Karthik Ramanna, Director of the ‘Master of Public Policy Programme’ at the University of Oxford said that the Indian Govt. must structure its bailouts as non-voting equity instead of making free debt available to companies. While addressing a Masterclass by Masters’ Union School of Business, Professor Ramanna shared his observations on the Rs. 20 lakh crore bailout package announced by the Indian Government as well as how India can seize the opportunity with businesses looking to shift manufacturing from China.

Please find below the key excerpts from Prof Karthik Ramanna’s session. Prior to Oxford, Prof Ramanna spent close to a decade teaching at the Harvard Business School. He is also on the Board of Advisors of the Masters’ Union School of Business, Gurugram, India. The full recording of the session can be accessed here.

An analysis on government bailouts
Bailouts are necessary and without them we will plunge into a great depression which can precipitate a world war or worse. But the bailouts are not free, they are intergenerational wealth transfer where tomorrow’s taxpayers are paying for today’s bailouts. Bailouts are often misused to socialize the risks so that businesses benefit from the upside, but they do not bear the cost of the downside. If this is how the bailouts are structured in this crisis then the outrage will only grow, and capitalism will become more illegitimate and countries like India will find themselves thrown back to the dark days of socialism.

Recommendation regarding the Indian government’s bailout package
Government bailouts should come as non-voting equity and not as debt. The Indian Government’s plan is effectively to make free debt available to companies. This is not a good idea because the government will then absorb the cost of failure, but if things succeed then the taxpayer will get no benefit. We must structure the bailouts as non-voting equity so that governments don’t get into the business of interfering with how businesses are run; but they do get a share in the upside. The United States did that in 2009, during the financial crisis and the US govt. even made a small profit on its bailouts; so there is a precedent of doing this.
Business executives should have more skin in the game to avoid gambling with public finance. He suggested more claw backs for executive bonuses if it is found that they were deliberately reckless with capital risks.

We must structure the bailouts as non-voting equity so that governments dont get into the business of interfering with how businesses are run but they do get a share in the upside

Shift from China;golden opportunity for India
The shift away from China is not going to be as dramatic as people are suggesting and it is not going to be as rapid as well. The Indian govt is trying to capitalize on this moment and is putting forward a lot of available real estate for companies that are looking to relocate manufacturing. But the biggest barrier for businesses relocating to India right now is the threat of legal expropriation, particularly for multinational businesses in capital intensive industries like manufacturing. He said creating (Special Economic Zones) SEZs, fast track courts are going to be just as important as providing real estate. In India, real estate isn’t the only missing infrastructure- power, water resources, high speed telecommunication, ports and transportation infrastructure is important, and missing too.

Rising supply chain risk and deglobalisation; Impact on the geo-political situation
Rising supply chain risk that COVID has effectively uncovered is going to accelerate the pace of deglobalisation and force a realignment of supply chain into more politically stable relationships. In immediate terms, this might be good news for a country like India because it is better aligned politically with the US than China has been historically. If looked at the broader spectrum, this is not good news for world peace- given that it can lower the incentives to avoid war. One of the major things that has avoided conflict in the last 20-25 years, particularly between the US and China is that they have been dependent on each other economically. And neither country has wanted to accelerate or exacerbate a situation that might lead to an armed conflict. If we see increasing deglobalisation from this particular crisis, particularly vis a vis China and the US then we risk an increased probability of a major armed conflict in the world.

The Masterclass series from Masters’ Union brings together leaders from the field of business, academics and administration to delve on how Covid-19 will impact the different aspects of business and economy. Masters’ Union is a technology focused business school led by veteran leaders, executives and businessmen. Situated in Cyberhub, Gurugram, it will start its first session from August 2020. Some of the others who have conducted a Masterclass include Narendra Jadhav (Member of Parliament, Rajya Sabha), Saikat Chaudhuri (Professor, Wharton School of Business), Baba Prasad (CEO, Vivékin Group) and Malavika R Harita (Former CEO, Saatchi & Saatchi Focus Network India).