Ripples on the brain

The Prime Minister’s speech at the CII has led to a needless controversy in the media. Though I had read about some reactions to his speech, I didn’t bother to check the contents of it till I saw this week’s Devil’s Advocate where Karan Thapar sought Montek’s reaction to the whole issue.

Controversies have been generated out of three portions of the PM’s speech. The first one is Manmohan’s reference to Keynes’ 1925 essay (as quoted by the PM):

But like bees (these captains of industry) they saved and accumulated, not less to the advantage of the whole community… (they) were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice.

By quoting this text, in my opinion, the PM wanted to convey two things to the industry captains in the current context:
1. Don’t always look for improving the shareholder value for the short term. Think about creating social capital - things that will benefit all the stakeholders, like a better environment, health benefits for the workers, offering employment to the less privileged etc. This also makes a lot of business sense. Just think about those leather tanneries in Tirupur that have now been closed down. Had they invested in greener technologies when times were good, would they have ever faced the situation they are in today?
2. Consume today only what is required. Now this doesn’t need any explanation.

The second one relates to the PM’s mention about Profit Maximization:

Six, desist from non-competitive behaviour. The operation of cartels by groups of companies to keep prices high must end. It is unacceptable to obstruct the forces of competition from having freer play. It is even more distressing in a country where the poor are severely affected by rising commodity prices. Cartels are a crime and go against the grain of an open economy. Even profit maximization should be within the bounds of decency and greed! If a liberalized economy has to succeed, we must give full play to competitive forces and the private sector should show some self-restraint in this regard.

Yesterday, Karan took his guest, Montek, and his audience for a ride by reading separately into the “Profit Maximization” sentence without looking at the context of the paragraph. Even when Montek sought to relate the “bounds of decency” with the non-competitive behavior mentioned earlier, Karan didn’t buy that view. Karan’s final question on this topic was very hollow:

I wish you were correct because the point the point about cartelisation was actually a slightly separate point although made in the same paragraph. But it was a separate point because this point about maximisation was made first. The problem is that if profits are made legally, any attempt to curb them will slow the engine of growth. It is in fact a fairly substantial disincentive to entrepreneurship.

Profits made legally do not always mean profits made within bounds of decency simply because the legal system will always have (intentional or unintentional) loopholes which are exploited by the corporates to make short term profits. Though legal system continuously evolves to plug these loopholes, it only manages to play catch up. So, even profits made perfectly legally do not always mean the actions were morally right or decent. The Tirupur example still holds here. Another example is the Sivakasi fire-cracker industry. Earning profits by employing child labour may have been legally okay some years ago. But, it is obviously morally wrong to have done that at any point of time. It is not that employing child labour was considered unethical only after it became illegal.

Hence, what is legally correct today need not be the same tomorrow. Since laws cannot cover all the activities in which the industry indulges in, the PM appeals to the conscience of the industry captains to go beyond just conforming to the written rules.

The following lines are the source of the third point of contention in the PM’s speech:

Four, resist excessive remuneration to promoters and senior executives and discourage conspicuous consumption…An area of great concern is the level of ostentatious expenditure on weddings and other family events. Such vulgarity insults the poverty of the less privileged, it is socially wasteful and it plants seeds of resentment in the minds of the have-nots.

Montek’s response to this was an eye-opener for me. The remuneration for the promoter chairmen are, if you think about it, not determined by the market forces. Since, they don’t move between companies like you and I do, their salaries are not based on demand and supply. There should be some tool with the individual shareholders to control their remuneration.

On the whole, I think the PM’s speech didn’t have any portion that has not been spoken/deliberated earlier. Moreover, considering the speech was on the topic of “Inclusive Growth”, the PM didn’t raise any controversial subject either. It just served the media to spin a story about the imaginary change of heart of the capitalistic and reformist Manmohan Singh around this speech.