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Monday, October 3, 2022

Capital Pains — challenges posed by high interest rate regime in Bharat

For Bharat to pull its poor out of poverty, and put more money in the hands of the government for redistribution, Bharat has to produce more successful businesses.

Building a new business is a pain in itself. Especially in Bharat where after almost 30 years of liberalisation, each government is still trying to improve the ease of doing business. But it still is not easy. We all read the post covering the travails of an entrepreneur trying to get his land classified as industrial (as per policy).

Poor entrepreneur’s energy, time and resources are spent in making sure he is allowed to continue to operate, after a lot of energy, time and resources have already been spent in getting permission to commence operations.

Simply put, a business needs 2 key component- idea and resources. In a country with a low per capita income, resources are not as easily available. Interest rates are sky high. Banks look at you like a criminal. They look at your balance sheet before sanctioning a loan.

Anywhere in the world, if that passes the muster you get a reasonable interest rate loan (see images below), but in Bharat you still have to provide a security. After providing security, the bank’s risk on a loan reduces, which should lower the interest rate (low risk = low returns). But while most Bharatiyas take low risk business loans, they pay the highest interest rates in the world. Irony, meet your doppelgänger — Indian banking.

If you are smart, forget making a product for global consumption in Bharat
Germany, France and Australia leave more money with the business — this enhances competence and R&D
America is one of the friendliest places for a small business loan. Larger ones are cheaper.

For those who do not have any property to provide as security, or friends in the Bank’s board, getting capital is impossible. So they turn to others who are doing what banks should be: NBFCs and individual lenders. Now since these loans are classified as ‘sub-prime-ish’, the high interest rates become even higher.

Business by nature is competitive, and nowadays that competition is global. So when your competitor has cheaper capital than you, he will out-price you, have money for marketing and R&D, and make a profit. You, on the other hand are toiling hard to put money into the hands of the central government (at the Repo rate set by RBI — nowadays run by an arts graduate with zero days of banking experience), local pollution, electricity, health, labor (fired an employee? How dare you), GST, Income Tax and communist leaders.

This automatically reduces businesses’ competitiveness at a global level. Some sectors get a government given export subsidy, but the day that is withdrawn, they’re finished (apparel industry in Bharat died overnight after the export subsidy was withdrawn).

High interest rates are like ridiculously high scoring board exams nowadays. Make one mistake and pay for life. Sadly, no one can learn without making mistakes.

Exalted few have earned the ability of attracting angel/ VC funds which is why almost all growth over the past few years has come from FDI funded projects. Real Estate, Logistics, Transportation, Commerce…. I challenge you to name one sector that has truly grown without primary or secondary FDI funding in the last decade.

Nowadays colonies are different. There no longer is the need to send in a ship load of English troops to colonise a country. It is achieved in following simple steps:

  1. Inspire 2–3 key appointees to keep interest rates high (Secretary Finance + RBI governor)
  2. Tutor one and all that FDI is a key indicator of “wellness” of an economy
  3. Come in with the FDI and make the natives work hard to make you rich. Do not even IPO, for the natives are a host, not a beneficiary in this relationship

Successive governments have followed the Pied Piper and celebrated the continued FDI led colonisation of the Indian market

So what should you do if you want to “make-it in India” by “make in India”? My suggestion is to

  • find an investor who believes in long term value you create, and not immediate cash returns. Your pitch has to be focused on that.
  • compete in a niche where your experience/ geography gives you some advantage. Defend that advantage.
  • work in a segment that is not price sensitive (let me know when you find one).
  • if you manufacture things in Bharat, be alert to where the competition that is out-pricing you is located. Put feet on the ground in that geography. Patriotism is good, but running your business is more important. You will not be able to help your country if you yourself need help.
  • if you can deal with the peacock dance of getting a government contract, and getting paid in time, work with the government.
  • if you are an honest to god businessman who only wants to focus on his work, please relocate. Go to Vietnam, or Cambodia.
  • become an employee type vendor of a mega FDI funded entity. Bureaucrats leave them alone (nowadays, might not last long). They’ll leave you with enough on the table to keep their long-term health good.

Every economy has its specific set of issues. But none has ever grown without a low interest rate regime. Unless Bharat gets there, its not serious about the business of business.

-by Abhimanyu Singh Rana

(This article was first published on the medium.com on August 30, 2020 and is being reproduced with permission, after minor edits to conform to HinduPost style-guide)

(Featured image source: Quora)

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