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Flipkart, Air India and the Crony Socialism of Narendra Modi

May 30, 2016


News-reports published in several newspapers last week revealed that the ecommerce company, Flipkart, had postponed the joining date of fresh MBAs it had recruited from the various IIMs, to December, later this year. The MBAs were supposed to join the company in June 2016. In order, to compensate them for the late joining Flipkart will pay the MBAs an extra joining bonus of Rs 1.5 lakh each.

These are clear signs of trouble at the company. In fact, one of the first things the information technology companies had done after the dotocom and telecom crash of 2000-2001, was to postpone the joining date of the fresh engineers it had recruited. The joining dates kept getting postponed and in several cases went beyond one year.

A friend of mine got so fed up waiting to join that he ended up joining the Indian Navy.

The news-reports on Flipkart further suggested that the company is facing funding issues and has had to cut costs to keep itself going. The question is why are Flipkart and many other Indian ecommerce companies, having funding issues?

In late January, earlier this year, I had written a column (not on Equitymaster), in which I had called Indian ecommerce a Ponzi scheme. After the post was published, I got solidly trolled on the social media. People said, I did not understand technology. Honestly, I don't understand technology, even though I am a BSc in Maths and Computer Science, and have an MBA in Information Systems. But that part of my education I have more or less forgotten.

I don't understand technology, but I do understand a very basic point-in order to survive, businesses need to make money. And almost all of the Indian ecommerce companies don't make any money. If you look at their financial results (currently available only as on March 31, 2015), their losses have grown at a faster rate than their revenue. What sort of a business model is that?

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Take the case of Zomato, a company which basically delivers food at your doorstep. The latest numbers of this company are available because 47% of it is owned by Info Edge, a stock market listed firm.

For the financial year ending March 31, 2016, the losses of Zomato shot up by 262% to Rs 492.3 crore. It had reported a loss of Rs 136 crore for the year ending March 31, 2015. The revenue of the company went by around 91.3% to Rs 184.97 crore. The revenue for the year ending March 31, 2015, was at Rs 96.7 crore.

So, the losses of Zomato went up by 262%, when its revenue went up 91.3%. What sort of business model is this, where the losses of the company go up at a much faster rate than its revenue? Of course, I don't understand information technology.

The Indian ecommerce companies have adopted a discount model in order to lure customers. This means selling products at a loss in order to build a customer base. And this has made their operating structure very similar to that of a Ponzi scheme.

A Ponzi scheme is essentially a financial fraud in which investment is solicited by offering very high returns. The investment of the first lot of investors is redeemed by using the money brought in by the second lot. The investment of the second lot of investors is redeemed by using the money brought in by the third lot and so on.

The scheme continues up until the money being brought in by the new investors is greater than the money being redeemed to the old investors. The moment the money that needs to be redeemed becomes greater than the fresh money coming in, the scheme collapses.

How does this apply in case of Indian ecommerce companies? Up until now the ecommerce companies have managed to survive because of private equity, venture capitalists and hedge fund investors, bringing in fresh money into the company at regular intervals. This fresh money being brought in essentially funds the huge losses that these companies make, in order to drive up their revenues.

This money seems to have dried up or is coming in more slowly than it was in the past. And this has put many Indian ecommerce companies in trouble. Some of them have had to cut down their operations. And some others like Flipkart have had to postpone joining dates of MBAs they have recruited, in order to control costs.

And this brings us back to the oldest business lesson-businesses need to make money, in order to survive. Businesses which don't make money for an extended period of time, don't survive. They shutdown. That is how it is.

Of course, there is a corollary to this rule. There are businesses which can keep running, even if they don't make money. They can keep making losses. This is only possible if they happen to be owned by the government of India.

Take the case of the government operated airline Air India (Okay, I know I am sounding like a broken record here, if you know what that means, in the MP3 era). The airline has made losses of Rs 34,689.7 crore between 2010-2011 and 2015-2016, and is still running.

Or take the case of Hindustan Photo Films, the fourth largest loss making public sector enterprise. The company has accumulated losses of Rs 7,794.51 crore between 2010-2011 and 2014-2015. As the table shows, the losses of the company have been going up over the years.

Hindustan Photo Films Manufacturing Company
Year Losses(in Rs crore)
2010-2011 1,156.65
2011-2012 1,352.32
2012-2013 1,560.59
2013-2014 1,560.59
2014-2015 2,164.36
Total losses 7,794.51

Source: Public Sector Enterprises Surveys

This is sheer waste of money. The money can be better spent on many other things like primary education, health, roads, railways, ports, and so on. There isn't exactly a shortage of things that the government of India needs to spend on. And it isn't exactly going around loaded with money. In this scenario, it needs to be careful with where and on what it spends its money on. Hence, the last thing it should be doing is subsidising losses of public sector enterprises which have been perpetually losing money.

The prime minister Narendra Modi in a recent interview to the Wall Street Journal said: "You can't suddenly get rid of the public sector, nor should you." Well, that doesn't mean that the government continues to run loss making companies like Air India and Hindustan Photo Films. Further, Modi has been governing for more than two years now, and if he still continues to run companies like Air India and Hindustan Photo Films, it clearly tells us that he has no intention of shutting them down.

The Congress led United Progressive Alliance practiced crony capitalism (the mess at public sector banks is a clear evidence of that) as well as crony socialism (by continuing to fund loss making public sector enterprises). While Modi has gotten rid of crony capitalism to his credit, he continues with crony socialism.

While, we may be able to have a Congress mukt Bharat in politics, it seems difficult to have that scenario when it comes to economics. Indeed, that is a big tragedy.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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16 Responses to "Flipkart, Air India and the Crony Socialism of Narendra Modi"


Jun 16, 2016

Isn't the end of this Ponzi scheme an exit to IPO?


s nair

Jun 1, 2016

Mr Kaul,

Pl note that H. P.F ha virtually stopped its mfg business in 2002-03 and has been carrying on certain job works. The loss represents interest on Loans - which has become N.P.A. in the books of Banks and Govt even in 1997-98.

No need of blaming any people in the Companay as Govt failed to see the technology advance in business.



May 31, 2016

I am surprised , as an ex employee of this company, reading the losses made by Hindustan photo film. The count do not have any activity after 2010. Wages of employees(around 400) were still paid at the 1996 levels
There seems to a big scam behind this
Or the values mentioned are cumulative loss of the year
Lease check the values
Or you can now get a breaking news



May 31, 2016

Indian government operate airline, railways, buses, sells petrol, make steel, mines coal, runs telephone department, operate banks and does many more things.

When does Sarkar-e-hind get time to make laws and pass really important bills like GST or land acquisition?


syed barkat

May 31, 2016

Very easy parroting the BJPs CONGRESS mukht bharat but walk down memory lane BJPs 2 MP are not a distant dream as CONGRESS 54 MPs botton line nither of the parties can bury the PSUs a which is a near imposible probality because the new socialism goes by the name RSS ( same wine in a new bottle )


Lt Col C V V Reddy

May 30, 2016

Till such time as BJP/NDA gets majority in upper house ie Rajya Sabha, Modi will not be able to get rid of white elephants called PSUs & burecratic fat. Who says India is Congress Mukt ?


subhash chandra

May 30, 2016

This is the first time I did not like you article just because you wrote this: "A friend of mine got so fed up waiting to join that he ended up joining the Indian Navy." what do you mean by this? can you please apologize for this!!


Sunil Bhadauriya

May 30, 2016

Thanks Vivek. Well written. I like Vivek's way of explaining the terms he uses in his articles. It makes every article crystal clear. Moreover this is going to save my money from being invested in glamorous but badly run businesses.


Manmohan Reddy

May 30, 2016

hi vivek,

i definitely support your view

i had lot on discussion abt ecommerce business plan structure,they are running on a never ending track,there is no light on other end of the tunnel,since there is no end for the tunnel

these E commerce gains cannot make profits,since we people in india always look for better price
once they start marking up their margins,we look for some other source for cheaper price...






Dr. K. S. Ananda Kumard

May 30, 2016

I sincerely request you to forward an open letter to our Prime Minister on this subject. You may also ask the public to respond to your criticism. Your remarks are known to the subscribers only now. Hence, tbis request.

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