|»5 Minute Wrap Up by Equitymaster|
On This Day - 14 MARCH 2012
How long will the Indian government milk tax payers?
In this issue:
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.
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!
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.
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.
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.
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.
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