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BW Businessworld

The A-B-C Of Ban-O-Nomics

The ban is taking India nowhere. Rather than using it for political mileage, the Centre should reverse its stand as it will retard investment

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Look back over the past year. If one were to landscape events in India, the picture would be liberally sprinkled with the word ‘ban’. Ban beef! Ban diesel! Ban jeans! Ban medicines! Ban noodles...

An easy, lazy way to solve a problem in the short term, politicians and their followers use the mighty ban to conjure up a cause — and grandstand over it. What should rightfully have been debated logically, becomes the stuff of self-righteous strutting for votes, often bringing with it no small measure of violence. And business be damned. Instead, the government should be very worried about statements like that from Akito Tachibana, MD, Toyota Kirloskar Motor, who said: “Automobile companies need long-term strategies, as it takes four years or more to develop a vehicle. If, all of a sudden, the legislation tells us diesel cars are banned, we cannot continue the business and we are afraid to invest more.”

With India’s prime minister globe trotting to win over investors, painting the picture of a forward-looking country poised for growth, news of sweeping bans make India seem like it is stuck in the past. In its first year, the governing party coined the beef ban. The result was a decline in beef exports. During the past fiscal, exports fell to $4 billion compared with $4.78 billion in 2014-15, and $4.35 billion during the period 2013-14.

Adi Godrej, chairman, Godrej Group, speaks of the adverse impact on agriculture and rural growth. “What do you do with all these extra cows? It is also affecting business, because this was a good source of income for farmers,” he says.

Kalim Ansari, a native of Uttar Pradesh migrated to Mumbai in early 90s and after much struggle he ended up as a craftsman in Asia’s biggest slum Dharavi. After 15 years, he drummed up savings of Rs 50,000. But Achche Din ended for him when Maharashtra broadened the cow slaughter ban to include all cattle. Ansari says, “I lost the only source of income I had.” As did many others.

There are around 200 million cattle and 115 million buffaloes in the country. Some 10 million cattle and buffaloes die every year. Farmers normally sell off their animals to slaughterhouses and buy younger animals. The leather and beef industries provide the impetus for the dairy industry to renew itself and grow. However, a hiccup in the chain spirals into a huge cascading effect putting the whole agrarian economy at a risk.

Older cows and cattle (except buffaloes), which used to fetch farmers a handy amount of Rs 30,000, are either traded at half price or given to shelter houses or abandoned. Cattle prices in the state have fallen 40 per cent to 60 per cent.

Nilesh Wasnik, a farmer of Latur district, says: “My four cattle are old and unproductive. Earlier, they fetched me Rs 80,000, but now I can’t hope to receive a paisa.” He says selling old cows in the black market is a risky business because of numerous vigilante groups.

A similar situation is found in states like West Bengal, Bihar and Uttar Pradesh. To beat the ban and double the income, cattle merchants resort to smuggling, that too on the international borders.

A report by the Supreme Court-appointed commissioner and senior advocate Upamanyu Hazarika has expressed concern over the rise in cattle smuggling to Bangladesh through the porous international border in Assam and West Bengal. He said over 3,021 heads of cattle were smuggled in 2014, while the number had gone up to 17,152 till 20 September last year. However, some reports have claimed the smuggling is to the tune of lakhs per year.

Leather Luxuries
Famous for genuine leather footwear, the Kolhapur market is on the brink of collapse. The ban has made it difficult for manufacturers to access cheap leather and they must now import it at a high cost.

According to M. Rafeeq Ahmed, president, All India Skin and Hide Tanners and Merchants Association, and chairman of Council of Leather Exports, the ban has increased the price of leather products by 5 to 7 per cent and has also brought down the production.“Maharashtra supplies nearly two million leather sheets a year all over India, the domestic market won’t be able to meet the demand and importing is as it is not viable which will result in the leather production going down,” says Ahmed.

The raw material needed by the leather industry in Chennai and Kolkata was supplied by the Deonar abattoir in Mumbai which now faces a shortage crisis. Yogesh Shetye, general manager of Deonar abattoir, says: “Bullocks and bulls are completely banned, and Deonar depends on buffaloes, whose supply is also down by 40 per cent.” Kolkata’s slaughter houses are also facing inadequate supply.

Mohammed Ali Qureshi, president of the Bombay Suburban Beef Traders’ Association, says: “The beef trade in Maharashtra is worth Rs 30 lakh per day and hide trade accounts for Rs 24 crore per annum. According to our calculation, the collective turnover of beef and hide was in the range of Rs 1,500 crore per year. All this business has finished since the ban on cow slaughter.”

Left in the Lurch
The recent crackdown on diesel cars in Delhi NCR has affected 5,000 jobs in the auto industry, and resulted in production loss of around 11,000 units of major diesel car makers like Toyota, Audi and Mercedes, who are now revisiting their investment plans in the country. “The sudden and arbitrary prohibition on the sale of high-end diesel cars in the NCR region and the ban on certain other products across various states in India have impacted investor confidence to a great extent,” says Trisheet Chatterjee, partner at law firm Jyothi Sagar Associates. “Investors are not only shaky about bringing in fresh investments in these sectors, but are also grappling with the uncertainty, production loss and huge expenditure that is being incurred to alter their plans for India.”

“Clear thought through policy changes that are investor friendly are the need of the hour, not random changes that leave investors, manufacturers and other stakeholders in the lurch,” Chatterjee says.

Goodbye Investments
On 2 May 2016, a massive protest broke out in Delhi against the Supreme Court’s decision to ban diesel taxis in the capital, which absorbs 5-8 per cent of total diesel vehicles sales in the country.
On 16 December 2015, the apex court barred the registration of diesel vehicles with engines bigger than 2,000cc in the capital until 31 March 2016 but later extended it. The court indicated it could be lifted with the imposition of an additional environmental cess on their purchase.

Such announcements have created a big impact on the passenger vehicle segment of auto giants like Toyota, unsure of its future investments in India. Recently, Shekhar Vishwanathan, vice-chairman of Toyota Kirloskar Motor, said: “If we were to go and ask TMC (Toyota Motor Corporation) for new products, they would ask: how do you know it will not get banned, and I will have no answer.”

The Japanese automaker has been suffering most since its two popular models — Innova and Fortuner — have seen double-digit decline in the monthly sales after the ban. Toyota sold 5,285 units of Innova in April 2015, but managed to sell only 4,269 units in April 2016. It’s the same story with its Fortuner model: it sold 509 units in April 2016 compared to 1,647 units in April 2016.

It’s not just Toyota. Sales of Mahindra & Mahindra, Tata Motors and luxury carmakers Mercedes, Audi and BMW also took a dent due to the ban. Over 70 per cent of the Mercedes’ sales volume is diesel-driven, and Delhi is a significant market, contributing about 15 per cent of its total sales in India.

Mercedes Benz India MD & CEO Roland Folger says: “Most of the decisions are postponed rather than completely cancelled. If the ban continues, then certainly cancellations will come into play.”

Around Rs 5,000 crore was invested in building diesel engine capacity by producers, when demand picked up between 2009 and 2013. Now, the industry’s fate hangs in the balance. Vishnu Mathur, director general, SIAM, says: “In the past 4-5 years Maruti Suzuki and Honda made big investments in the diesel technology. Toyota invested Rs 1,000 crore on a diesel plant. The ban has created a concern among automakers regarding the government’s policy.”

Another badly affected lot are cab drivers. On 30 April, the Supreme Court refused to extend the deadline fixed for the conversion of all diesel and petrol-run taxis to CNG. The worst affected was the BPO industry, which lost $400-500 million in 10 days. The driver fraternity took a bigger hit, as their business came to a standstill. Alam Sheikh, a cabbie who recently bought a Swift Dzire to increase his earning, says, “I lost business of Rs 15,000-20,000 in the 10 days of the ban. It will be a difficult month for me to pay the EMIs.” And there are other industries reeling under bans and regulations, such as the tobacco industry.

Graphic Warnings
“Instead of a freer world, governments are making it a regulated world, mindless that bans are as ineffective for end-consumers as they are for tax collectors, whose pockets are only deepened through illegal means,” says K.K. Modi, chairman, Modi Group, whose flagship Godfrey Philips produces cigarette brands like Four Square, Red and White, and Cavanders. The government recently mandated that cigarette firms include pictorial warnings on both sides of the pack, taking up 85 per cent of the space.

Companies vehemently oppose the decision, saying it will encourage customers to opt for illicit producers that, of course, don’t use warnings; and this in turn will impact the economy and worsen unemployment. Critics say people will continue to smoke heavily, warnings or not.

The Supreme Court put its weight behind the new rule. The tobacco industry is estimated to suffer a loss of around $68 million (nearly Rs 452.4 crore) a day due to the new health warning. More than 80 lakh tobacco workers and their families are affected, and farmers’ groups are among those taking out large advertisements in newspapers criticising the legislation. The factory shutdown by ITC and Godfrey Philips is hurting the government’s coffers as well, costing it more than $10 million (nearly Rs 66.53 crore) a day in tax revenues, according to industry estimates.

Illicit Advantage
“The government’s policy of not allowing FDI in the industry and instead levying more taxes on the industry is leading to the illegal sale of spurious cigarettes, mostly foreign brands,” says Modi.

Pictorial warnings encourage illegal and smuggled cigarette trade because they give the impression that they are safer alternatives to their legal counterparts. “They do not reduce demand, but merely shift it from the legal to the cheaper, regulation non-compliant illegal cigarettes of suspect quality, so undermining the objectives of tobacco control.”

A recent Ficci study, ‘Illicit Markets — A Threat to our National Interests’, estimates the overall market of illegal cigarettes in India at a significant 20.2 per cent of the cigarette industry, having grown from 15.7 per cent in 2010, and resulting in a huge revenue loss of Rs 9,139 crore to the national exchequer.

The shrinking legal domestic cigarette industry has adversely affected the entire value chain with 3.5 million Indian cigarette tobacco farmers facing unprecedented hardships. The resulting loss in earnings of farmers and the acute financial distress faced by them have already led to many cases of suicides. While an industry that is so detrimental to health should perhaps be phased out, it should not be cut off abruptly at the neck, causing losses to millions.
The ban on alcohol in many states also echoes the same situation.

Bottoms Up
“Banning eating, drinking and smoking will be ineffective in a developing economy,” says Satya Poddar, partner, EY. It will only induce the consumer to spend more through the illegal route and taxable money that goes to the government will now only go to a bootlegger’s pocket.”

Bihar is currently facing an all-encompassing ban on alcohol. Chief minister Nitish Kumar imposed the ban to fulfil his promise made to women’s self-help groups at one of his election rallies in Patna.

Critics say this ban will push Bihar back by several years. “Loss of revenue for the state will be to the tune of Rs 4,000 crore and this will lead to unemployment (direct and ancillary) as a result of loss of business,” says Sumit Mazumdar, president, CII. “Illegal liquor mafias will rise and so will the sale of spurious liquor.”

Adi Godrej believes it’s worse than that — liquor prohibition actually adversely affects the economy. “It’s bad for social structures because drinking doesn’t really reduce consumption,” he says.

History tells us that bans just don’t work. “Illicit brewing and liquor smuggling became one of the biggest industries in the state,” says Pramod Krishna, director general, Confederation of Indian Alcoholic Beverage Companies. “Haryana’s tourism industry suffered badly as tourists preferred to visit neighbouring states, where there was no prohibition.” As a result, in 1998, the ruling Haryana Vikas Party lifted the ban.

When you call any of the Kerala Excise Commissioner, the ringtone says: “Say no to drinks, say no to taxes.” The Kerala government is implementing a blanket ban on alcohol by shutting 10 per cent or 400- odd retail shops every year, slowly bleeding to death. The state, which is one of the highest consumers of alcohols, sees sale of Rs 30 crore worth of booze every day and accounts for 15 per cent of Indian Made Foreign Liquor (IMFL) sales in the country.

The ban has far-reaching implications for IMFL units, especially when they have plans to expand production. Diageo-owned United Spirits, French major Pernod Ricard and Kishore Chhabria-owned Allied Blenders & Distillers, which together control almost 70 per cent of the close to 6 million cases by volume in the Bihar market amounting to Rs 1,500-2,000 crore are in trouble. Deepak Roy, vice-chairman, ABD, says: “We have crores worth of material at godowns, for which excise has already been paid. All this will become redundant with the ban.”

Another state on the ban radar is Tamil Nadu, where chief minister Jayalalithaa announced that her government will implement prohibition in a phased manner. The impact of the ban here will also be huge financially. Many believe it’s a social issue and alcohol isn’t the real problem; abuse is. “There needs to be a demarcation between the consumption of alcohol and alcoholism that leads to the women of the household bearing the brunt of the situation,” says Dilip Bantiya, chief financial officer at Radico Khaitan. But clearly, bans do little to root out social evils.

Tarnished Image
Experts believe that India’s image is being tarnished with the multitude of bans making headlines everywhere; made far worse because the Prime Minister remains silent on the issues, specifically on the controversial beef ban. This sends out confusing signals. “India’s image was once liberal and now that image has diminished. It’s fading, voices of jingoism is not the right thing to hear,” says ad-maker Prathap Suthan, who created the ‘Incredible India’ campaigns. In fact, so frequent are the bans that they are affecting the way the general public view their country. Recent and ferocious debates over whether India is a tolerant country or not have been so vitriolic that today people feel afraid to speak up against a ban — or any measure taken by the current government. It would not be untrue to say that the cultural fabric has been riven apart. Satirists today make fun of India’s ‘ban culture,’ so pervasive has the problem become.

But all sentiments aside, the shocking fact of massive job losses, paralysis of various segments of the economy, loss to the exchequer and the obvious drag bans have on business and investments, are something no government should be encouraging. Stakeholders would do well to take a second look at the ban-o-nomics that is taking the country back in time.

A number of sectors has been reeling under the curbs imposed by the government

* India’s beef export during the last fiscal declined to $4 billion from $4.78 billion in 2014-15

* The tobacco industry has been taking a hit of around $68 million a day due to the new health warning rules set by the government

* During the 10 days of ban on diesel cabs, the BPO industry lost $400500 million, according to a Nasscom source

* Toyota sold 4,269 units of Innova in April 2016 compared to 5,285 units in April 2015. Sale of its Fortuner SUV too fell to 509 units in April 2016 compared to 1,647 units in April 2015

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Disclaimer: BW Businessworld does not endorse or encourage cigarette smoking or excessive alcohol consumption