How long will the Indian government milk tax payers?

Mar 14, 2012

In this issue:
» 'Crorepati' policymakers in a bankrupt state!
» Will India's first UMPP become unviable?
» The way forward for Indian pharma
» 50 co-operative banks may shut down
» ...and more!

---------------------------- Raise your voice before this turns into yet another scam? ----------------------------

When millions don't even have food to eat, our government is thinking about bailing out multi-millionaire CEOs!

Is this government really made up of our representatives or is it on the payroll of those corporate giants?

We at Equitymaster feel strongly about this cause, and thus have started an Urgent Poll where you can read all about this and cast your vote to make your voice be heard!

We strongly recommend every Indian, who wants to make a change, to take a look at this.

Click Here to read more and cast your Vote... Before it's too late!


Life Insurance Corporation of India (LIC) is a financial institution that has familiarity and reach better than any other in the country. One fourth of Indians have insured their lives with it and many more will continue to rely on it for insurance and investment needs. For an entity of its size, with assets nearing Rs 14 trillion, LIC's influence on Indian financial markets is not surprising. Despite competition from several private sector players, the insurance behemoth has done well for itself. Both, in generating premiums as well as investment returns its track record is appreciable.

That LIC has traditionally been a major participant in most public issues of PSUs is well known. It apparently also funds nearly 25% of government's expenses. But what about digging deep into its pockets to salvage the reputation of its debt strapped owner? Isn't that something policy holders and tax payers should oppose? The government may argue that LIC's investments in PSUs have swelled in market value over the years. But as per an article in Reuters, forced investments have eroded the insurer's investment book by nearly 25% in recent years. Take the recent Oil and Natural Gas Corporation (ONGC) public issue for instance. Buying shares in an overpriced issue that had been skipped by other investors is nothing but milking tax payer money.

What is surprising is that the situation seems eerily familiar for millions of investors in India's first mutual fund, the US-64. The fund collapsed after the state-sponsored manager, the Unit Trust of India (UTI), took heavy losses on its investments. Especially, those in other state-owned units in the 1990s. Yet, the government seems well on its way to create more such US-64's by milking cash rich PSUs. LIC of course is not the only one. Coal India comes a close second and there are many others in the pipeline.

Meanwhile, the government's inclination towards bailing out loss making PSUs is also not new. It stepped in to bail out UTI in 2002. Now, Air India's bail out proposal is under consideration. If that goes through, others like Bharat Sanchar Nigam Limited (BSNL), Mahanagar Telephone Nigam Limited (MTNL) may also fit the bill. Hence unless tax payers raise their voice against this gross misuse of sovereign funds, such wealth destruction will prevail. If you feel the same way as we do, then raise your voice to Ban Bailouts. Remember, every vote counts!

 Chart of the day
While power generation companies falling behind their schedule in capacity creation is worrying, there is a bigger gap that needs to be plugged in India's most important infrastructure sector. Power transmission and distribution losses currently stand at almost 30% for the entire country. However, there are many states where the losses are much higher.

Data source: Planning Commission

Punjab was the very state that heralded the Green Revolution some decades ago. It went on to become one of the most prosperous states of the country. But today the state is embroiled in a severe economic crisis. Years of poor governance have left the state finances in a complete mess. It is now seeking a multi-billion dollar bailout from the central government.

But here is a very shocking paradox. The personal wealth of Punjab's policymakers has grown multifold over the last five years. The near bankrupt state's newly-elected member assembly has emerged as one of the richest club of "crorepatis" in the country. Meaning, they have a personal net worth of Rs 10 m or more. According to a recent report by the Association for Democratic Reforms, 101 of the state's 117 newly-elected legislators are "crorepatis". Back in 2007, just 77 policymakers were "crorepatis". What has made these politicians so filthy rich? They claim real estate, local industries and ancestral property to be the biggest reason for their phenomenal wealth. Another claim is that all this money is 100% uncorrupted. Well, we leave it up to you to decide how true that claim is.

Do you think the claim of Punjab's policymakers that their wealth creation has been through uncorrupt means is true? Let us know your comments or post them on our Facebook page / Google+ page.

Tata Power seems to have caught the state utilities in the wrong foot by asking for a tariff revision for its Mundra ultra mega power project (UMPP). The company had won this project after quoting a tariff which was lower than the other bidders. Now any change in the tariff would definitely be unfair to other bidders. In addition to that, any company is supposed to bear the risk of increase in the cost of operation if they have committed to do a project.

However, the tariff revision request from Tata Power is not totally unreasonable. The Mundra project is very dependent on the imported coal supplies from Indonesia. In the light of coal price hike by the Indonesian government, this project is not viable at the earlier bid tariff. And, challenging the decision taken by other country legally is definitely not an easy task. Hence, there is no easy choice left for the viability of the project. Either state utilities raise the tariff and keep India's first UMPP running. Else, sooner or later it would add to the woes of power generation companies. In turn, it may affect the banking and infrastructure sectors as well.

Product patents were introduced in India in 2005 and were set to change the pharma landscape in the country. But certain points in the law have been a bone of contention between multinationals and domestic players. One such has been the issue of compulsory licensing. Holders of patents (as of now MNCs such as Pfizer, Bayer, Novartis and the like) have an exclusive right to make and sell their products. But there are certain cases, where the government can allow a non patent holder to make and sell a patented product without the patent owner's consent. This is known as a compulsory licensing. Domestic players feel that granting compulsory licenses are necessary especially since life-saving drugs must be accessible to all. MNCs argue that these licenses should be granted only during a national emergency. Otherwise they undermine their R&D efforts in producing these drugs.

The recent case wherein the government allowed a compulsory license to Natco to produce Bayer's anti-cancer drug will set the tone for what is to follow. But this has a flip side as well. Given the loop holes in the patent law, MNCs will be wary of introducing innovative drugs in the country. Further, many domestic players have formed alliances with MNCs. This is not only for drug discovery but also for marketing products in India as well as overseas. This could then come under threat if the former decides to exploit the compulsory licensing clause. So far top players such as GSK Pharma and Pfizer have been introducing new products in India at a steady pace. Whether the judgement will alter the overall landscape remains to be seen.

The US federal open market committee (FOMC) meet ended on Tuesday with no big surprises. While concerns emanated with respect to inflation due to rising oil prices the Federal Reserve (Fed) deemed it as a temporary phenomenon. Quantitative Easing (QE3) too, as expected, was not given a mention. However, Fed stated that operation twist (selling short term bonds to finance the purchase of long term bonds) and near zero interest rate environment would continue till 2014. Thus, it appears that Fed is just delaying the inevitable. And it remains to be seen for how long it can.

The strict guidelines that the Reserve Bank of India (RBI) has with the banks has prevented Indian banks from going belly up. But the same guidelines are being blamed when it comes to cooperative banks. The guidelines are considered to be too strict and will be held responsible for nearly 50 of them about to close down. The RBI had set a 3 year deadline way back in 2008 for cooperative banks to achieve critical efficiency parameters in terms of capital adequacy and net worth. But nearly 50 of them are expected to be still lagging behind in this on the D-day. As a result, they are in a danger of being closed down.

Cooperative banks are considered to be the lifeline of the Indian banking system. They extend services and fill the gap where commercial banks are unable to reach. But in recent times they have been losing business to their commercial counterparts. As a result, many of the banks have been unable to come up to the RBI's standards. But the question is whether RBI will take a hard stance against them or show some leeway? The 50 banks in question together account for nearly 13.5% of the total deposits of the state and central cooperative banks. If these are shut down, the loss to the depositors would be huge. As a result, it is expected that the RBI may grant them an extension on a case by case basis.

Showing no signs of pullback, the Indian stock markets seem on their way to clock reasonable gains for the third successive session this week. The indices were amongst the few gainers in Asia in today's trade. At the time of writing, the BSE Sensex was trading 105 points above the dotted line. Those in Europe have opened a mixed bag.

 Today's Investing Mantra
"You ought to be able to explain why you're taking the job you're taking, why you're making the investment you're making, or whatever it may be. And if it can't stand applying pencil to paper, you'd better think it through some more. And if you can't write an intelligent answer to those questions, don't do it." - Warren Buffett

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    12 Responses to "How long will the Indian government milk tax payers?"


    Mar 14, 2012

    What a shame. There is hardly any billionaire in Punjab legislature. The standard now is minimum Rs. 1 billion to be accumulated and there is no better profession than politics.



    Mar 14, 2012

    It is a bad joke on the Indian public repeated ad nasum which is killing the nation.God save this country from UPA and all politicians.

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