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Investing in India - Straight from the Hip by J Mulraj
The messages sent by the electorate A  A  A

PRINTER FRIENDLY | ARCHIVES
10 MARCH 2012


Let's start with looking about the positives from last week's election results of 5 states. During the week there were Parliamentary elections in Iran, Presidential elections in Russia and state elections for five states in India. Only the last can be said to be free and fair. The first two were rigged. Indian democracy is mature, and transfer of power is peaceful and voluntary. That's a wonderful thing, especially when one sees the plight of people in countries like Syria, where residents of Hom are being butchered to death by their own leader.

What are the messages the electorate is sending out to the polity?

In the states of UP, Punjab, Goa and Manipur the electorate has given one party/alliance a clear majority. In the fifth, Uttarakhand, it is neck and neck with the Congress ahead of the BJP by one vote, but needing four more (four individuals are going to get quite wealthy). This suggests that the electorate is fed up with the logjam, and the corruption, that coalition politics entails.

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One doesn't know if, on an all India basis, voting in a single party again, would be possible, given India's diversity, but this is the preference of the electorate. And a message the political parties would do well to appreciate viz. that it is high time coalition partners do not behave as if they have a right to loot the country as a quid pro quo for supporting a minority government.

The other message being sent is that economic growth and good governance matter. The anti-incumbency factor does not work if the Government has performed and delivered economic growth. This message was sent when the incumbent Governments of Gujarat and later of Bihar were re-elected. This is an extremely important message and a sign of India's maturing democracy.

Ever since the British left India, our politicians have been perfecting their policy of divide and rule, creating divisions on the basis of caste, creed and religion. It is hoped that the polity will learn that these factors are subservient, in the minds of the electorate, to good governance, growth and jobs. Those who try to entice them with sops will not succeed.

Ruling parties in states as well as the centre are adept at adopting well meaning social welfare schemes, but more out of the political compulsion of seeking re-election than out of any social conscience. Most of these schemes, all of which have a laudable purpose, end up with leaky pipes and little of the intended benefits reach the deserving. The balance sheet of the centre, or the states, goes into huge fiscal deficit as a result of the leakages. The fiscal deficit pushes up interest rates and crowds out capital formation which is necessary for future growth.

So what are the options for UPA II?

The best case scenario is that it will learn from these messages and try to push the economic reforms agenda fast forward. Politically, this may mean forming an alliance with the SP and making Trinamool Congress less of a prickly thorn. A belated recognition that regional political parties deserve respect could, hopefully, result in the long delayed GST being approved. If so, it would be a very positive step for the economy and a boost to investor sentiment.

Or take the delay in mandating fuel efficiency norms, badly needed to cut oil dependency. There is no need for the UPA to succumb to pressure from SIAM (Society of Indian Automobile Manufacturers) and delay the introduction of mandatory fuel efficiency norms in vehicles. The US had done this after the first oil shock, and the industry has responded by improving fuel efficiency. For a nation that imports more than 70% of its crude oil, not introducing such norms is the kind of failure of governance that is so detested by the electorate. The Government can mandate fuel efficiency norms through an executive decision and does not need political support for it. There is no excuse for not doing this.

Also entirely within its purview are executive decisions of nominating heads of large institutions like LIC and UTI, which have been headless for months. The insurance regulator, IRDA, has expressed concerns over corporate governance in LIC for this reason. The commonly expressed concern is that the LIC is being used as a tool to bail out the Government, and has, under its instructions, bought stakes in public sector banks to recapitalise them, because the Government, with its fiscal deficit is unable to, and, more recently, bailed out the offer of 5% stake in Oil and Natural Gas Corporation Ltd. (ONGC), through auction, by subscribing to 4.4% of it at the last moment.

In fact, during the past 11 months, the LIC has sold some Rs 35,000 crores worth of shares in private sector companies, (including blue chips like ITC, Bharti Airtel and Mahindra & Mahindra Ltd. (M&M)), to raise money to invest in PSU banks and in ONGC.

UTI has similarly been headless and has paid the price, slipping from a dominant position in assets under management, to # 5. Two years ago it was # 2. Surely if the UPA II wanted to demonstrate its ability to govern well, it could, and should, quickly appoint heads to these two national institutions. They do not need political support for it.

Political support would be needed for the pending legislation on pensions, insurance, land acquisition, mining and other areas. The Congress has decided to introspect after the debacle in the state elections. If after such introspection they conclude that they would rely on their old strategy of trying to divide and rule, and to bribe voters through social welfare schemes which are paid for by the nation, not by the party, they would face a similar debacle in the general elections, due 2014. If, however, they decide that valour is the better part of discretion, and go ahead demonstrating their willingness to govern well, they may save the day.

One hopes, for the sake of the country, it would be the second.

How does all this matter to investors? It does.

India has a power generating capacity of 185 Gigawatts, the fifth largest in the world. Two thirds of this is thermal, requiring coal. Coal India is the largest producer of coal in the world, but entry of the private sector is restricted. Coal India needs to ramp up production but is hampered by environmental constraints, and, recently, by a rumoured Government pressure to buy back its own shares to enable it to reduce its fiscal deficit. As a result, power tariffs may rise 33%, in order to defray the 'high cost'.

But, a lot of the 'high cost' is due to the fact that power is stolen, with official connivance, and accounted for as 'transmission and distribution losses'. Good governance would call for this theft to be stanched. It can be done. Gujarat has managed; it now has uninterrupted power across the state and its state electricity board is profitable. The result? GDP growth in Gujarat is 11%, higher than in India. Agricultural growth is also higher, because water has been made available.

If the Central Government were to be equally harsh on power thieves, instead of being harsh on its citizens by pushing up power tariffs, India could also easily restore an 8% plus GDP growth rate.

One of the input costs is natural gas. The price for domestically produced natural gas has been fixed by the Government at $ 4.2/unit. Reliance, and its partner BP, which owns 30% of the KG block, feel this price is unremunerative and seek a higher price for making the investment to push up production of KG basin gas, which has fallen. Imported gas costs nearly thrice the amount. It would be a matter of common sense and good governance to sit down and decide on a remunerative price for domestic producers, in which the Government, too, has a stake, than to pay three times the amount for importing the stuff.

Whether or not Government acts to bring in fuel efficiency, some manufacturers are doing so. Tata Motors (Telco) introduced the concept car Tata Megapixel, which, using a combination of fuels, including electricity, would give an efficiency of 100 km/litre. It had earlier brought out the world's cheapest car, the Nano, and is going to bring out a car, using technology from its French inventor partner, Guy Negre, which would run on compressed air! The US is pushing for cars to be run on natural gas. We continue to subsidise diesel. This is not the heeding the message of the electorate.

Productivity and innovation are what will drive Indian industry forward. As in the Tata Nano, and now the Tata Megapixel. As in the world's cheapest tablet computer from Data Wind. As in the Chotukool, the Rs 3500 refrigerator brought out by Godrej. An Israeli company, Better Place, is innovating with an idea to promote electric vehicles, and will be operational next month. It will offer the electric vehicle without a battery, for which the buyer has to pay an annual charge, depending on usage, much like a mobile phone plan. The main problem with electric vehicles is that the batteries take too long to recharge, and Better Place has a better plan to address that. The car owner has to drive into one of several battery switching stations it will set up and, within five minutes, the spent battery would be replaced with a fully charged one.

Governments ought to be promoting such innovative ideas, instead of putting roadblocks to them.

In other corporate news, Tata Communication (the erstwhile Government company, VSNL) plans to raise $ 2 b. to help finance a takeover of Cable & Wireless Worldwide (CWW). The Government has yet to clear sale of surplus land of the erstwhile VSNL, a sale in which the Tatas are not beneficiaries. What, other than poor governance, could be the reason for the delay?

Last week the market slid in the three days before the Holi festival, then made a colourful comeback. The BSE-Sensex ended the week at 17,503, down 133. The NSE-Nifty ended at 5333, down 16.

The Reserve Bank of India (RBI) has cut CRR by a whopping 75 basis point, to impart liquidity, which would propel stockmarkets. It would cut interest rates only after a clearer road map emerges on the fiscal deficit front. This could be presented in the Budget. However, the fiscal deficit picture so presented may be dressed up by cutting plan expenditure (bad for future GDP growth) and by mis-estimation of revenues and expenditures.

But what investors need to watch out for are signs that the UPA Government has heeded the messages of the electorate. Is it progressing on economic reforms, after re-aligning political forces? Is it serious about improving automobile efficiency? Is it serious about governing its own institutions? Or is it, in the Union Budget, increasing its expenditure with nary a thought for tomorrow.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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5 Responses to "The messages sent by the electorate"
Paramjit singh
Mar 18, 2012
A good analysis of the upa goverment.it is time that the govt.take some concreate step and brings reform in the economy.it should not be blackmailed by the TMC as in the case of Railways Buget.it must keep country interest fist instead of his govt.it is time to shake hand with SP and push reform further to save the indian economy.if reform are implemented than FII money will flow like water and ultimatey indian govt.and the indian rupee will be appreciated. Like 
Baljit Kumar Mehta
Mar 14, 2012
A very objective and critical analysis which brings out the failures of governance and also suggests practical measures. The need to cut the infructuous expentiture by the govt needs to be further emphasised. This will larger portion of the revenue for development and uplift of the poor and underprivileged population. Like 
Tikam Patni
Mar 10, 2012
U must me kidding. Growth policies benefits the country, and populist policies benefits the High Command. The choice before UPA II is obvious. Make hay while the sun shines. Like 
P. K. Saha
Mar 10, 2012
I would request everyone to visit commuintycentre.in wherein some good points have been put up towards achieving a realistic, mature & modern democracy and discuss in your forum. Like 
yesyespl
Mar 10, 2012
RBI is mismanaging the inflation and economy.This is creating a bubble, of unmanageable proportions. The RBI is simply releasing more money to keep the finances running at the behest of the Central Government. The day is not far away at this rate one litre bottle of water will cost Rs 25/- and milk Rs 50 per Kg in two or three years, at this rate. Why not tighten the austerity measures cut out wasteful expenditure for another year. Check the Government machinery expenses which are 60%. At this rate despite depreciating US $ the Rupee will further depreciate to Rs 100 within next few years. There should be some law to hold the RBI responsible for such bunglings and mismanagement of the affairs of the State.
Please do not add more water in the milk.
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