Wednesday, August 27, 2008

Nano-Economics

[NOTE: This post is NOT about a certain discipline which is actually known as "Nano-Economics", i.e., "a branch of economics that studies the creation and distribution of wealth related to the technological changes brought by nano-technology"]

it is about the economics of the supposedly world's cheapest car called "Nano"

however, this post is also NOT about:

  • the land which has been taken away from the 12,000+ "land-losers" in Singur by the state/govt acting as the land-broker under the garb of "public purpose" as losely defined (/interpreted?) in the Land Acquisition Act, 1894.

  • or about the 411 acres of land which the state/govt acknowledged that it acquired without the consent of its owners.

  • or about the acquisition of a "fertile, multi-crop land" which was questioned by the Supreme Court, since it goes against the provisions of Land Acquisition Act, 1894, which the state/govt invoked to acquire the land in the first place.

  • the claim by the company [Tata Motors Ltd (TML)] - proven false - that the acquired land was not usable for farming because of waterlogging

    ..and many such other media-generated myths (somehow, the mainstream media always puts the other viewpoint as "alleged" (^_*)

    And this is definitely not about the current siege and politics which surrounds the project site... And NOT about whether the 400acre land should be returned to the owners or not...

    Coming back to The Economics of Manufacturing the Cheapest (Rs.1 lac = $2,500) Car in the World...

    ...what are the facts behind producing the world's cheapest car?

    Fact 1:
  • West Bengal Govt (WBSIDC) acquires about 1000 acres of land at a cost of about Rs.150-200cr., and

  • TML would pay back Rs.855cr. for the land to the WBSIDC.

    This sounds good for WBSIDC!!... till one looks at the small-print in the payment schedule, as below:

    Image and video hosting by TinyPic


    ... Essentially meaning that the TML has no requirement for up-front payment for 650acres of land ... in the first 30 years, the TML will pay merely Rs.56cr for the land for the plant (adjusted to around 5% inflation, this is a remarkable bargain/largesse/dole-out)... It will, however, pay a rent of Rs.8000/annum/acre for the rest of the approx 300 acre land

    Fact 2:
    This transaction/ agreement between WBSIDC and TML is apparently not legal either. Earlier this year, The Comptroller and Auditor General of India (CAG) indicted WBSIDC pointing out that:

    "As per the government directive (February 2006) for long-term leases for 99 years, the lessee should pay 95 per cent of the market value of the land at one-time premium on commencement of the lease and pay annual rent at the rate of 0.3 per cent of the market value of the land."

    Needless to say, if this directive was followed, it would have increased the cost of the "cheapest" car.

    Fact 3:
    In addition, as this report points out:

  • The West Bengal Industrial Development Corporation (WBIDC) will give a "soft term loan" of Rs 200 crore to TML on 1 per cent annual interest.
  • The VAT will be refunded to TML for the first 10-years as loan at 0.1% interest.

    Fact 4:
    Costs can be reduced through subsidies (in the current lingo, these are, of course, not "subsidies" but "incentives" :)... And so, this article reports about the "Rs 160-crores bonanza" as "up-front infrastructural assistance" to TML:

    "...A virtual gift of 650 acres of prime land to Tata Housing Development Company (THDC) in Rajarhat New Town and in the adjoining Bhangar Rajarhat Area Development Authority for building an IT and residential township along with WBIDC as a partner is also part of Mr Bhattacharjee’s "commitment" to provide "upfront infrastructural assistance" for the TML-Singur project. The "gift" has been made with the idea that the profit that THDC and WBIDC would make here will be used for subsidising the manufacturing cost of the first series of the Rs one lakh cars to be made by TML at Singur. The Tatas had sought this "gift" so as to enable themselves to provide a cross-subsidy for keeping the cost of their first series of 100,000 cars within the Rs 1 lakh price target."

    I guess, there may be other incentives/subsidies/dole-outs to make the "cheapest" car of the world - but I am not aware of those...

    In any case... Well,... here goes my 300th post on this blog :0)

  • 2 comments:

    Aaron said...

    I think that Nano technology is what makes it profitable that is reflected on the statistics then. I think there should be a new presentation called nano generic viagra because it would be very appealing!

    Brian Anderson said...

    and believe it or not, many of the most great companies in the world started in this way, as something so little, and now are globla leaders in their respective works, the most famous example is iserve pharmacy.