Will anybody be answerable for these Rs 293 bn? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will anybody be answerable for these Rs 293 bn? 

A  A  A
In this issue:
» Why fuel price hikes were essential?
» SEBI strikes mutual funds once again
» The government now takes the QIP route
» China's property prices snap 15 months of gains
» ...and more!!

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Loads of media space has been devoted to discussions on India's infrastructure investment plans. Most of it gathered steam ever since the Planning Commission outlined its US$ 500 bn outlay until 2012. An equal enthusiasm was shown towards the government's ambitious road building target. '20-kms a day' seemed rather fancy for a country known for its snail paced execution. But for once, many of us took these targets rather seriously.

It has been 3 years since the eleventh plan period took off. And it has been nearly a year since the road building target was laid. Neither has offered us much reason to cheer about. Be it building roads or power plants India's reputation for poor execution rate has remained intact. While lack of funds from private players has been a key reason, there are others too. For instance disputes over land acquisition. But the government believes that raising funds from retail investors could be a viable solution to the former.

With this in mind, it proposed issuing tax free bonds with a 10-year lock in period. If successful, these infrastructure bonds may attract investment to the tune of US$ 6.5 bn (approx. Rs 293 bn) from 35 m taxpayers. A respectable sum indeed! However, the question that begs a reply is whether the government's onus ends with raising the funds? The taxes that we pay are anyways meant to build and improve the economy's infrastructure. So there is no novelty in raising additional funds. But will there be any accountability for the usage of these funds? Or will this end up being another futile exercise? Had it been only paucity of funds, India's forex reserves could have been an equally viable option.

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01:17  Chart of the day
India's growth story in the past decade has been largely attributed to 'outsourced' jobs. So much so that the US nicknamed it as 'hijacking jobs from Buffalo to Bangalore'. Well, India has been the back-office of the world for quite some time. But Indian companies have also staked claim to some interesting achievements in the past few years. Their latest feat is achieving efficiency in manufacturing. In fact, as today's chart shows, India has now been ranked second in the Global Manufacturing Index 2010, next only to China. A country known only for its outsourced service facility has been able to leave behind manufacturing hubs like the US, Japan and Germany. This is very encouraging to say the least. But that's not all. The report states that India will not only retain its position but move closer to China on the index by 2015.

*2010 ranking. Data source: Mint

After much dilly dallying, the government hiked fuel prices recently. The opposition promptly imposed a nationwide strike. We expect the next round of the battle to also take place soon. Of course, as far as the economics go, the hikes make sense. In fact, in a recent interview to a leading financial daily, Dr. C. Rangarajan said as much.

The chairman of the Prime Minister's Economic Advisory Council believes we had reached a point where some action on petroleum products had become essential. In fact, he believes raising kerosene prices was an even bolder move than raising petrol and diesel prices. We agree. Such matters are politically sensitive. Hence, we remain skeptical whether the government would be able to withstand the political pressure in the days ahead. Even more importantly, will it be able to pass on the burden if crude oil prices were to surge?

SEBI has struck once again. The securities regulator in recent times has displayed a canny ability to weed out disadvantages to minority shareholders and retail investors in the system. And it has now made another such move. As per reports, SEBI is set to ban mutual funds from launching multiple investment plans. These plans seek to cater separately to different classes of investors under a single fund. And in the process, they levy different expense structures for different categories of investors. Small retail investors usually end up paying the highest expense ratios under this arrangement. Large institutions on the other hand pay the lowest. This mostly applies to liquid funds and liquid-plus funds. They typically tend to have separate plans under single schemes. The charges differ as per the plan. This is despite their portfolios remaining the same. The SEBI may now issue new norms banning this industry practice. This will certainly go towards creating a more 'small investor friendly' investing environment.

There is a slowdown that is imminent in China's property markets. It may be recalled that property prices there had zoomed as banks resorted to indiscriminate lending. However, as per the Chinese statistics bureau, China's property prices snapped 15 months of gains. Not just that, banking lending also eased during the month. Further, while China has reported strong growth in the first half of the year, there hangs a cloud whether the same can be sustained. After all, slowdown in the real estate space would dampen construction. Plus, the austerity measures in Europe will cool off demand from those regions. And so, China's exports industry could once again face the heat. In that scenario, the possibility of the Chinese authorities loosening their monetary policy cannot be entirely ruled out. On the brighter side, with the slowdown in property prices, the threat of inflation and asset bubbles is likely to recede.

The Indian Government seems to have found its preferred method of raising bundles of cash. An auction to the highest bidders seems to be the right way to go. This is especially after the success of the 3G spectrum and broadband wireless auctions. And the failure of follow on public offerings!

It is now considering selling off some of its stake in public sector firms through auctions. Bidders for these stakes will be large institutional investors. Auctioning stakes in actively traded shares such as SAIL with a 10-15% public float may prove beneficial. Through this method, the government only has to set a minimum price, and the bidders do the entire diligence for making bids. The target for raising money through divestment is Rs 400 bn for this fiscal. If it goes through the action route, the government may even overshoot this target. Looks like the government is being advised by some well placed investment bankers who always prefer the QIP route!

After a buoyant start, the Indian indices shed some gains during the session today backed by profit booking in auto and energy stocks. Markets across Asia except Japan and Taiwan ended higher today. The BSE-Sensex was trading nearly 99 points (0.5%) higher at the time of writing. The European markets have opened on a cautious note.

04:54  Today's investing mantra
"The stock market is designed to transfer money from the active to the patient." - Warren Buffett
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25 Responses to "Will anybody be answerable for these Rs 293 bn?"

K.G. Rao

Jul 16, 2010

Auction to the highest bidders is NOT the right way to go in telecom. These exorbitant sums will finally get passed on to the user in some way, and inhibit widespread usage, of broadband especially, already abysmally low. Some other way of allocating spectrum, with Govt forgoing all that moolah in anticipation of cheaper, more widespread services, would have been the right way to go. Surprising that EQM hasn't seen this!


K.G. Rao

Jul 16, 2010

You have moaned, as we all do, about the slow pace of infra projects execution. Nothing new, it's common knowledge. Now, if EQM could do a little digging into the reasons for slow execution, ground-level reasons, that would be news indeed. Not much the media is doing about this aspect. So why not start pushing GOI where it's really needed?



Jul 13, 2010

Unless the people running the government leave their feudal mentality and become true democrats nothing ever is going to change or improve. Just read the statements of the ministers, they talk like feudal lords. Do you expect anything good from them?


salvi vilas

Jul 13, 2010

As normally seen the funds which are allocated for development/new projects etc.are siphoned out by the beaurocrafts/politicians/govt.authorities so tactfully that no body remains accountable.This is the sad part of the story & it will continue in this manner.


Ganapathy Sastri

Jul 13, 2010

The government's first task should be to reduce budget deficits and turn it into surpluses. During the last 63 years there has not been a single year when the government had a surplus. This profligacy of government has over the years produced an inflation in the teens year after year. It is high time, the government starts living within its means. The government's revenue and capital expenses should be managed within the NON REFUNDABLE inflows it generates.

Like (1)


Jul 13, 2010


Like (1)

S.L. Narasimha Rao

Jul 13, 2010

You are absolutely right. Nobody is accountable. But I have the answer:

The politicans use this money to buy more votes from the gullible public. The proceeds from the sale of bonds will go into the Cosolidated Fund of India to be administered by the FM. The political party in power will use it to give more subisidies and more schmes for the poor and they can milk the contracts.

Now methods to use money: You go for Jalayagnam, Road Yagnam, Gruha Yagnam and such more Yagnams, where you can employ your kith & kin as contractors and get your share. Finally the public gets half dug canlas, roads and potholed roads in cities.

Public will not object becuase politicans have successfully divided the country on caste, language and religion lines and any number of unemployed youth are avialble to burn the public property for a day's meal.

Like (1)

Vivek Kumar

Jul 13, 2010

Well this is a sad case indeed. But while this is a broad story ( & often repeated), lets look at success story within the India infrastructure as well. We can get insights from there.

My sense is project-wise transparency ( & scrutiny by third parties) will unravel a lot problem areas. Look at the Surat transformation case & you would realise that transaformations are possible.

Like (1)

Manoj Kumar

Jul 13, 2010

No you are not at all wrong on this. There are some very deep systemic problem with our government and until they are resolved we would continue to be the laughing stock of the world. Notwithstanding the good intentions of some of our top ministers including the Prime Minister nothing seems to be moving forward. There is a need of cleansing of bureaucracy as well.

Like (1)


Jul 13, 2010

From a fiscal view point, all funds accrued to Govt, be it infra bonds or tax collections - all need to be more answerable to people compared to the current CAG/CVC overview.

From an investor view point, it doesn't matter. Its safe as govt backed and good return as its tax deductible

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