Equity Or Debt?

The worst was K Karunakaran. He tried to get Maruti to set up a satellite plant in Kerala. It was such a patently uneconomic idea that all his clout failed to carry it. So he picked up a row with Suzuki on the gear box and ensured that it would be produced by Maruti. The economics of that import substitution is uncertain; but it was certainly a diversion that enabled Mr Karunakaran to veer attention away from the basic issue facing Maruti "" namely that it had to gear up to face the rapidly emerging competition. The best way to face it would have been to expand production and occupy market space before others. But that required capital; and since investment in an increasingly competitive market was going to be risky, the capital was best invested in equity. Suzuki was prepared to share the required increase in equity; and if the Indian government was not ready to put up its own share, Suzuki was prepared to raise its own. This, however, was rejected by Mr Karunakaran; the expansion plans of Maruti had to be limited to what could be financed by profit accumulation and borrowings.

 

The decisions taken at the meeting of the Maruti board last week show that the thinking of the new minister of industry is no better than that of Mr Karunakaran. A year has been lost in bickering with Suzuki; at the end of it, the board has confirmed the decision taken last year to limit ambition. Even now, if the government had any sense it would reverse its decision, agree to invest further in the equity of Maruti and give the board the mandate to go full steam ahead. That is the way to maximise the market capitalisation of the company in the long run "" which would be the advice, not only of the disinvestment commission, but of any investment adviser with a modicum of sense.

The decisions required are as clear in respect of most public enterprises as they are in the case of Maruti. It has nothing to do with core and non-core, priority and non-priority; what matters is whether the enterprises can survive as competitive entities. Most cannot, and must be sold off as so much real property. Some, like Maruti or Indian Petrochemicals, are via-ble right now, and need to be unfettered. Many enterprises are in between, consisting of components that can be salvaged as viable businesses and others that must be sold off. All of them require active enterprise-level management; and that is inconsistent with rule from Delhi. The Centre needs in every case to move away from being a manager of government industry, and towards becoming a rational investor. It could do worse than make a start with Maruti. Let there be an end to the completely unproductive skirmishes with Suzuki and baiting of R C Bhargava; let the government put its money where the promise lies.