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Investing in India - Straight from the Hip by J Mulraj
Yahan Sub Kuch Bikta Hai A  A  A

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11 MAY 2013


OLX, an online auction site, has the slogan 'Yahan Sub Kuch Bikta Hai' (anything can be sold here), which, given the corrupt state of our country today, could well be the slogan of the Government.

The latest, in a long list, of scams which are rocking Delhi are two. One the alleged payoff to the nephew of the Rail Minister, Bansal, to secure a promotion and two the alleged interference by the Law Minister, Ashwani Kumar, together with officials of the coal ministry and of the PMO (Prime Minister's office) in the investigation conducted, under the instruction of the Supreme Court, into allocation of coal mines.

A chagrined Supreme Court was moved to call CBI (Central Bureau of Interference, sorry Investigation) "a caged parrot". The CBI confirmed executive interference.

There are demands, as there have been earlier, to make CBI and the police independent of politicians. Such demands have been made earlier as well, including by the Supreme Court, but politicians of all parties are keen on retaining their hold over CBI, the police and other investigative agencies, for their own political ends. The Supreme Court is now baying for an autonomous CBI.

But Harish Khare, a former media advisor to Manmohan Singh, has cautioned against the hypocrisy of seeking a fully autonomous CBI in a brilliant must read editorial in the Hindu

One has only to think about J Edgar Hoover who headed the FBI in the United States, and used his powers to secretly spy on all politicians, including Presidents, Governors and Congressmen. Here is what a write up on him in Wikipedia has to say "Late in life and after his death Hoover became a controversial figure, as evidence of his secretive actions became known. His critics have accused him of exceeding the jurisdiction of the FBI. He used the FBI to harass political dissenters and activists, to amass secret files on political leaders, and to collect evidence using illegal methods. Hoover consequently amassed a great deal of power and was in a position to intimidate and threaten sitting Presidents."

This is the reason why we should be careful in what we wish for. Yes, a more independent CBI is most desirable, and one hopes this episode will help us get there. But it has to come with the sort of checks and balances that is the hallmark of our Constitution and of any working democracy.

Faced with the twin scandals of the Law Minister and the Railway Minister, the Congress did not have time to celebrate its victory in Karnataka State elections, where it did got a majority. It ought not to gloat over this. The vote was against the corruption riddled BJP in Karnataka, and the electorate is sending a clear message that what it wants from any Government is good governance, a clean administration, and sensible policies to stimulate economic growth and create jobs.

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However, what we see is a stinky corpuscle of an inept Government battling off one sordid scandal after another, combined with a myopic opposition who prevents Parliament from functioning and sensible policies to be introduced. The political leaders of almost all parties are senior only in age, not in maturity of wishing their country well.

In such a scenario what is it that is driving our stockmarket, and of the US as well?

Last week the BSE-Sensex gained 2.6% till Friday close to end the week at 20,083 and the NSE-Nifty at 6,095.

Basically markets are being driven by a deluge of global liquidity, with Central Banks creating and pumping in money, supposedly to stimulate economic activity, but most of which is going, instead, into various assets.

One had mentioned in last week's column, the insane thought, supported by no less that Mario Dragi, the head of the ECB, that banks in Europe should start charging interest rates for depositors to put money in them! The ECB has also arm twisted the Cypriot Government to force its banks to forfeit 40% of its large deposit holder's money.

The European economies are moribund; their experiment with a common currency has failed, although they don't admit it. The Euro has only succeeded in making the stronger economy of Germany, stronger, and, without the ability of being able to devalue, the peripheral countries grew weaker. The forced austerity in the peripheral countries is slowing their economic growth, adding to their unemployment (youth unemployment is an untenable 50% in Greece) and making the repayment of debt less likely. The Euro would inevitably collapse.

Japan, which has taken the baton of pump priming from the US, and plans to create and pump in $ 1 trillion, is beset with an aging population and a shrinking domestic market. It is seeking investment opportunities in large emerging markets and has the technology and the productive skills as well as the money. But domestically its currency, and its assets, are not an attractive proposition.

Hence this slosh of liquidity is seeking out opportunities to invest in countries like India, which still has a vibrant domestic market for goods and services, and an economy that, despite all the sins committed by its leaders, continues to grow at over 6%.

Foreign investors are, however, investing in the large cap. stocks, in order to be able to exit as the first whiff of trouble. They are also investing through the ETF route, rather than in individual stocks, for the same reason.

So one should expect huge volatility as this money exits at the slightest problem. There are not many bullish drivers; RBI has cautioned that it will not be able to reduce interest rates much further.

Globally, though, there is a bullish factor - technologies are providing solutions to the energy shortage. There is a brilliant, MUST READ, article by Charles Mann titled "What if we never run out of oil" in the Atlantic

Besides the technology of horizontal fracturing, which has made huge deposits of oil and gas trapped in shale rock to become commercially exploitable, new technologies are also making it possible for countries like Japan to exploit undersea reserves of methane hydrates. In shale oil/gas, the US, Australia, and China have very large deposits that would make them energy independent. Israel has oil shale, which is confusingly distinct from shale oil, but it could, probably, become energy self sufficient. Canada has humungous deposits of oil trapped in tar sands. Japan will use methane hydrates to achieve independence. This would reduce the effectiveness, and the clout, of the OPEC countries.

The article, however, warns of countries with such huge deposits running the risk of getting the Dutch disease. This happens when one sector of the economy, such as petroleum, sees a boom, which drives up salaries in that sector. The other sectors then have to match those salaries, which they can't afford to do, and the other sectors start declining.

With its long coastline, India should explore for deposits of methane hydrate. It should also look for, and have policies to encourage the search of, shale oil/gas deposits.

The tricky part here is the pricing mechanism for such shale or other gas. Unlike crude oil, which is transportable globally and freely tradeable, gas is not. To transport gas, countries have to lay pipelines, for overland transport, or have cryogenic tankers to first liquefy gas, transport them at sub zero temperature, and then to regassify it. Often the pricing of gas is linked to the price of crude oil, which is somewhat like saying 'I'll sell as much tea as you want, but linked to the price of coffee'.

The Rangarajan Committee has recommended a near doubling of existing gas prices to $8, but there is some debate over this. The price of $8 is largely based on the Japanese import price, which is the highest, and vastly higher than what it sells for in the US, or, for that matter, what the Government of India had, in a long term contract with Qatar, signed for. The pricing is tricky because it has to be attractive enough for companies to want to look for energy deposits, yet not too high as to sink the customers.

Interestingly, Saudi Arabia, which has the world's largest reserves of crude oil, may have to give up its quest for shale oil, because of lack of water!

Just as it requires deep thought in trying to fix a long term price for gas, so also legislators need deep thought over the proposed food security bill. This has several implications. It can become a huge and increasing burden on the Centre, just as the petro product subsidy, the fertiliser subsidy and others have become. Once introduced, no Government can easily reverse it, hence the thought must go into it now.

Secondly, as T N Ninan has brilliantly pointed out it can skew the nature of crop production in favour of cereals (which are subsidised) and against other crops like pulses, oilseeds, fruits and vegetables. Even today, the Government has overflowing godowns of wheat and rice procured at high prices, which, due to lack of storage facilities, are lying in open fields and are rotting. So we have excess production, which is wasted, even as people starve.

The market has moved mainly due to global liquidity and is likely to be very volatile. It's a game of who will be holding the baby when the music stops. Its better to invest in stocks of fundamentally good companies which are well run, and not to be bothered about market fluctuations.

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 "Yahan Sub Kuch Bikta Hai"
rnb
May 13, 2013
This is a brilliant piece.
Never in the history of India has a government put up everything for sale -- defence contracts, jobs and even mines. The only time it has moved to file a case is when a government is in the oppositioln.
Kudos to Jawahir-ji for this article.
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sn malhotra
May 12, 2013
A CBI modelled on the lines of the supreme court, with a bench of Investigators and a Chief Investigator with appointment and sacking rights with parliament itself probably is required. Like 
shiv
May 11, 2013
Nice article. keep up the good work.1st thing i open in mail.when i see it. Like 
Prof. N K Jain
May 11, 2013
I have two comments. If I recall the movie about Mr. Hoover, he was too long in the seat. This long tenure gave him immense powers to keep dossiers on political big wigs. In case of CBI we can try the organisation structure which does not have a single person as CEO. It may comprise a board of three members who may retire by rotation.
In energy sector a recent innovation about nuclear fusion reactor is being talked about which if become practical will eliminate the need for fossil fuel.
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MITHUN
May 11, 2013
Can you please give details of the yardstick you used to certify the HINDU article as being "brilliant".Perhaps you did not care to read the reader's comments which I strongly suggest you do.The author has only succeeded in showing how confused he is about what is really needed at this stage in this country.It is nothing but a planted article by a person who is still serving his old master loyally and a crude attempt at influencing public opinion in favour of his master.
As far as the FBI is concerned,it is not for nothing that their HQ was named after J.Edgar Hoover despite all the accusations that were made against him.
Surely the thought of an independent and powerful CBI is giving the creeps to our Alibabas and their 40 thieves.
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