Isn't this wealth destruction of another kind?

Apr 11, 2012

In this issue:
» Can 'land banks' solve India's agri problems?
» Lavasa Corp goes the Kingfisher way
» Faber advocates gold over stocks
» Does US need QE3 after the failure of QE2?
» ...and more!

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Every few months the chief auditor of government accounts (CAG) has been unraveling cases of preposterous wealth destruction. Over the months, the 2G telecom scam, the mining scam and now the coal block scam have conveyed one message clearly. That vested interest has destroyed sovereign wealth. In some cases the corrupt ministers benefited. In others private companies raked in profits with cheaply acquired government assets. However, that public wealth was destroyed stands uncontested.

In recent days, the government's actions against profitable PSUs have redefined wealth destruction altogether! True that the threat from rising oil prices has never impacted the Indian economy as sharply as it is now. Right from currency deprecation to inflation to high interest rates to retarded GDP growth to fiscal deficit. Every economic variable has been adversely hit. Hence the government has turned to the few cash cows in its stable to bail itself out from distress. The profitable or cash rich public sector companies were initially supposed to raise funds for the government through public offerings. However, volatile markets led to the debacle of the disinvestment plans. This forced the government to milk the PSU assets indirectly. Getting Coal India to pay for imported coal or Indraprastha Gas to supply fuel at rock bottom rates are part of the tactics.

No doubt better supplies of coal and natural gas can sort out India's energy needs to a great extent. That can also ease inflation and boost growth rates. But draining PSUs of their cash and other resources is certainly not the ideal mode to achieve this goal. Such random policies also show the lacuna in policy making. The government has realized the importance of investments in discovery of energy resources very late. It is a pity that more wealth destruction in profitable PSUs will cover the government's ineptitude.

Do you think that the government is resorting to wealth destruction in PSUs to cover its ineptitude in policymaking? Share your comments with us or post your views on Facebook page / Google+ page.

 Chart of the day
Before the crisis on oil prices magnified, the cause for incessant inflation was attributed to rise in food prices. However, data from Economist shows that Indians are amongst the lowest spenders on food and grocery items as compared not just developed but also developing economies. In fact Indians spent less than US$ 1 per day on food items in 2011.

Data source: Economist

In its most basic form, what do you think is the function of a bank? Well, we believe its job is to take capital from those who do not need the same at the moment and give it to those who are in need of it. An arrangement of this kind has worked wonderfully well since time immemorial, isn't it? So, how about using the same approach in the area of agricultural land? In other words, taking uncultivated land from people who neither want to lease nor sell it but are willing to give it to those who are in need of it. Well, an idea of exactly the same nature has been put before India's planning commission and is believed to be under its active consideration. The ET reports that the proposal will kill two major issues associated with India's agriculture at one go. On the supply side, it would address the concerns of landowners and thus bring under cultivation large tracts of underused or fallow land. And on the demand side, it would provide the needy sections of society an access to land, which they have not been able to compete for in the open land market. The implementation though is not as easy as it seems. Owners of land are likely to put up their land in the land bank only if there are strong land records and guarantee that land grabbing will not happen. Thus, it could be a long time before any such proposal sees the light of the day. India does not have such innovative systems though to realise its full potential.

First it was an airline in the sky, and now it is a realty project in the air that is all set to trouble banks. The problems at Kingfisher Airlines forced lenders to write off their loans to the carrier as non-performing assets. Now, the dream project Lavasa, championed by Hindustan Construction Company (HCC) has met with a similar fate. Lavasa Corp has failed to service its loans, so some banks have treated it as a non-performing asset for the fourth quarter. Failure to get environmental clearances and project delays severely dented its finances. The parent company is also in mucky waters. HCC has already been referred to the corporate debt restructuring forum to lessen its debt burden reschedule repayments. Banks have around Rs 80 bn exposure to the company. In light of a GDP slowdown in FY12, maintaining asset quality seems to have been the biggest challenge for banks, more so the public sector ones. We only hope that the situation gets better next year.

At a time when banks are struggling to keep their asset quality in order, restructuring the books of failing corporations could end up being disastrous. If you feel the same way as we do, then raise your voice to Ban Bailouts. Remember, every vote counts!

Whenever we want to enrich our macro-view of the global economy, Marc Faber is one of the bright minds who receives our full attention. So what is his opinion on investing now? He feels that the US stock markets are in an overbought territory. On the other hand, he is still pretty bullish on gold from a long term perspective. As per him, gold is not in a bear market, but in a correction phase. Instead of trying to time when the correction will end, he urges individual investors to gradually accumulate gold. Several factors such as negative real interest rates, chances of detrimental monetary policies in the US and Europe, as well as the political worries in the Middle East will keep the prospects of gold shining. Meanwhile the fundamentals of equities in Indian stock markets continue to be very different from that in the US.

It is all very well for to hope that India's GDP grows at 9% plus on a consistent basis. But it does not make sense if the benefits of this growth are not felt by all sections of population. And that is one big problem that Asian countries including India and China face. Developing Asia's rapid growth in recent years has given rise to a widening rich-poor divide. The Asian Development Bank has stated that if inequality in the Asian region had remained stable over the past two decades, growth over the years would have lifted 240 m people more out of poverty. This would be the equivalent of 6.5% of developing Asia's population in 2010. But instead, inequality widened even as Asia's economic growth took off. The share of income going to the richest households has increased in the past decade. Close to 20% of total income has now been cornered by the wealthiest 5% in most countries in the region.

Income inequality brings with it considerable perils. For one it can be a harbinger of social unrest of the kind we have been witnessing in the Arab world. It also leads to more pressure on the government to kowtow to populist polices many of which tend to be ineffective. All these then serve to malign growth itself. That is why Asian governments need to focus more on productive areas. These include education, healthcare, infrastructure and creation of quality jobs if growth has to be all encompassing. However, with Indian government finances in a state of disarray we wonder when the government will get its act together in this regard.

Just a few days ago, the US had released a report that showed the number of jobs created in the country was slowing down. This has raised an important question. Is the recovery in US sustainable? Or, does it need another round of quantitative easing (QE)? The question will most likely be answered today when the Fed Chairman, Mr Bernanke makes his speech at a Federal Reserve Bank Conference. Some experts and economists feel that the US recovery is still sluggish and this warrants the need for another round of QE. But some feel that US has already stretched its balance sheet to the limits. Printing more money would only find its way into the riskier equity markets and not really help the overall economic recovery. Going by the fact that most of the money printed in QE-II found its way into emerging markets rather than the US; we doubt that QE-III would do any good for US. They need a more sustainable long term program to boost their economy. Short term quick fixes will only get them thus far.

Taking cues from their peers across Asia, the indices in Indian stock markets opened below the dotted line and languished in the negative territory for most of the session today. Commodity stocks led by Jindal Steel, ACC and Ambuja Cements led the pack of losers. At the time of writing, the BSE Sensex was trading 46 points below the dotted line. The indices in most other Asian markets closed lower in today's trade. Those in Europe have also opened lower.

 Investing mantra
"As long as we can make an annual 15 percent return on equity, I don't worry about one quarter's results." - Warren Buffett

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    10 Responses to "Isn't this wealth destruction of another kind?"


    Apr 12, 2012

    The current situation has become so murky that every one is anxious to maintain or increase their group`s strength by any mean. Hence they hatch plans each morning to keep the strength intact.Scruples get a back seat.We know already that profession(?) of MPism pays most hefty than any other in India.They try best to cling to their for 5 yrs without rendering any service to the country.CM of west bengal has been plundering by asking for additional funds for development to spend imams by paying reatainership @Rs.2500/- per month.Is it an element of state`s development? Centre cautiously agrees to all her demands without any checks.Should not CAG poke its nose in such sanctions! These are from tax payers`money.West Bengal is facing fund crises left behind by former Left Front govt.But present govt has started spending in painting local parks`railings doubly and streets`lighting needlessly out of MLA`s local area development funds.Are these not wastages?CM begs to waste. But centre after some initial murmurs sanction her demands as UPA 2 are scared not to loose the strength of her Parliament.So no body cares the country but only for counting stay UPA 2.I shudder at the thought of what kind of tsunami has been awaiting India.Only Occupy Wall Street perhaps may thwart to some extent.



    Apr 12, 2012

    The sad thing about Indian democracy is that there is not an iota of accountability among our elected representatives -- otherwise with the combined intelligence and financial acumen of the IAS guys ,many great things could have been accomplished-- You think they would not have deliberated on the options availbale ? So long as our elected folk think only about the next elections and amassing wealth when they are in power, things won't change. Maybe an annual performance review of each ministry/offical in public will help.regds


    laxmikant saboo

    Apr 12, 2012

    what was this regulator doing for all the four years.was they sleeping on the job.why shouldn,t we kick them out.what will happen to the tax & divdend the company has paid.on monday gujarat gas has increased prices of gas by 10-15% what this regulators are doing



    Apr 11, 2012

    While the objective of operationalising the power plants is important from the standpoint of generating power and thereby growing economy, the support from cash rish corporatons should be at market rates so that PSU do not subsise other companies. For example, averaging out the coal price based on Cal value of domestic+imported coal . In a free economy pricing should be a factor of demand and supply . When individuals pay for oil price at market rates why not cash rich corporations pay market price. The FSA however will improve productivity at CIL and make up and improve profitability further.



    Apr 11, 2012

    Does the Government has any other options to prolong its survival ? All Measures of last resort will be tried, till we go the Greek Way. The coalition rules must be changed. No political party has patriotic leaders they are all vote earners.



    Apr 11, 2012

    now on the one side all psu s are acting detrimental to the compnys interest and are platying to the tunes of politicians we small investors since disorganised the govt and its bureacrats taking advantage of
    all investors should refrain from subscribing to public issues of psu boycott them
    even sebi which is formed for the so called protection and education of small investor are having alrge sums of mony of 2000 crores why a regulator should have such ahuge reserves of money it is a simple loot from smll investors and sebi babus are buying property worth 280 crores to live apalatial life at whose cost infact cag has already pointed to give back or give it to central funds sebi is indirectly supporting all shady promoters to loot from the public otherwise why a share listed on first day should come down to rs 12 when its issue price is rs 150 sebi does not take any responsiblity and collect fees and watching the funand lot of so called consent orders are given which are appear to be be very shady . ithink a day will come when investors cant comment on sebi like supreme court /high court judges take for example sending of balcnce sheet of companies it is mandatory on the part of the company to send hard copy .and it goes on asking by mail to inform thwem wheter i need hard copy and if i need i should ask .why the hell i should go on asking each company after all with my money and banks money co has been formed and writing expenses of all nature and a company like nestle also does not send inspite of asking specifically the balance sheet hard copy before agm .the company gives one telephone number which no one picks up and it gives two tel no of registrar who informs that i should contact the company .and i had to speak to some sebi offiial to get a balance shhet which i am entitled to and that too after agm is over se the plight of investor.
    in another case like kilburn chemicals numeric power the company has sold enire business with fixed assets for rs 900 crores and 100 crores and the co is yet to give anything to minority shreholders .sebi should make it mandatory that 30 to 40 percent should be given back to minority shareholders if more than 90percent of assets are sold .like this there are wholelot of isues
    which can be fought in court and we can win .where is the time for small share holders a subramnia swamy or prsant bhushan should come to our rescue .so iniffect we have all lost interst in the capital mkt since it is always one sided barring very few companies which to find out is real art and very very few can only find



    Apr 11, 2012

    I have not seen a more inept and corrupt Government than what we have now.Central Government and State
    governments compete with each other in proving which is most destructive and corrupt. As long as Political parties raise funds for electioneering, as long as large discretionary powers are
    enjoyed by politicians, as long as no Balance Sheets are published by political parties and as long as donors names are held confidential, corrupt practices will continue.

    Our country was looted by Md Gazni 19 times and later the invading forces decided to stay back rule and plunder. This was put an end to by colonial Powers which came for trading, slowly and gradually through unfair and corrupt practices established empires.They exploited the colonies for a couple of hundred years. Is not this wonderful? A limited Liability comPany gaining land masses of immense wealth and passing them on to the Crown which became crown colonies?

    Similar things could happen. India may be sold/ sovereign wealth plundered without any body realising. Politicians are actively assisted by Corrupt Beurocrats and businessmen. Bharatmata ki jai.

    Like (1)

    Ragini Ghanekar

    Apr 11, 2012

    I fully agree with your views. This government lacks any good ideas to steer country towards prosperity. It is using hackneyed old ideas like gold import duty. It is a throw back to the days before liberalization. It can not think out of the box and find imaginative ways to find solution to country's problems which is the need of the time to build up on last twenty years economic progress. It should take up some ideas from China in this matter though in democracy things may not be easy.

    Like (1)

    Suresh Kumar

    Apr 11, 2012

    Its crystal clear that the government is unable to come out with any significant policy formulation - be it on defence, foreign policy, natural resource distribution, labour, social welfare, FDI, taxation or even the basic ones like education, health or infrastructure. In order to compensate for this, the government can announce doles like free power, unemployment/ old age allowance or free lunch of any kind. We have the highest ratio between the income of our MPs and MLAs and the average citizen and in return we get the most slow and bureaucratic system. This results in ineptitude and corruption. What better way to please the public than announcing doles to inefficient PSUs like SEBs which have highest losses in Transmission and Distribution? Competition can help provided the government stays out of the loot mode and behave like true shareholder.

    Like (1)


    Apr 11, 2012

    Its not ineptitude, but rather a short-sighted shrewdness in wanting to please the public with a view to seek popularity and vote-catching! PSUs are meant to be used keep the dirty politicians/parties in office at any cost!

    Like (1)
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