Are regulations impeding the growth of the economy? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are regulations impeding the growth of the economy? 

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In this issue:
» Should oil & gas sector be de-regulated?
» India has a tough job of meeting energy security
» Power sector needs overhauling at centre as well as in states
» Unlocking the true worth of public sector enterprises
» ...and more!

India's economic growth has slowed down to below 5% in the past two years. Factors such as slowdown in demand coupled with rising interest rates have pulled down capital investments taking place in the country. But a major reason for the slowdown is the policy paralysis. A host of critical decisions pertaining to important sectors had been put on the back-burner by the previous government either due to the eruption of corruption scams or simply bureaucratic hurdles. This has adversely impacted the fortunes of regulated industries such as telecom, mining, power and energy. Lack of investments in the country's basic infrastructure can severely impede the growth of the economy going ahead. Therefore if India has to come back on a robust growth track, it needs to do a re-look at the regulatory framework that comes in the way of efficient functioning.

Regulations play an important role in safe-guarding the country's natural resources. Even in case of pharmaceuticals, regulations are necessary to keep healthcare costs affordable for the poor population. However too many regulations can stymie the growth of any industry. Also too many changes in laws with retrospective effect, the Vodafone case, can cut a sorry figure of the country's investment landscape.

Therefore the immediate task at hand for the Narendra Modi led NDA government is to take a hard look at regulations governing critical sectors. The government has already made the right start by merging ministries thereby reducing the time required for approval of major infrastructure projects. Going ahead, the government is expected to take some crucial decisions regarding Goods and Services Tax (GST), Foreign Direct Investment in Defence and host of the others.

Not to forget about the banking sector that has been at the receiving end of poor performance of the overall economy. The steep jump in bad loans in the banking system has adversely impacted their financials. Thus, the much needed regulations to re-capitalize banks as well as stringent laws for extending credit needs to be put in place to achieve full-proof regulatory machinery.

Regulations ought to be investor friendly, transparent, consistent and profitable for the industry but not at the expense of compromise in national interests of the country. How the present government frames regulations achieving a balance between the two will determine the recovery in the country's investment climate.

Do you think the regulatory climate in India is investor friendly? Let us know in the Equitymaster Club or share your comments below.

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01:35  Chart of the day
The pharmaceutical industry in India is valued at over US$ 25 bn. Globally, it is 3rd largest in volume terms and 14th largest in value terms. With limited health insurance penetration in the country and a large share of population living below the poverty line, the country has consistently relied on affordable medicines to meet its healthcare needs. To keep drugs affordable, the country chose to remain under process patent regime since 1972. This equipped the domestic drug companies to develop and innovate patented drugs through reverse engineering. In addition to this, the government has also been controlling prices of essential medicines through Drug Price Control Order (DPCO).

In 1995, India signed the Trade Related Intellectual Property Rights (TRIPS) agreement with World Trade Organization (WTO) that ushered in the product patent regime in 2005. Under the new regime, domestic companies could no longer manufacture copy-cat versions of patented drugs using a different process. The number of drugs under price control has also been on a steady decline. However in 2013, the number of drugs under price control was once again raised from 74 to 348 drugs covering 652 formulations. Besides, India has utilized the flexibility of TRIPS to safeguard interests of the general population through non-grant of patent approval and compulsory licensing.

Drugs under price control on the rise

Looks like it's a day of discussing regulations across sectors. Consequently, we move from pharma to one of the most regulated sectors in the country. We are indeed talking about the Oil & Gas space. Owing to rupee's appreciation as also decline in international oil prices, jet fuel rates have come down in recent times. And this is like manna from heaven for airline companies who are heavily strapped for cash. Not just jet fuel, even prices of non-subsidised LPG gas has come down significantly in recent months, providing relief to customers who have to buy beyond their usual quota of subsidised cylinders.

Does this mean that it's a good time to talk de-regulation? Well, we don't quite know. The issue has been a political hot potato for many years now. There's a section out there that feels prices need to be regulated as otherwise the common man would be severely burdened. And there's another section in favour of de-regulation as it reduces the huge subsidy burden that can then be diverted towards more productive purposes. One thing is certain however. Total deregulation is next to impossible. What can be done instead is efficient distribution so that only the most needy benefit without giving a free ride to the financially better off.

The global energy security could be under danger. There is a real risk of shortfalls. As the spend on energy efficiency needs to rise. "The reliability and sustainability of our future energy system depends on investment". That's what the International Energy Agency has to say. And rightly so! That's because US$ 48 tn is required by 2035 to meet the world's growing need for energy. An investment of US$ 2 tn is required every year by 2035, projects the agency. India is no exception! It requires a massive investment of US$ 1.5 tn in power sector during the same period to support its economic growth. Well, this should not come as a surprise. Production from existing oil and gas fields is declining. Power plants need to be replaced. What more? There are other assets that will reach the end of their productive life. However the current investments are misdirected. Ideally such investments should promote energy security, competitiveness and environmental goals. Quite often government policy decisions and incentives drive the investment decisions. And this gives rise to conflicting interests. Hence, a credible policy framework and stable long-term sources of finance is the only panacea to the energy needs of India and the world alike.

Power cuts are back! This comes at a time when generating stations are sitting with idle capacities, not functioning at full rates. This is the irony of the power sector in India at the moment. With the financial conditions of the state electricity boards - which are suffering major losses due to a host of factors including billing defaults coupled with their inability to increase tariffs - in a mess, they are simply not in a position to procure more power. While the new government is expected to provide a significant amount of push (given the success of the sector in the state of Gujarat under the rule of current PM), the fact of the matter is that it will be up to the state governments to ultimately make the key changes relating to tariffs, subsidies and collections. Not to mention the key issues that need to be resolved at the central level as well - those relating to coal and gas availability (and prices) - which have impacted the sector substantially. While the expectations of changes are high, such developments do provide some indication about the difficulties that the government will face in bringing about changes.

At the risk of sound too optimistic, we do not want to predict if the Modi-led NDA government will do wonders to the economy. However, at least the government seems to be hitting the nail on its head when it comes to identifying problems. And we believe that itself is an encouraging and good start! Take the case of government owned enterprises for instance. Due to sheer negilence and pilferage of resources, most of these entities have destroyed wealth. Besides their poor profitability, many of the PSUs have been a constant drain on taxpayer money. Therefore PM Narendra Modi plans to stop the UPA practice of encashing profitable PSUs to nourish the poorly performing ones. Moreover, it plans to do more with ones that are profitable, efficient and have the potential to create wealth. Such initiatives, we believe can unlock a lot of wealth, not just for the government, but also minority shareholders of the PSUs.

In the meanwhile, the Indian stock markets, remained flat. At the time of writing, the benchmark BSE-Sensex was down by 3 points. Majority of the sectoral indices were trading firm led by Auto and realty stocks. IT and auto were among the biggest losers on the bourses. Most of the Asian Indices were trading in the red with China and Hong Kong being among major losers. European markets too have opened the day on a weak note.

04:40  Today's investing mantra
An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business." - Warren Buffett
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1 Responses to "Are regulations impeding the growth of the economy?"


Jun 4, 2014

Definitely not. Regulations should be lucid and transparent.
Strict implementation policy is needed. Regular monitoring and controlling of policies by regulatory bodies is need of hour.

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