»5 Minute Wrap Up by Equitymaster

On This Day - 16 NOVEMBER 2012
Common sense is so uncommon

In this issue:
» Faber: Forget fiscal cliff, this is the real reason stocks are falling
» Diesel price hike brings petrol cars back in vogue
» A parallel between India's and Russia's political system
» Soros still optimistic about gold
» ... and more!

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In 2011, the country was rocked with what is now referred as the 2G scam. The erstwhile telecom minister was accused of favoring a few companies for 2G licenses and spectrum. Instead of auctioning the spectrum he allocated the same on his own whim and fancy. The Comptroller Auditor General (CAG) of India came up with a huge estimate of loss to the government caused by this scam. Post that there was a long argument over what is the exact quantum of loss. Nevertheless there was a scam and there was a loss to the exchequer.

In 2012, the Supreme Court of India finally cancelled all the disputed licenses. Now the telecom regulators and ministry had to decide the price at which these cancelled licenses would be auctioned. So what did they do? They went back to CAG's estimate of loss and decided to price the spectrum at the price taken by CAG in its report. It would be good to remember here that the telecom ministry was the one that had argued that CAG's estimate of loss was too high. Nevertheless the ministry had a task at hand. The task was to rake in as much money as possible as the government needed to bridge its fiscal deficit. So they decided to auction the spectrum at a ridiculously high price despite the industry pleading them to not do so. The result is what we all know. The auction was a flop.

The operators refused to bid aggressively. They in fact avoided the circles where the reserve price was set too high. The result is that the top 3 bidders will end up not paying the government a single rupee for the next 3 years but will walk away with new spectrum. Why? Because the fee that these operators had paid way back in 2008, which the apex court had stated will be refunded to them, will cover the amount that they have to pay right now. The operators were given the option to stagger their payments for 3 years. If they take this option, which they ought to, the top 3 will not pay anything right now. The others would also end up paying only a part of the amount due. Result being that the government may end up getting just Rs 3.8 bn from this auction. This is not even comparable to their estimate of getting a minimum of Rs 140 bn from the auction. So obviously their plans for bridging the fiscal deficit with the spectrum money have gone for a toss.

Now the blame game has started all over again. The telecom minster blames CAG for unrealistic estimates. Fingers are also being pointed towards the telecom regulator for setting the price too high which led the auction to fail. But the thing is all these ministers and regulators together had decided on these high prices. There was an EGoM that had agreed to set the reserve price at what it was set at. Why didn't they just set the price at sensible levels at that time? Today it is easy to start a blame game and point fingers. But the bottom line is the government allowed its need and greed for money to overpower its own senses. It has no one else to blame for this fiasco but itself. Hopefully the policymakers would learn from this mistake and start pricing other auctions for resources at sensible levels. Otherwise all their estimates and plans to control the fiscal deficit would remain on paper.

Who in your opinion is responsible for the 2G spectrum fiasco? Let us know your comments or post them on our Facebook page / Google+ page

 Chart of the day
Consumers can breathe a sigh of relief. Petrol prices have been brought down effective today. The price for petrol has been cut down by 95 paise. This is the second reduction in petrol rates since October 2012. The rates have been brought down in line with the international oil prices which have been trending lower in recent times. As shown in the chart consumers of nearly all major cities in India would pay less than what they paid in July 2012. All except for Kolkata where prices for petrol would still continue to be higher than what they were in July. This is despite the fact that the cut for Kolkata was as high as Rs 1.19 per liter.

Source: Financial Express

Stock indices are fickle indicators. They have a tendency to react to any big news. Any development regarding the Eurozone debt crisis and the markets are quick to give their response. Any news about elections or the fiscal deficit also has about the same effect. Though these factors may have some effect on the future of the economy, one must not forget that the price of a stock is function of its earnings potential. Corporate earnings are central to stock markets.

Marc Faber, the famed writer of The Gloom, Boom and Doom report has voiced a similar view. He expects the US stock markets to tank by about 20%. The reason he cites is neither the US fiscal cliff nor the Greek debt woes. The sole reason according to him is bleak corporate earnings. Investors must remember that though the market tend to react to short term news, in the long run, the stock price is determined by earnings and earnings alone.

Demand for diesel cars has seen a boom in the past couple of years. As the government freed petrol prices, diesel prices remained unchanged. With the result that the differential between the two fuels significantly increased. Accordingly, many automakers changed gears and focused on ramping up diesel capacities to meet this demand. So high has the demand for diesel been that such cars accounted for 57% of total car sales. As waiting periods for diesel cars lengthened, inventories of petrol variants only mounted. But the past month has seen some shift. The government recently had announced a hike in diesel after much dilly dallying. This has not been significant enough to reduce the gap. However, it has to a certain extent raised the demand for petrol variants once again. The festive season has also been a boon for petrol cars. Thus, in October 2012, a 3-5% jump was seen in the sales of petrol cars. Whether this trend will continue remains to be seen. Automakers on their parts, however, are focusing on various strategies to ensure that demand for petrol cars picks up going forward.

Prime Minister Mr Manmohan Singh has found support from many quarters in the corporate world. That includes the likes of veterans like Mr Deepak Parekh. But that does not take away the fact that Mr Singh's noble intentions have remained on paper. He has done little to break from the shackle and put important reforms on the fast track. But it seems he is not entirely to be blamed for this. For the political party that he belongs to has more than one person calling the shots. And the persons in question are more politically than economically inclined. As a result the country's economic interests have been compromised for political motives.

In an interview to Economic Times, renowned economist Professor Jagdish Bhagwati drew a parallel between India's and Russia's political system during the latter's communist rule. He believes that Mr Singh's hands are tied because he is merely a political figure head. The professor of economics and law at Columbia University believes that the 'political tragedy' in India is taking a huge toll on its economic prospects. We hope Indian voters take cognizance of this. It is time we look for political heads who know more than vote bank politics.

There appears to be no respite from the global economic uncertainties. Even though fears over Europe's debt contagion have eased for now, the risk of a blowout remains. The US economy continues to grapple with a persistent slowdown, while China is witnessing a decline in growth. All this should bode well for gold. That is the reason why billionaire investor George Soros has increased his stake in exchange-traded products backed by gold during the quarter ended September 2012, as prices jumped by 11%, the most in more than two years. Central banks across the world are still experimenting with stimulus measures to prop up their respective economies. Such actions will result in currencies losing value and, consequently, add lustre to gold.

Is it really the time to be ushering in new banks? The current ones are heavily burdened with non performing assets and debt restructurings? Plus the interest rate environment although easing continues to be harsh. But with over half the country still without access to banking channels, financial inclusion is also the need of the hour. The Finance Minister P Chidambaram has asked the Reserve Bank of India (RBI) to start efforts towards issuing the final guidelines for new banking licenses and receiving applications from interested parties. The central bank however insists on amending the Banking Regulation Act before making such a move. An issuance of a new license would still take 6-8 more months so this issue can be addressed. The real question is who will get this golden ticket?

After opening the day on a negative note, the Indian equity markets are currently trading above the dotted line. At the time of writing, the Sensex was up by 53 points (0.3%). Other major Asian stock markets have closed the day on a mixed note with Japan and Indonesia closing in the green while markets in China and Malaysia closed in the red.

 Today's Investing Mantra
"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't, pays it."? - Albert Einstein

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