The Govt finds a new way to destroy wealth!

Dec 21, 2011

In this issue:
» Corporate India faces crisis of confidence
» Indian IPOs fare terribly in 2011
» Are Americans taking away Indian jobs?
» Indians pay US$ 700 m for land administration services
» ...and more!
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The Indian government's finances are in a mess thanks a horde of problems such as slowing tax revenue, depreciating rupee, rising expenditure on food security and universal health, and so on. You can imagine how bad the fiscal deficit can get if things go on the way they are doing now. To help keep the deficit under check, all eyes are now set on cash-rich public sector undertakings (PSUs). Experts are suggesting various ways that would end up transferring the surpluses of PSUs to the government Budget. To give you some numbers, the big four mineral-extracting PSUs are sitting on a whopping cash pile of Rs 1.15 trillion. But would it be right to use profits that the PSUs have earned to set off against expenditures that the government is incurring?

To be able to answer that, it is important to understand the nature of the surpluses that the PSUs are sitting on. The fact that PSUs are amongst the most inefficient lot in our country is no secret. A majority of state government PSUs are either bleeding or closed. Even the central PSUs have a hard time competing with private sector players. Then how is it that some PSUs have amassed such astounding profits?

The story goes thus- Before 1991, domestic mineral prices were quite below global prices on account of price controls. As such, PSU profits were humble. But then India's economy witnessed a paradigm shift. Price controls were lifted. At the same time, the global economic boom gave a fillip to commodity prices. These factors were the key to the fat surpluses that some big PSUs flaunt on their balance sheets. It is clear that this is not regular income, but windfall gains that may not repeat in the future.

Would it be wise, then, to use such one-off gains against regular expenditures? Remember, commodities like oil and minerals are limited and will exhaust some day. Several countries in Africa and Latin America burnt their fingers by going on a reckless spending spree with their commodity windfalls. On the other hand, Norway, Chile, and Gulf countries like Kuwait and Saudi Arabia realised this and conserved part of their windfall gains for the future through sovereign wealth funds. It is upto India to leapfrog by learning from the lessons of others, or learn through the hard way of self-experience.

Do you think PSU surpluses should be used to fix India's fiscal deficit? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
As of all the gloom surrounding the Indian economy wasn't enough, the October 2011 mining data comes as another jolt. Some major reasons for the decline in mining output were the crackdown of corruption in the mining industry as well as strict enforcement of environmental norms. As you may know, mining is very closely associated with a number of manufacturing industries. Any slowdown in mining activity has a negative impact on industrial growth and, in turn, the gross domestic product (GDP). It is worth noting here that mining and quarrying activities account for about 14% of the index of industrial production (IIP) and industry contributes about a quarter of the aggregate GDP.

Data source: Economic Times

A leading daily reports that there is a new word in town. And it is landing a blow so powerful to corporate India that the one given by the 2008 crisis just pales in comparison. The word is being called the C-Word or to put it more seriously, confidence. No doubt, economic numbers painted a bad picture back in 2008 like they are doing currently. But what is making the all important difference as per the corporate honchos is the very low level of confidence right now. And why not? At a time when the Government should be doing all it can to promote important reforms and speed up execution, it is busy doling out subsidies and adopting other populist measures. As a result, money is being diverted towards wasteful expenses rather than finding use in capital expenditures that would improve the long term productivity of the nation. Although the companies that cater to consumption needs like FMCG and automobiles are still hopeful about the immediate future, it won't be long before they too will start feeling the pinch unless the Government wakes up real fast.

The stock markets have not had a very good 2011. The performance of the secondary markets has dampened the sentiments in the primary markets as well. The IPO (initial public offering) market has had a terrible year as well. The number of issues during the year was just 37, amounting to Rs 60.4 bn. The same number last year was 64 IPOs aggregating to a total amount of Rs 363.6 bn. One major reason for lower number of issues during 2011 was the postponement of major PSU issues like that of Oil and Natural Gas Corporation (ONGC) and Steel Authority of India Ltd (SAIL). These were postponed due to the negative market sentiments which would not help in getting the high valuations that the companies wanted. In terms of performance, companies that did come out with an IPO did not deliver returns to its investors. Most of them saw their prices eroding as fundamentals failed to justify the higher valuations that the companies had incorporated in the IPO price.

Taking Indian employees to the US has become more expensive in the year thanks to the shortage of H-1B visas. So companies like Infosys are increasingly hiring American workers for onshore projects. Another call centre run in New York City run by Aegis Communications, a subsidiary of India's Essar Group, has as much as 90% of its workforce as Americans. According to Washington Post, global competition in hiring is affecting the 'cross shoring' trend too. As American companies look for talent in India and effectively raise the pay scales, Indian companies may eventually find more value for money amongst American employees. We believe that this is a healthy trend as far Indians are concerned for it will certainly make American and European companies less resistant to set up shops in India.

Land is a state subject in India. There are myriad of regulations and procedural formalities that need to be completed before acquiring land. And it is true that every time you encounter higher bureaucracy, you have to grease their palms to get your work done. In fact, a study conducted by Transparency International (TI) reveals that Indians pay approximately US$ 700 m every year for land administration services. Lack of knowledge and complicated land acquisition processes are the root cause of corruption. And note that this is not the case only in India but amongst other countries as well. In fact, corruption was one of the main reasons why the property market of Spain crashed in 2009. We believe that in order to eradicate corruption, government needs to have proper bye-laws and a transparent policy in place. Eliminating layers in bureaucracy can also help the matter. But it is difficult to say whether this is going to happen anytime soon. Many politicians have vested interests in land parcels and vouching for land reforms effectively means axing their own toe.

In the meanwhile, the Indian stock markets witnessed heavy buying across sectors in today's trade. At the time of writing, BSE Sensex was up by 238 points (1.6%). Banking and consumer durable stocks were the top gainers of the day. Among Asian stock markets, Taiwan and South Korea led the gains. China however, was the only loser (down by 1.1%).

 Today's Investing Mantra
"It takes character to sit there with all that cash and do nothing. I didn't get to where I am by going after mediocre opportunities." - Charlie Munger

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11 Responses to "The Govt finds a new way to destroy wealth!"

prem prakash

Dec 29, 2011

Why you always opposing subsidy given to food, fertiliser,power and interest rate hiking which benefits targeted poor and middle income group people. Don't you know that industrialist swindling money in the name of bank loan, looting natural resourses, spoiling environment, miscl. subsidies.

afterall PSU money were got from the sale of natural resources which belongs to country and that should go to government for the benefit of country and not for the fradulent and greedy stock market investors.



Dec 22, 2011

A contrary view is not out of place. Let the government dip into the PSU cash as a one time measure but at the same time desist from passing Food Security Bill but use the PSU funds to bridge the fiscal deficit.


madhav k.apte

Dec 21, 2011

Gennuine fear is that indian rupee is on down slide like zimbabve $ due in addition to deficits, very huge piles of spurious pirated indian currency notes smuggled[it is already most favoured nation[!] for this. Idea of manageable low inflation is ridiculous due to its compounding effect,ideal being 0 or - rate only but no economist seems to dare to talk over this.



Dec 21, 2011

The wake up call to the current leadership to take immediate concrete steps to bring the economic growth on rail, is of no use. It seems that there are vested interests which are hell bent on destroying India as a country and above all its economy. Its not that those who matter do not have the eyes, brains, vision. They simply lack the national spirit or to say their spirit has been marred by certain vested interests. Even the RBI seems to have closed its mind. We only hope that the people of India, especially the downtrodden see where their true long term benefits lie and do not elect inept and person with stale and selfish mind set who seem to be cutting the same branch on which they are sitting. I for one, personally have no hope from the current leadership of this GREAT nation.



Dec 21, 2011

Definitely Government should not use the funds of PSUs for financing deficit. Govt. should consider the interest of minority shareholders.


Biraja Shankar Hota

Dec 21, 2011

To meet the fiscal deficit target of 4.6% of GDP the Govt. should over-work for tax-revenue collection,unearth black money, check massive scale corruption,reduce govt. expenditure and finally disinvest holdings in the PSU. It seems, govt. will do nothing right but resort to the the wrong fiscal policy to transfer PSU surplus to the budget. The market capitalization of such is thoroughly deplorable in present economic scenario and if they are dried off their liquid resources they will face a situation the
Govt. is now facing.After all, what for this transfer of surplus of the PSUs? To win election through populist measures like those are inveted at the moment?


sunilkumar tejwani

Dec 21, 2011

it is absolutely absurd on the part of the government even to think about using PSU companies'funds for meeting wasteful expenditure, instead these funds must be used for further investment into the related areas in which the concerned PSU companies are operating. This will ensure their long term growth and sustainability of their business and create shareholder value. This will benefit all in the long run, for example the government can set the prices at which the PSU mining companies should sell their produce,to keep inflation under check whenever the mineral commodities prices skyrocket in the global markets especially due to rampant speculation.



Dec 21, 2011

Governments wasteful expenditure, inability to be frugal,profligate behaviour of ministers, very heavy salaries and perquisites of Parliamentatarians for the third rate job they do only for a small part of the year, endless corruption high salaries of Govrnment employees with out any productivity linkage,etc have led to the various financial problems. There are several PSUs that are a basket case, while a few PSUs have some surplus money which belongs to shareholders. Now the evil eyes have fallen on these reserves and the Government of India wants to plunder it.Jayalalitha is giving free trips to Jerusalem while there is poverty all around and backward communities and Adivasis have no food to eat.Government Of India is financing Haj Pilgrimage spending millions of Dollars trying to appease minorities. This money can be well spent on education of the poor and the downtrodden. A time may come soon when Tirupati temple and Anantha Padmanabha Swami Temple in Trivandrum may also be plundered to bridge Government deficit. God save the country.


Amit Sengupta

Dec 21, 2011

First of all this set of ministers must be told emphatically that they represent the people and own niether the Govt nor its wealth. Ask even the most naive investor - sure that all will shout 'nonsense - this move must be abandoned'. Govt needs money - for what? - for food security - not more than 20% of which will actually reach the real poor - and no one will ever know who all benefitted and how. When will these politicians plan out a 'job for all' & scrap 'food for all'.


Pankesh Sethi

Dec 21, 2011

Government has surely found a new way to destroy wealth or we can say to use the same in its interests.Government is gazing at pile of cash to fulfill 2 objectives:
- 1st one is regarding coming elections in 5 states;so government cleared the food subsidy bill to cash in vote bank..
- n second one,government is trying to reach as close as possible to its target of fiscal deficit of 4.6% of GDP.

Hopefully Government will think about India as a whole..

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