|»5 Minute Wrap Up by Equitymaster|
On This Day - 26 FEBRUARY 2013
Is democracy failing?
In this issue:
But this western style democracy is facing challenges like never before. In the West atleast, politics are increasingly becoming more focused on promises and ideals rather than pragmatic solutions. So you have a situation in the US where the recent governments have made big spending promises to citizens. But they have no resources to fulfill them as debt has kept piling up. Similarly, the Euro is also being severely tested as the formation of the single currency was probably based on the European ideal. But practically speaking this was always going to be a challenge given the different rates of growth and development in each of those countries. Thus, today, in the aftermath of the global financial crisis it seems more and more likely that the Euro could break up if certain countries forming part of it do not recover.
Politics in India is no different. Promises are made for the uplifting of the poor, or on the basis of religious ideals. But there is not much focus on practical solutions to the problem at hand. That is why we have seen disruptions in the Parliament in recent times. The ruling and opposing parties have not been able to come to an understanding on virtually most of the important issues. While development is considered important, most are quite clueless or do not have the willingness in its execution.
Of course this is not to say that democracy has failed. Despite challenges, in the longer term it is still the best form of political system that can ensure the economic well being of any country. But governments need to take more efforts to understand the underlying problems of their respective nations. They need to focus more on practical solutions to these issues if the countries have to prosper in the future.
But what was not taken into account is one crucial difference we believe. China is a current account surplus nation. In other words, it exports way more than it imports and thus generates huge amount of surplus capital. India on the other hand has mostly been a current account deficit nation. It consistently borrows from abroad so that its imports needs are met. And such a position does not give us the luxury of creating a sovereign wealth fund. Simply because the money that will be contributed towards the fund will not be ours in the first place. Thankfully, good sense has prevailed and the idea has now been shelved by the Finance ministry. Let's just focus on getting our house in order in the first place. Concepts like sovereign funds can be taken up later.
As a result, India is seeking billions of dollars in taxes from some of the world's biggest MNCs like Royal Dutch Shell and Vodafone. The demand is on the inter subsidiary transfer of funds that according to IT department are improperly valued. Readers may note that MNCs frequently buy shares of overseas units as a way to inject cash into the overseas units. This is one of the many ways of tax evasion. Now, levying higher taxes may be seen as a dampener to foreign investments. However, we think the IT department must do its duty in demanding what is rightfully due.
Yesterday, it offered spectrum in 4 key circles at a price which was nearly 30% lower than the November's reserve price. But yet again, the operators shunned the auction. The only bidder was Sistema Shyama who is desperate for spectrum post the Supreme Court's order to shut down operations in circles where its licenses were cancelled. The operators have been crying hoarse that the government has to price the spectrum in a conducive manner. The sector is already facing the hardships of intense competition and high costs. And during such times if the government decides to squeeze more cash out of it for meeting its own deficit targets; then obviously the operators would put up a fight. Maybe the government should sit down with the operators and discuss things with an open mind. That would help them with more successful auctions. No point in coming up with one auction after the other if they are all going to fail.
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