Health and Safety Standards

It was still very early in the morning and I was not fully awake on the drive to the airport. Thus when I saw a huge cloud of smoke I dismissed it initially, but the accompanying fat bright orange flames, leaping into the air, jolted me into a state of total awareness. It was difficult to judge from a distance whether the fire had emerged from a construction site or the adjacent slum; but it was relatively easy to gauge that the extent of damage to life and property was extensive. “Maara gaya bechara gareeb” (The helpless and the poor have died), said the driver and drove on; but my mind stopped at that statement. In the city of Mumbai, life comes cheap and especially of those without any means. But just because there is such abundance of life in the country, does it mean that it can be dispensed with easily?

The November 26 attacks of Mumbai created a furore in the city. There was public outcry for a special armed force to be created for the protection of Mumbai; after all, the city has suffered numerous terrorist attacks in the last few years. I was among those who became a part of one such movement, a group that silently but visibly (with black arm bands tied through out the day) declared that we would not rest until such a task force was installed in place. Surprisingly, the government realised the need and the citizens’ stipulation was fulfilled. Yet today I wonder if our demand was adequate. A fight against terror is a must and the country needs to be protected from further attacks; however the loss of life that occurs due to such attacks is no different from the loss of life that occurs due to poor health and safety regulations. So why has there been no crusade in the country towards improving the general living and working conditions in our cities?

Yes we are a developing country and that means that we have limited financial resources. However, that does not mean that we do not try and improve efficiency and productivity. Improving health and safety standards not only protects human life from unnecessary fatalities but also improves the economic output. Take construction workers working on scaffolding without harness for example. A good worker, unable to balance himself will be inefficient at higher altitudes and will eventually be replaced by maybe a less able individual, either by the supervisor or by mortality. Providing the good worker with a harness will help him be efficient and deliver on time. The same harness will also prevent accidental falls and save lives. With India undergoing a construction and infrastructure boom, this safety standard that has apparently been made mandatory by the government, but its use is still not widespread. Setting up of new standards might also lead to an increase in jobs or in creation of new ones–manufacturers, distributors, training experts, inspectors etc. One cannot neglect the increased feeling of safety and security that it will provide to the daily wage earner, increasing his dedication to work.

Joseph Stiglitz, the noble prize winning economist calls communities the fourth pillar of economic development (the other three being markets, government and individuals). The vast economic disparity in India, the caste based society and the restricted access of English to the elite and the upper middle class; have all led to the non-development of this fourth pillar in India. Vested interests dominating inclusive growth and the prevalent acceptance of corruption, both further fuel the economic disparity preventing community development. In the absence of community development and with extreme poverty it is difficult to install health and safety regulations which will be adhered to and be effective. However, just because it will not be effective, does not mean that we should not start somewhere; the same way that just because in the long run we will all be dead does not stop us from living and learning in the process. Any thoughts, any ideas, please do share.

Corporate Debt Market in India - Need of the Hour

Indian regulators have drawn a lot of criticism from global market participants for their limited initiatives towards liberalising the domestic capital markets. From a pure policy point of view, some of this criticism is probably unjustified. However, the lack of attention given to the development of a healthy and liquid public corporate debt market is definitely worth raising some questions.

Both domestically and internationally, volumes have been published on the lack of a public corporate debt market in India, its desperate requirement for the country’s growth and also the remedial measures that need to be adopted by the regulators. While the knowledge base has existed for the last several years, there is no concrete curative action in sight yet.

The current global economic crisis heightens the need for thriving and transparent public corporate debt markets in India for two main reasons. One, there is a lesson to be learnt from lax lending disciplines and overburdened balance sheets, and secondly and more importantly is the need to disassociate the country’s growth from a desperate need of international capital.

The sub-prime crisis was more than just lending gone wrong; it was money lent incorrectly. In the hay days of the housing boom, US institutions were extending mortgages to students who had no income in sight for years to come. The idea was that these would be bundled with more credit worthy assets and risks would be averaged. In India, the banking system is similar in this “risk averaging” approach; however, the shallow markets raise the stakes involved. The large, mid and the small cap (and hence diversified risk base) companies borrow (working capital and term loans) from the same banks domestically and in foreign currency. The same banks also fund the promoters who own majority of the equity in these companies. Further, the treasuries of these banks subscribe to the equity of the listed entities and are even dependent on the same corporates for fee income. In the absence of any derivatives, all this risk is kept on the balance sheet of the banks and majority of the lending is done by a handful of domestic (mostly public sector) banks. This overdependence on the small banking network creates a potential systemic risk.

There are those who argue that Indian banks have survived the current crisis better than their foreign counterparts. This has largely been due to the high savings to GDP ratio that the country has, which exists with the domestic banks in the form of deposits. So in short, if there was a crisis that was to happen, it would be the average Joe in the country that would suffer like those in the West are currently. A thriving public corporate debt market would take away some of this risk away from the banks.

It would be incorrect to say that there is no corporate debt market in India currently. There is one, but it is not “public” in the true sense and most definitely it is not liquid. Most of the corporate bonds are subscribed to by banks (no surprises here) or by institutions such as LIC. The pricing of the bonds is done not based on a market benchmark but based on the return expectation of the subscribing investor. Thus there is an entry mode but no exit mode. The exit is blocked by the mostly OTC traded market making sizeable transactions difficult and also by the fact that the return expectation of one institution may not be aligned with that of another institutional investor. In fact this probably also brings forth another point – had there been a public corporate debt market in India, maybe the marked to market valuations of Indian banks would have been different; probably leading to more sober balance sheets?

In any eventuality, a corporate debt market in India will necessitate ratings. This will be an impetus to improving corporate governance and financial discipline amongst Indian corporates. A liquid debt market in India will provide benchmark pricings, creating more transparency in the large cap sector and providing more assurance to the small cap sector when borrowing from banks. Public benchmarks will prevent price wars on loans which currently impair the domestic debt markets. Efficient pricing mechanism will also provide more comfort to overseas investors who are reluctant to participate in the illiquid and non-transparent domestic corporate debt market.

International investors do bring in much needed capital, however, in India, in recent times most of this has been speculative money as opposed to long term investments. This is evident in the fact that FII investments in the country exceed FDI investments. In order for the economy to grow and the income disparities to reduce, there are three key sectors of focus – agriculture, education and infrastructure (which includes energy). All these three sectors are capital intensive sectors with returns being generated over the longer run. These require long term commitment to each project invested in. Such commitment is missing from overseas investors. In fact even foreign banks participate only in a limited way in debt funding of long term domestic assets.

To use domestic capital more efficiently, for the growth of these three sectors, a liquid debt market will come in very handy. Companies, issuing non-convertible debentures currently, all subscribed to by LIC or the likes can then tap the public markets and raise incremental proceeds. India currently has approximately a 30% savings to GDP ratio, most of which is channelled to the countries’ public sector banks. With a thriving debt market, maybe the domestic savings can be used more efficiently and the savings to GDP ratio stabilised. With more diversified investments (away from banks and equity markets) and stable returns, the country’s population at large can benefit. And while it might seem that retail investor participation in debt markets would be difficult, active debt mutual funds provide an answer. In fact with the advent of the new pension reform scheme, pension funds can provide a large corpus for investing in the domestic debt markets. Investor education can also pave the way to making individuals realise the value of balancing their savings over asset allocations and averaging return expectations over a period of time.

India is a young country today with an average age of c. 25. As we grow older as a nation, we will need savings that generate stable returns and that are to some extent decoupled from risks to the financial sector. So along with corporate India, it is the nation on the whole that will benefit from a thriving local corporate debt market. Let us hope that the upcoming budget addresses this need of the hour with some proactive actionable suggestions. The rest we will then need to wait and watch.