rate other than the most unscientific intangible " INFLATION" please write to me at prasad@prolabs-vecaun.com. I would be more than thankful to understand the benefits of a high interest regime.

In conclusion I would like to say that the right way to grow wealth is by making products and services which would capture the imagination of the national and international consumers. For this we require innovation and innovation requires entrepreneurship. Entrepreneurship requires risk taking by everyone. Making the entrepreneur stake all his personal assets in a high interest environment is not risk taking- it is something like pushing someone to a position where FEAR TAKES OVER AND CREATIVITY CEASES TO FUNCTION.  We have to make sure that our entrepreneurs get a level playing field to put money in product development and make fantastic products. That creativity and talent is available in India in abundance is a foregone conclusion but should we give that creativity the right environment to grow and flourish and then enjoy together the fruits of that growth like developed nations is what we have to decide. 

Currently the truth that is visible to me is that our talent is chained and forcibly tied down to a  wrong self defeating system.

Let us endeavor to create an India where risk and returns of entrepreneurship is shared by all. let us wake up into an era of JOINT PUBLIC ENTREPRENEURSHIP AND ACCOUNTABILITY by taking off the chains of high interest regime and collateral security.
JAI HIND
PS:Sorry for the harsh title.