The Grave Challenges that Tatas Faced

 

The House of Tatas is known as a salt-to-silware conglomerate. Its listed companies have a market cap of more than 300 billion USD. Its group companies are leading players in jewellery retail, commercial vehicles, cars, steel, airlines, airconditioners, hotels, packaged consumer products like tea and salt, chemicals, coffee chains, housing, lending solutions, tea, e-health, e-grocery retailing and more. Tata Consultancy Services (TCS) is a behemoth and is the largest IT services company in India. 

The list of businesses the Tatas run is very long.

More important, it is one of the business groups that has lasted for more than a hundred years. It is still thriving. It has an excellent reputation and the brand generates a certain amount of trust.

The stories of its philanthropy are known and so are its pioneering ventures into airlines, steel or luxury hotels(Taj, Mumbai). Less known are the challenges it faced in its early stages where it may not have survived.

This is the fascinating bit about businesses where entrepreneurs take risks and survive. Overcoming these life-threatening risks typically is a turning point. The entrepreneurs learn from these events and rework the business model.

The group was founded by Jamshedji Nuserwanji Tata in Mumbai. He set up a trading company and earned a lot of money during the American Civil War. But when the collapse of the American economy happened in 1865, the firm made huge losses. Jamshedji had to honour heavy debts and had to sell his house in Fort, Mumbai to meet his obligations.

Jamshedji's son Sir Dorab took over in 1904. The Tata Steel Company was set up in 1907 and started manufacturing in 1911. But in 1924 it was on the verge of closing down and Sir Dorab had to get a loan of INR 10 million from the Imperial Bank of India to establish a public limited company. To do this Sir Dorab had to pledge his entire personal fortune( INR 10 million) and his wife's jewellery. 

The highly risky decisions at these pivotal moments are what makes the journey so interesting.

 

Is it the power of generosity?

 

Narayan Murthy is a true legend, an icon for generations. As a successful middle-class professional in India in the 1980s, it was an audacious step  to take the plunge into entrepreneurship. And in his journey, he set several benchmarks - the first to distribute wealth through stock options to a very large base of employees, the first to insist on the highest corporate governance standards for a fledgeling business, the uncompromising adherence to values and more. In the process, he created the  $70 bn behemoth that gave a fillip to job creation and entrepreneurship in the country and built the reputation of  India flying high as an IT superpower. IT services today are the biggest exports from the country. There are very few companies anywhere that are so innovative, pioneering and that also have transformed an industry and maybe even changed a country.

He belonged to a lower-middle-class family, his father was a schoolteacher with eight children. Now he is worth about $ 4 bn and by all accounts with time, his reputation and respect keep going uph. His daughter is married to the Prime Minister of the UK. It is by all means an abundantly blessed life.

In a recent interview with his son Rohan on TV ( link below), he says his favourite character in Mahabharata is Karna for his generosity. In the story, Karna gives away anything that anybody asks for including his shield that can protect him from any weapon. He is a tragic hero, He is the finest warrior amongst the heroes,  he suffers all along from fate but that does not stop him from being always ready to sacrifice. Murthy also in a very uncharacteristic gesture, did not retain a substantial equity in Infosys as everyone would do, but shared it equitably with his co-founders and employees. Infosys Foundation has carried forward that work too. 

It is quite curious that someone who in the last few decades gave away the most has also got back the most.

https://www.msn.com/mr-in/news/other/exclusive-rohan-murthy-interviews-dad-nr-narayana-murthy-on-starting-up-sacrifices-values/vi-AA1dzxnN

Budget Journeys

 

Sir C.D. Deshmukh (pic above), the first Indian Governor of the Reserve Bank of India in 1843, was the finance minister from 1950 to 1956 and presented the annual statement of receipts and expenditures of the Union Government, called the budget in 1951-52, effectively the first year after India became a republic.  

A quick comparison of this budget with the latest one shows how much changes in 70 to 75 years.

The revenue receipts in 1951-52(FY 52) were expected to be 370 cr INR and the expenditure 375 cr with a deficit of 5cr.

Cut to estimates for 2023-24 (FY 24). The revenue receipts are INR 26.3 lac cr. A jump of 7108 times. But expenditures have increased even more relatively. The total expenditure budgeted is INR 45 lac cr i.e. 12,000 times.

Inflation and growth - both have played their parts.

Amongst other interesting items, the Government in FY 52 was planning to import 2 million tonnes of wheat from the USA, the balance of payments was positive at 66 cr INR.

The number of taxpayers was however not insubstantial in the context then. Against a population of 45 cr, we had 6 to 7 lac income taxpayers. 

In FY 19, we had 6.7 cr taxpayers (including companies and firms) with about one lac of individuals reporting more than 1 cr income.

The defence used to have a very high proportion of expenditure earlier. Out of 375 cr in FY 52, defence accounted for 180 cr. In FY 24, it is expected to be 5.96 lac cr ( 3311 times of FY 52) out of the total of 45 lac cr.

Who is to blame for the financial crisis ?

The conventional view is that the bankers and lenders were greedy and in their attempts to get their bonuses, went on a lending spree to unsuspecting borrowers. The Wall Street has been accused of being corrupt, stupid and irresponsible. Obama and McCain ensure that the message is repeated in every rally and sound bite.

Is this true?

The root cause of this crisis is in the sub-prime mortgages. And the fact is that the US government policies have led to this fall. Right from the days of GI bill, the government has followed a policy of encouraging home ownership at any cost, blatantly flouting sound economics. The borrower had the options of refinancing a long-term loan at his convenience for times when interests went down but staying at a fixed interest otherwise. This threw the mortgage lender into a crunch in the interest-volatile periods. In order to manage the interest fluctuations esp. after the seventies, the financial system engaged in significant financial engineering through multiple instruments.

Later, the US system encouraged loans with low interest rates and poor credit checks precisely because the risk had been parceled off though financial instruments and the players like the loan originators, brokers and banks had no risk of any bad debts. This encouraged many individuals to stretch themselves thin with low down payments, high loans, long repayment periods and the party had to collapse after the increasing realty prices became unsustainable and started going down.


Now the government and the politicians want to subsidize the system through a bailout so that the individuals who borrowed indiscriminately actually get a reprieve for their follies. As in the earlier government interventions, the solution proposed is based on self-interest rather than solving the problem. This will only ensure that the system is not cleansed fully and we live to see another day.

Global Meltdown and India

The financial meltdown has sent shockwaves throughout the world. For many Indians, it is their first exposure to how integrated the world economy has become. This is a novelty for them when the newspaper headlines are not about the shenanigans of ministers or rantings by a communal organization but what is happening to Lehman or Morgan Stanley or even ICICI.

The Indian economy remains fairly robust despite the shocks. The banking system is very conservative. There is practically no use/misuse of financial instruments which have sent the Western markets to a spin. The drivers of growth like increasing liberalization, demographic advantages, low cost skill arbitrages and technology-led productivity growth in several sectors continue as they are. The stock market of course is getting battered due to fear, panic and flight of foreign capital (which is increasingly wary of emerging market returns).The overheated sectors like realty or the businesses primarily dependent on the Western markets like IT or ITes will undergo sharp changes in their business models.

I foresee no major disruption in retail or FMCG sectors due to this financial crisis. The retail sector had anyway started undergoing its own adjustments for a few months now due to its own set of dynamics.