Common sense is so uncommon - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Common sense is so uncommon 

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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

01:15  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.

04:55  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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14 Responses to "Common sense is so uncommon"

sudhir adhikari

Nov 21, 2012

The totally immature government is solely responsible for the mess.



Nov 20, 2012

Mr Rao, you don't understand. CAG's report said there was a presumptive loss of Rs xxx to the exchequer, due to non adoption of price discovery methods. Today's situation is'nt the same as 2008.

Today, 3G, 4G are being sold off, and several changes have been made e.g. spectrum band changes, re-auctions every few years etc and then Sarkaar has set the prices at 2008 levels just to spite the supreme court and CAG.

Clearly this government is behaving shamelessly and not only in contempt of courts but also of national interests. It needs to go, and shame on BJP as the main opposition party which has failed to rein in the Congress


Shiv Shankar Ranganathan

Nov 18, 2012

The government is solely responsible for the entire mess that the 2G
auction has become.


Clifton Gonsalves

Nov 18, 2012

This is one of the very rare instances that i fully disagree with your point of view - The CAG had first of all gone beyond its brief to dictate policy to Govt for a retrospective public deal & coming up with a ridiculous estimate. The Govt was right in its revenge exercise by pricing this auction at that ridiculous estimate. The outcome ( which the Govt wanted to prove ) is a SLAP in the face of CAG. It is very easy to criticize someone else's procurement decision. Suppose the Govt had to set levels below the CAG figure and bidders would comply - then YOU and CAG would say - "inspite of the earlier CAG observation, the Govt has again chosen to favour the industry by setting low levels..."


Abhay Dixit

Nov 18, 2012

If govt really believed that there was no loss in earlier allocation, the reserve prices could have been in line with those prices. Politically, government wanted the auction to fail so that they can blame CAG. That is what they did.

Like (1)


Nov 17, 2012

Really elaborative, informative and unbiased. Keep it up

Like (1)


Nov 16, 2012

Regarding your vies on 2G scam, why not we think the other way. The govt. wanted the process to fail and they have succeeded in it. They want to save their ministers and politicians who were involved in the scam and now it is easy for them to escape.

Like (1)


Nov 16, 2012

It is the government that is to be blamed for this fiasco in general and in particular, Kapil Sibal. It is impossible to stand that guy blabbering utter nonsense on TV, with the body language of that of the wisest person in the world.

Like (1)


Nov 16, 2012

How could we compare the situation between 2008 and 2012. In 2008 there was only 2G. Today we have 3G & 4G which is an advanced one and 2G is of least important. From 3G & 4G auction Govt. have already earned more than a Lakh crore Rupees. So it is ridiculus to blame CAG that their projections are high. It is obviously evident that the Govt. has only attempted to justify the action by it and show to the people of this country that there was no scam in selling 2G in 2008. We are not fools to accept what Sibal and Chidambram has said.

Like (1)


Nov 16, 2012

Sir, much hyped EGOM a body constituted to arrive at a price for new auction have failed to understand the reality of business & lacked business sense.if such ministers are running god knows where our nation will one in govt seem to be accountable to any one, every one wants to point finger at other & play a blame is a shame for prime minister that if he can not control a country he should retire immediatey & rest at home.

Like (1)
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