Investing in India - Straight from the Hip by J Mulraj
Financial inclusion, Bimal Jalan style A  A  A

11 JUNE 2011

The Bimal Jalan committee has made recommendations, regarding to the development of capital markets, that are, to my mind, illogical and retrograde. (Disclosure: this columnist is India representative for Institutional Investor, and MCX-SX was a sponsor of its investor conference in 2010). Less than 1 per cent of India's population invests in equity and the amount invested is probably 4% of household savings. If we are to have genuine financial inclusion of India's population in its economic growth, it must surely come from expanding both the base of investors investing in equity as well as a substantial increase in the % of household income that goes into it.

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Bank deposits, where about 80% of the household savings go, do not give a return which is higher than the rate of inflation. The money invested there is thus like a cancer, with inflation eating away into its purchasing power slowly and relentlessly.

The mutual fund industry has also not been marketed well in India; consider that in the USA the mutual fund industry controls assets greater than its banking industry! Recently, SEBI has imposed a ban on payment of upfront brokerage to distributors of mutual funds, which has led to a shrinkage of mutual fund assets, instead of growth!

Come to stock exchanges. Action here is concentrated in a handful of cities, mainly Mumbai, and in a handful of stocks. Existing stock exchanges or mutual funds or insurance companies have made little effort to spread the message that investing in equity (directly or through a mutual fund) is advisable and a means of achieving the desired goal of financial inclusion.

The Jalan committee has recommended that no promoter of a new stock exchange be allowed to hold more than 5%, from the start. He should gather 19 other investors but they must not be 'acting in concert'. The Exchange must be a 'not for profit' organisation and earn only a modest return. The report discourages a listing of the Exchange, on the ground that it would then become a 'for profit' organisation and would thus have a conflict with its role as a first line of defence for its regulatory obligations.

These conditions are such that it assures no competition will emerge for existing exchanges, of which NSE is a market leader. And hence it ensures there won't be financial inclusion. The limit of 5% is also arbitrary and inconsistent, when compared to other asset classes. Banks, insurance companies and commodity exchanges are equally institutions in which there is large public interest. Yet RBI, the bank regulator, allows a promoter to hold 40% in a bank; IRDA, the insurance regulator, has placed a limit of 26% and so has FMC, the commodity regulator. The other 3 regulators permit 100% ownership initially, and give a certain number of years for bringing it down. Why would anyone promote an exchange, take the risk, manage the business, if he has only a 5% interest in it, equal to that of other passive investors?

The Jalan Committee has arrived at erroneous conclusions because of its single focus point of 'conflict of interest' between a commercial and a regulatory function. This single focus has detracted its attention from taking a holistic view of the benefits greater competition can bring in exchanges. Primarily by spreading the equity cult beyond the 1% of population that currently invests in it. The fact that it is only 1% despite BSE being over 120 years old and NSE being around for decades, is indicative of their inability to widen the base of investors and thereby promote financial inclusion.

'Conflict of interest' exist in daily life; the important point is how they are dealt with. Take banks. Most of the household financial savings go into banks, so we should be more concerned. The RBI is a vigilant regulator. Yet we do have banks (remember GTB?) which go under and have to be rescued. We also have banks, like PNB, with a solid and consistent financial performance.

Or take IT companies. One can argue there is a lot of public interest. More than 100,000 families depend, e.g. on TCS, which has over 100,000 employees. In this sector, too, we have reputed companies like TCS, Infosys and Wipro but also the oddball like Satyam. Do we impede new IT entrepreneurs, or banks, by saying they cannot hold more than 5% and may not list?

The Finance Minister has expressed concern at being able to meet revenue targets, because the growth in corporate profits is expected to be moderate, leading to lower tax collections, and because the stockmarket is not conducive to making more IPOs of PSUs and meeting its disinvestment target. Perhaps if there were more investors who were more willing to invest in equities, both these concerns may have been allayed.

Several sectors have been affected by rising interest rates, which are being raised to try and tame inflation. The auto sector is one such; auto sales in May were up 7%, compared to over 30% in the prior two months, thanks also to the hike in petrol prices, raised in a catch up attempt after the petro pricing subsidy model ran to the inevitable unsustainable mode. A six day strike in Maruti's Haryana plant, now declared illegal after it threatened to spread to other auto companies, will depress figures for June as well.

Export growth was a surprisingly health 54%, yet, because imports grew too, thanks to higher crude oil prices, the trade deficit of $15b. for May is a source of concern. It is ironical that we encourage imports, by underpricing petrol/diesel, and discourage exports, by the IT Departments claims that onsite IT work is export of manpower (taxable) and not of IT (tax exempt), and then worry about why the trade deficit is widening!

The IT Department has, as per Yahoo, stated that it is useless to attach the assets of Hasan Ali, as the assets are nowhere near enough to meet the tax liability slapped on him. Either the claim by the Department was eerroneous or its assessment of his ability to meet it is. Both can't be true.

The inflation that is of greatest concern is food inflation. A June 5 article in the New York Times 'Food Supply Under Strain' explains why. We have a massive food crisis on our hands, because growth in population, combined with higher food intake as emerging economies grow and people eat better, has overtaken growth in food productivity. Governments are not putting enough money to fund research into improving crop productivity and coming out with improved seed varieties. So food inflation will continue, which means interest rates would not be coming down in a hurry.

Crude oil prices are also unlikely to come down; we have probably already reached 'peak oil' or are near it. Several steps need to be taken; India has just recently mandated fuel efficiency norms for cars, something that was done decades ago in the US and which this column has been long advocating as a sensible step. India also needs to immediately place a ban on gas guzzlers and SUVs which do not meet efficiency norms. At the least, a punitive duty should be put on them. Efficient public transport systems must be built without delay or controversy.

China has moved far more sensibly in this respect, and has designed, with Volkswagon, a single seater car that costs only $ 600 and gives 258 miles per gallon!. The current automobile was designed and built at a time when oil was cheap and plentiful and is thus a wasteful use of the energy contained in the oil. 80% of the energy in the oil is used to move the vehicle and 1% is used to move the passengers, in proportion to their respective weights. (see www.natcap.org). It, therefore, makes eminent sense to design cars where the weight of passenger/weight of car is higher. That is the premise behind the Tata Nano.

Instead of planning for food security, instead of planning for a world in which fossil fuels are disappearing, instead of planning for how more of our citizens can benefit from corporate growth, we waste our time in chasing away salwar-khameez clad gurus, in scoring brownie points debating over the use of thieves and rogues to describe politicians, and in inappropriately dancing at the Samadhi of Mahatma Gandhi. When will our political leaders behave like mature adults and fulfil the responsibilities of nation building imposed on, and accepted by, them?

Looking to the utter lack of governance from all political parties, one cannot be over optimistic about markets, and could expect the sideways movement, with a downward drift, to continue. Last week the BSE-Sensex fell 107 to close at 18268 and the NSE-Nifty fell 30, to end at 5485. If India is to grow, as its people are capable of doing, and if a larger part of our population is to share the benefits of that growth, it is high time that political leaders also grow, and shoulder the responsibilities of their office.

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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18 Responses to "Financial inclusion, Bimal Jalan style"
Jun 12, 2011
You have hit the nail on the head. Our politicians are not inteerested in serving our country. They are self servers who assume office only to line their pockets and suck the life out of our ordinary people with irrationaland poorly thought out rules and regulations. Why would they care for the nation when they have banked their loot in overseas banks and their children avail of better education in overseas countries. Like 
Jun 12, 2011
Sir, You have made all the right comments which go to show the social responsibility and other nagging thoughts coming in the form of a beautiful write up. What is of concern is, the right people who are in a position to take decisions should read these essays and act accordingly. There is democracy only in electing the people's representatives and once they are elected it is their own decision without consideration for others' opinions that sees the light of day. I am afraid the vote bank politics does not suit our country! See China where project implementation is perfect and the communist government is not really wanting in administration. Yielding ground to a lot of discussions in our nation we are arguing a lot while the final decision is taken by a person who is not too knowledgeable but the ignorant and mediocre politicians believe that person to be their saviour. God save the country! Like 
V S Gurumani
Jun 11, 2011
There is a simple reason why committees like the Jalan Committee (or the Malegam Committee on MFIs) make such crazy recommendations. It is like what you see each night on the TV media: the same set of "experts" hog all the time and state the same stuff on different channels. In these committees, the same set of people oscillate from one to the other. I believe there is n "I support you, you support me" syndrome in operation here. All these so called experts are steeped in thinking patterns which are at least a decade, if not two decades old. They make nice, intelligent statements when you talk to them one on one. I remember one lunch where I was seated next to one of these worthies and he spoke a lot of sense on how development effort in any form should be supported and NGOs encouraged to attract more foreign donations, by relaxing the FCRA (I work for an NGO). But put them in a group and each odd ball will have his or her own pet view come through in the final recommendations. And, what can people who have led a cloistered life in which they did not have to pay for anything understand about the travails, tribulations and aspirations of the emerging India? It is indeed, tragic and I for one am glad that in a funny way, the Anna Hazare type movements are creating a groundswell of debate on the essentials of good governance. Like 
Jun 11, 2011
Mulraj-ji ! Aap Mula(depth) may jayenge to aapke manme prashna uthega ki "Topi ke niche kya hai ?" Kaala Dhan (sampatti)! The 1.47 trillion US Dollars lying in the Swiss banks has been the "karamat" of "Gandhi Topi" which has been in power in "Mera Bharat Mahan" for 55 out of 64 years of post-independence era ! During the first 25 years , i.e. 1950 thru 1975 , the "Topi" and Nehru-Gandhi family Raj had almost 400+ seats out of the total 424 seats in the parliament ! With such "brute" majority and "zero" opposition to the "Raj" it could have implemented infra-structure development, vigorous "family planning" and imprroved "Roti-Kapada-Makan" for the "Aam ( sorry , NOT Mango !) Aadmi" ! Our hero of the nation for 16 years "Jawahar" systematically killed the "bania" spirit of competition existing among our "Vaishya" traders and instead made them compete with each other in for funding "Topi-ke-Niche" to get Licences from the "Topiwallah" party ! In the last 64 post-independence years the Shah's,Mehta's,Birla's,Bhatias Jijodia's, Kanodia's , Chettiars, Kirloskar's, Tata's et al improved upon their skills to appease the "Permit-License" Raj and today ,except TATA, most others have no skills to stand international "Free Market" competition to create their "brand image" for capturing the US & European markets with quality manufactured products ! They will need next 25 years to unwind their earlier "skills" of "Topi-ke-Niche" before they could stand in those "Free" markets ! Today we have the reality where in Mumbai city's Dalal Street the SENSEX is going up & down whereas in Goregaon Aarey Milk colony the original residents of Mumbai do not have proper two square meals a day for days ! Our record breaking "longest W.C. in the world" is the Indian Railway's rail line from Kashmir to Kanya Kumari for the morning chore of an avaerage Indian citizen ! That is the ground reality and here we discuss about Bank-Interest vs Mutual Fund vs Inflation ! Those concepts do add value to the wealth creation much of which goes into the "parallel economy" within the country and eventually outside the country to the Swiss banks ! Jai Hind ! Call the British back to run this "sick nation" for the next 50 years ! Like 
rajiv jain
Jun 11, 2011
its true in all terms Like 
J.Divakar Jain
Jun 11, 2011
The article is utterly insensitive of the feelings of the billion strong populace of India. Is Mr.Mulkaraj from different planet as not to know the culture and social fabric of India. While calling the Sadhus and sanyasis as thugs and thieves, he has shown his absolute lack of knowledge of the society. Just knowing about the money and the market does not place him in any pedestal so that he could call people of other vocations and culture in such demeaning language. He better widen his vision and learn to respect people of other culture and class. Like 
Jun 11, 2011
Regulatory role must be distictly different from that of a player. Avioding conflict of interest is very fundamental to providing level playing field for companies to put their stocks on an exchange. Independent reguators generate confidence among the investors. So I do not see any problem in Jalan's theory of 'Conflict of Interest'. Like 
Jayanta Das
Jun 11, 2011
While you are cribbing about 1% public participation in the equity, you should go into the reason for that. I believe not even half of them make money in the stock exchange, so why they will participate to be looted again and again, atleast they get something secured in the public sector banks. Like 
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