Cry the beloved country-may, 2012.

[suraju06]

Share:

Facebook X (Twitter) LinkedIn WhatsApp Email Share Link

This is the news item in The Times of India dated 30 May 2012:

Govt. Move to Benefit 2000 cotton mills
Banks told to recast Rs. 35k crore textile debt:

--The Government on Tuesday asked banks to restructure loans worth Rs. 35000 crores to the Textile Sector, bringing relief to the sector, which is reeling under the impact of volatile yarn prices and slow down in major markets. Banks have an exposure of Rs. 1.56 lakh crores to the sector, which means just under a quarter of the loans will be restructured in one of the biggest loan recast programme.

--Around 200 cotton textile mills will benefit from the package. A majority of them are in Tamilnadu. The man-made fibre segment which is also covered by the scheme are mostly in Gujarat.

--Of the overall package, nearly 27000 crores is expected to be pocketed by the cotton mills while 3600 crores will flow to the man-made fibre segment.

--The package will include a two year interest moratorium and conversion of eroded working capital into longer-term loans with three to five year terms.

--In order to encourage banks to implement the package, The RBI will allow banks to classify these loans as performing assets thus giving them the relief from provisioning in their Balance Sheets.

--the debt restructuring package will be considered on a case to case basis by concerned Banks.

Now the comments about the news item:


The poor “common man” who never has any role in such matters, and who only exercises his right to vote once in 5 years that too to elect the majority caste candidate from his co nstituency has the following doubts in his minds:

1. The fact of the situation is that there are textile mills which have been managed well and performed well despite the difficult market conditions. While there are many mills which have failed to perform and have incurred even cash losses, have built up a negative net worth due to accumulated losses there are also good mills who have managed their affairs well and have made profit. The package announced gives incentives to the bad performers while leaving the good performers in the lurch. Does this not amount to incentivising bad performance and discounting good performance? To be fair the Government should have announced equally attractive benefits to performers too. Even if it is vote bank politics (Gujarat will be going to polls shortly) and the attempt is to help a labour intensive industry to rake in votes, the good mills also employ labour from the same pool. The logic beats me. Can some one explain?

2. Most of the uncertainties in business is well managed with the help of modern systems. Thus you have various insurances, forex forward contracts to take care of fluctuation in value of exports, employing badali labour to manage finely the labour input costs, bank finance which takes care of up to 75 % of the working capital gap etc., where is the need for such glucose drips to save a dying patient? If a patient did not know how to manage himself well and is sezed by a death wish the natural course would be to allow him to die quitely.

3. Will the same treatment be extended to other units which have fallen sick in other segments also?

Comments are welcome. Cheers.

 

[prasad1]

Your argument is similar to saving auto industry in US.
You are saying that in a pure capitalism an industry has to survive or prosper on its own strength. But we are not in a pure capitalism. In India it is a regulated capitalism.

"The growing concern of the prospects is well justified. Allowing the industry to collapse would be a catastrophic blow to Indian economy, national security, the labor movement and the financial and social health of hundreds of communities."

Of course there is political goal too, they must constitute a large voting block.

Similar argument can be made as why AI (Ashamed India) be saved versus Kingfisher allowed to die.

Why protect retail industry from Walmarts?

 

[ozone]

I am not an expert, but still venture to provide my thoughts.
I do not think this refers to whether the mills were managed well or not. I think this is similar to a drought.
Many small players have had stocks that were not lifted I guess due to the global situation. They have incurred loss due to no sales, piled up inventory and interest payment on loans. If you look into the stock market, you will see the entire sector not doing so well.
IMO, this is not so much of a good vs poor performers, but about how to bail these people out. Those that have managed to survive, can manage to pay off the loans and the interest. This makes perfect social sense, may not make economic sense though. Those who are neck deep in crisis are being helped so they dont sink. If they cannot pay for the interest, the pressure would only mount and push them against the wall. So, this relief might help.
Of course, this is assuming the problems are genuine. Govt cannot look at these situations from a business or economics point of view. When there is drought, whom else other than the Govt would you look up for a saviour?

 

[prasad1]

Sometimes when the playing field is not level, government has to step in to make it level.
Does it make economic sense, that is altogether different matter.

There are no pure capitalist country or pure socialist country.
A purely capitalist economy will be a Head without Heart, and purely socialist economy will be Heart without Head. Neither can survive, we need a combination, every government tries different combination of Head and Heart.

 

[biswa]

I am curious though. How do you classify China?

 

[prasad1]

I am curious though. How do you classify China?

Welcome back, we missed you.
China and Russia is a curious mix.
In Russia the proper rules and regulations have not been formulated. Capitalism has been unleashed without the checks and balance, The tycoons are robber barons and the government enforces their will selectively.

In China you operate at the whims of the Communist party, there are parallel hierarchy in organization, sometimes the party is
stronger than the CEO. Again the enforcement is haphazard and arbitrary.

It will take time for these countries to stabilise.

I am not an authority on their practices. It is purely bookish knowledge.

 

[suraju06]

My comments have nothing to do with the isms or my political ideology/leanings. There are two entrepreneurs. One is prudent and is successful in his business and is making profits. The other over-stretches his resources,mismanages his business, fails to understand the course of the market, takes bad decisions, incurs losses and looks up to Government for help. Both are in the same business but their achievements differ. My question is why should the Government ignore the former while helping the later. The later may deserve a helping hand to save the many families of workers from starvation. But who is responsible for all the woes. Why shouldthe punishment for the mistakes committed be transferred to the Government? If the sick unit has to be helped out do it but give some tax relief to the good perfomer also so that efficiency is also rewarded.

Now what are the effects of the action taken by Government? Let us look at that briefly:

1. With the concurrence of RBI the Banks will do a cosmetic surgery to recast their balance sheets by taking away Rs. 35000 crores worth of assets from the NPA (Non Performing Assets) basket and will add them to the Performing assets basket. The banks will look healthy to that extent because one vital parameter determining the health of the banks will look strong viz. the percentage of NPA to total assets in the Balance Sheet. But another parameter called the return on assets will go down to very low levels because these “performing Assets” do not earn any interest because of the moratorium declared. Moratorium is a decent word and in course of time the accumulated interest under moratorium will also be converted into a term loan with a long repayment period at raidiculously low rate of interest or at nil interest. In simple words that can be understood by the common man this effectively means that the inefficiency of the individual sick units and their owners have been effectively transferred to the financing banks. The politicians claim to have saved the labourers from starvation death,Government gets the votes, the inefficient entrepreneurs get a reward, the efficient entrepreneur turns philosophic,the banks keep licking their wounds (they have several of them) while the common man stands bewildered as the events march past him.

More about this jugglery later.

Cheers.

 

[ozone]

It is not clear from the post what the argument is. If it about the mis use of good intentions, I am with the author. But you need to more specific about what the mis use. For e.g., it is clear in the case of Kingfisher Airlines that any bail out by the Govt is a misplaced sympathy. That might not be the case in the textile industry. There are a lot of people who only know about making business and livelihood through Textile business. They might have genuinely invested and lost. As I have said before, a social setup cannot be seen the same way as an economic set up. Every one is not born with intelligence and talent. They need to be allowed to survive and if such people have failed, they need to be helped to revive.
Which of these is genuine and which isnt (like the KingFisher Airlines), I cannot say. But that does not mean the social concept of helping the failed is flawed. In another thread, we remember discussing that the really intelligent is the one who makes money and its the money that counts, not intelligence. Then why cry over lack of intelligence here?

Is your argument that the value of money one has earned, has been diminshed by the (you say easy) offer made to the other? You would rather see him starve and die, so you feel the money earned by the other was well earned?
I fail to understand what you are trying to convey.

 

[prasad1]

It is not clear from the post what the argument is.

Is your argument that the value of money one has earned, has been diminshed by the (you say easy) offer made to the other? You would rather see him starve and die, so you feel the money earned by the other was well earned?
I fail to understand what you are trying to convey.

Mr. O3, (beautiful post)
That is a powerful argument, and you are absolutely right. There are no level fields in this universe. The rich are rich because they took advantage of the prevailing circumstances. For Instance Hindustan Motors, or Leyland motors flourished because the government gave them protection in India, even though their parent companies died. So you can say that HM's wealth is all because of good management. So if a company is doing good socially they need some financial assistance, government should help, but it should be done like a loan. In US the massive bailout to AIG, or GM paid back handsomely. So the bailout saved the jobs and government got its money + interest.

If one wants the government to be totally ruthless, why do we need government. These people who claim they do not want government do not know what they are asking for. It will be like returning to good old days of lawless west. The mighty will rule and others will be mere servants.