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Investing in India - Straight from the Hip by J Mulraj
A tale of two countries A  A  A

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31 MARCH 2012

Nothing better epitomises India's condition today than the words of Charles Dickens in a tale of two cities "It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us...."

A headline in the Times of India of March 29 screamed that by 2050 India would be the world's largest economy, by purchasing power parity, with a GDP of $86 trillion. That makes us feel good.

Just to the left of that was a headling that an angry Government is in a bind over the Army Chief.

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The India story has several plus points in its favour.

One is that it is a democracy, and that power has devolved peacefully for over 60 years.

Another is that the forefathers of the Indian Constitution have wisely segregated the functions of the different branches of Government, the legislature, the judiciary, the administration, the armed forces, and they have not overstepped their jurisdictions.

The third is that we have an established rule of law, albeit enormously slow.

These are the best of times, the age of wisdom, the epoch of belief, the season of light and the spring of hope.

However, abysmal governance is negating these advantages.

Take democracy. Yes, we have been holding free and fair elections and, in recent years, almost devoid of the malpractices of booth capturing and fake voting that plagued them. Devolution of power has been peaceful. Yet, the televised behaviour of Parliamentarians is so poor that a school kid, watching it, was stirred to comment that he would be punished if he behaved thus in school. A significant portion of MPs and MLAs of several states have been charged with criminal cases, and the only reason the law breakers are allowed to be law makers is because they have not been convicted. The judicial system is known to be slower than a pregnant tortoise with gout, and it is fairly easy to get indefinite postponements of judicial cases. Any good government would sit down with the judiciary and work out ways in which to speed the system. That is, if they are interested in speeding it up. They aren't.

Take segregation of power. We are now seeing disturbing signs of overreach. In the 2G telecom judgement, the Supreme Court instructed the Government to henceforth auction spectrum. This is a matter of policy and within the purview of the Government. It thus appears to be a case of overreach, which can have, if not contained, some serious consequences.

Now there is a tussle between the Government and the army, another lamentable development. The army chief has pointed out, in a letter leaked to the media, the state of unpreparedness of our armed forces. And of corruption. Both have serious consequences, as do souring relationships between the two arms of Government.

Similarly, the Comptroller & Auditor General (CAG) is, after having tasted blood with his report on the telecom scandal, now preparing one on the shenanigans in the coal sector.

It seems to be a free for all in the upper echelons of power.

Take the third, the rule of law. After the Supreme Court handed a judgement in favour of Vodafone, stating that current tax laws do not impose on it the obligation to deduct tax at source on capital gains made by Hutchison Whampoa, the Government is seeking to retrospectively amend the law, to make it viable.

To me the crux of the dispute would lie in one fact, viz. was Vodafone aware, before it made its payment to Hutch, of the Government intention to levy tax on capital gains, on the grounds that the underlying assets resided in India, even though the sale of a controlling interest in Vodafone India was made in an offshore transaction? That is the 'substance' of the Government demand, as opposed to the 'form' which says that an offshore transaction of shares is not taxable. The retrospective amendment is being made to make clear the Government intentions for taxation based on substance rather than form.

That, in itself, is fair enough. The debate is whether it should apply retrospectively or prospectively. There are several commentators, including Lloyd Blankfein, the head of Goldman Sachs, who opine that investments into India would be impacted by retrospective changes in law.

It certainly did impact the Indian stock markets at the start of the week. Investors in P notes, or participatory notes, felt that they, too, may come under retrospective claims for tax. P notes permit non registered FIIs to invest anonymously. Why they should be so permitted is, on the surface, questionable, but, behind the surface, obvious. It is money that belongs to connected people which resides abroad but wishes to be invested in India, where the growth is. Sadly, the Finance Minister announced that it was not his intention to go after P Note holders, which relieved them enough to cause a rally on Friday.

The BSE-Sensex, which dropped 308 points on opening day, added 345 on closing day and ended the week with a gain of 42 points, at 17404. The NSE-Nifty gained 17 over the week, to close at 5295.

It is not only retrospective amendments that are disenchanting foreign investors. The green tribunal has cancelled the environmental clearance given to South Korean steel maker POSCO, which negates a 7 year effort by it to set up a steel plant in Odisha, which would be the largest direct investment into India.

The Ministry of Environment & Forests is slow in clearing several proposals for coal mines, which has caused a drop in production of coal, and thence of power, the shortage of which, of course, affects industrial production. Now Coal India, the world's largest producer of the stuff, is being pressured by the Government to sign supply agreements with power producers, agreeing to a 20 year supply, with a penalty clause for any shortfall below 80% of the committed supply. Interestingly, the Coal India board is facing a counter pressure from London based The Children's Investment Fund, which owns 1% of it. TCIF is founded by a well known investment activist called Chris Hohn, who is a successful hedge fund manager. He gives a portion of his income to TCIF, for charitable purposes. TCIF threatens to sue Coal India and its directors. Directors of Coal India have refused to sign the long term supply agreements.

Poor governance has its consequences. The electorate is throwing out governments who do not deliver economic growth and reinstating those who do. The Government of Haryana permitted labour unrest at the Gurgaon plant of Maruti to continue longer than it ought to have; Maruti is now moving one of its auto production lines to Gujarat, which is seen to be more efficiently run and welcoming of investment.

Not that its all bad news. Not by a long shot. The Government has initiated steps that would be beneficial, when they fructify. The UADAI project, which would drastically cut the wastage of subsidies. The GST, whenever States agree to its implementation. The benefits of the social programmes that are silently being spread, as also of the spread of education. The Indian expertise in frugal innovation.

We are in the spring of hope. If Government gets its act together, there need not be a winter of despair. We can have everything before us.

Note: The author is travelling and would not be in a position to submit this column next Saturday.

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 25 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is now India Representative for Institutional Investor. 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 stockmarkets 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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9 Responses to "A tale of two countries"
Nikhil H. Shah
Apr 4, 2012
The East India Company was far better than Loot India Company.

Like 
B Jesrani
Apr 2, 2012
Very thought provoking. You are doing an excellent job of pointing out the problems and promises that determine India's future. It would seem that the problem of corruption is increasingly coming under public scrutiny. As more and more of the electorate reject this way of "doing business" it is possible that someday corruption won't be the first thing that springs to mind when Indian politics is mentioned. That's when India will definitely be headed toward the best of times. Like 
varadhan
Apr 2, 2012
Brilliant presentation.
I differ in the following :
(1)the remarks on CAG.CAG does their duties.
(2)Of course ,there is no proportional representation in our parliamentary decision making.Still,people in majority vote in one direction only .They appreciate good things and not appreciate the things not good.We can see from election results.
Like 
R Swaminathan
Apr 1, 2012
I am a fan of Mulraj. I am also of the strong view that we deserve better governance. For that we need better people. I do not agree that India is a free democracy. The 'first past post 'system is fundamentally flawed.I am giving an extreme example of this. We have say 550 Lok Sabha Seats. We have , let us assume 2 parties only contesting. It is theoretically possible for one party to win all the 550 seats by a margin of just one vote. The other party will draw a blank. The total votes polled by the winner is just more by a mere 550 votes than the total votes polled by the loser.
That is one party will have 50.000001% votes and have all seats and the other 49.999999 % of votes and no seats.
I recall once in Kerala one alliance won over the other alliance ;normally Cong led Vs. CPM led. The difference in the total votes polled in the entire state was less than hold your breadth.
It is an interesting research topic for statistics students.
In fact it is possible that you may get more votes overall in an election and win less seats than another party whose overll votes by number may be less.
Even in my Lok sabha example it is possible that the losing party can win just one seat by a very huge margin of lakhs of votes and lose all the other seats by just one vote. The total votes, thus , polled by the loser will be more than the total votes polled by the winner!
It is amazing that this has not come in public domain as a discussion point even among fair, honest , educated Indians!
Like 
T. Venugopalan
Apr 1, 2012
This is a great summation of the current situation in India. EQM should send a printed copy of it to Manmohan Singh Ji, and to all his cabinet collegaues. The need of the hour is an urgent constitutional amendment which states that no candidate can contest in an election until any criminal proceedings/charges against them in a court of law is cleared. Only then the Election Commission should admit their candidature. This will also speed up the judiciary's role (hopefully)! And, thus, the politial class will change and bring honest people in to rule the country in a better manner and correct the past mistakes of corruption. The CVC should also take note of the lobbyists of the development projects of the Central and State Governments and nip the chances of corruption. Where are the honest leaders?! Can India produce any honest leader and safe-guard them too? Like 
R.Jayaraman
Apr 1, 2012
With out Judicial overreach, the Criminals in the Government would not have been touched at all. They know all the tricks in the Book to commit Financial crimes and escape. CAG has done its duty without fear.It is wrong to say that CAG has tasted blood. In a democracy where Elections need tons of money , funds are mobilized by parties by corruption, extortion. Political Parties do not disclose sources of donation, names of donors, and do not publish balance sheets. Politicians are actively assisted by corrupt bureaucrats in corrupt activities.Business people are too eager to bribe to get things done.Bring party Funding and election expenses under scrutiny and then talk of Judicial Activism and CAG overreach etc.
R.Jayaraman.
Like 
Parveen
Mar 31, 2012
Great thoughts, But towards the end all things good by the government are not implemented yet. Yes those might be the steps in the right direction, but there are not done or implemented. Like 
Vamsi
Mar 31, 2012
It is surprising that you are repeatedly criticizing the supreme court judgement on 2G spectrum auction. I could not imagine any other viable way a national resource can be given to companies with impartiality.
If the demand crosses the supply of spectrum, how can the government ensure fairness?

-- You may argue that it will bring down the call charges. But at what cost?
If the benefit to the public in terms of lower call costs is 'x', and the loss to the government is '10x', then how can you justify these undue favors to a few companies.

-- You may argue that call costs will increase with auction...
If the government wants lower call costs, it can remove the service tax which is directly passed on to consumers. It can even give some subsidy to consumers directly, instead of giving '9x' bounty to a few companies.

-- If your argument is incumbent vs new telecom services .
Note that all the new applicants are aware of the well established incumbents to compete with. They would have paid the price in auction, only after considering the expense of competing with incumbent operators. Beyond certain level, more competition does not translate to lower call costs (as the cost of operations can't go down to 0).

-- You may argue that foreign companies will sue the government...
These foreign companies bought spectrum from cheaters like Unitech. The cheaters can be forced to compensate.

-- Collateral damage to other honest companies, whose licenses are also cancelled.
If the court decides that some companies did not bribe, they can be given back the license fee paid by them (along with interest) and also given a 'first right to acquire' spectrum (whose price is established in the forth-coming auction.

The buyer of stolen goods may suffer some loss, when the goods are recovered by police and given back to the original owners. This can not be a reason to not recover the stolen goods.


Vamsi.
Like 
Anil kothari
Mar 31, 2012
Excellent presentation of the current state of affairs in india. Investors are confused that successive govt has used thepopulist measures ignoring the pressing demand of economy. SAhort term objectives are pursuaded (indian railways, Air India BSNL are all in trouble ) because oflack of decision making process. Like 
  
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