Rajiv Kumar, vice-chairman of Niti Aayog, said the other day that he didn’t worry much about who owned a company so long as it added to Indian economic activity and created jobs in India. Kumar was promptly challenged by the Swadeshi Jagran Manch, which has a nationalist worldview. It is an important issue, and worth exploring.
Consider two examples: Jaguar Land Rover (JLR) and Maruti Suzuki. The first was bought by Tata for $2.5 billion. The company’s factories are in England and China. The generous R&D budget is spent in the UK. Indians buy hardly any of the half-million high-value vehicles that the company sells annually. In every way (sales, employment, technology), the company has nothing Indian about it. But ownership brings its rewards: annual pre-tax profits are about 80 per cent of what Tata paid for the company—a successful investment, if ever there was one.
The Maruti Suzuki story is the mirror opposite of this story. The company is majority owned by Suzuki Motors of Japan. The 1.7 million cars it turns out annually are sold in India or exported. The company’s staff is almost entirely Indian. Maruti pays massive sums in tax and generates upstream and downstream employment through its vendors and service stations. Indeed, the company earns about as much as Suzuki does in its Japanese market. It is a goldmine for Suzuki, as JLR is for Tata. Along the way, Maruti’s Indian investors too have made a ton of money—the company’s stock has been one of the market’s best performers.
So which should the country rather have: JLR or Maruti? In my book, much the bigger benefit to India comes from Maruti rather than from JLR. Would we swap Suzuki’s receipts from Maruti, in return for tens of thousands of jobs, thousands of crores of tax revenue, the development of an auto ancillary industry, and the dollars earned from exporting cars? If we did, we would be the biggest chumps on earth. Similarly, would we be better off if JLR were based in India rather than the UK, had factories here that exported cars in massive numbers to China and elsewhere and, in return for all this plus quality jobs and technology development, we gave up the profit that Tata earns from its ownership of the company? Once again, this is a no-brainer: ownership has less value in the equation.
Full marks so far to Rajiv Kumar for getting it right. But Kumar should know that that’s not the whole story. We also have to consider Flipkart, which moved its base to Singapore a few years ago because it found India’s rules for retail restrictive, if not plain stupid. Singapore offered lower tax rates, easier access to finance, and other benefits. As a consequence, when Walmart bought the company last month, India saw little of its investment of about $16 billion, though the investment was for the Indian market. Here is a start-up that has created more shareholder value than perhaps any other, but it couldn’t stay Indian and so the value created has gone mostly to foreigners. Would the country have been better off if its rules of business and its operating environment had been friendlier to start-ups like Flipkart?
And what about Air India, which the Manch is against selling? The first question is, what value does Air India offer the country? It flies aircraft made elsewhere, and uses mostly imported fuel; no domestic value linkages there. Operationally, the business has been marginally in the black with low oil prices and no financing charges. But there will always be financing costs, and oil prices go up and down. So this is not an airline with a future, at least under government ownership. Selling it on more liberal terms would leave the taxpayer better off. There is also a chance that the new owner might turn around the airline. The government should ignore the Manch and its dated notions about public sector superiority, and try again.