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Blowing the balloon - Views on News from Equitymaster
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  • Nov 1, 1998

    Blowing the balloon

    The government and the bureaucracy is at their best again. While the myth on which the Unit Trust of India was built and the "safety" of the quality of assets held by the financial institutions like ICICI, IDBI, and IFCI were being questioned, the government and the bureaucrats did what it is increasingly becoming good at: blowing hot air. A rescue plan in which the Reserve Bank of India would be the lender of last resort and State Bank of India would stand by for temporary liquidity was presented. Then, in terms of broadening the rescue package to include money lying with private companies and individuals, the long-awaited share buy backs were given the go-ahead, subject to yet-to-be-announced SEBI guidelines. To add merit to this package to boost the sagging stock market, more announcements on economic liberalisation and deregulation followed. The logic is: if the share market revives, UTI will not have a problem that this government will have to worry about - let some other government worry about the rot.

    If the number of economic packages and announcements made by our governments determined economic performance, India's GDP would be growing at 10% per annum, the BSE-30 Index would be hovering at the 6,000 level, and our financial institutions would have no bad loans. Blowing hot air into a balloon is great to get that balloon skyward again but blowing hot air into a leaking balloon won't get you very far. In fact, it will probably get you nowhere at all and make you short of breath. After all these years of privatisations, I wonder what is the number of companies sold by the government to a private group to be run like a private enterprise. Probably zero. The selling of minority stakes in companies like MTNL, VSNL, and State Bank of India are the governments attempts to sell assets to raise money for its ever-growing deficits. It is a shame that MTNL, with a 40% non-government shareholding has to still act as a conduit for loans to the government or that it cannot sack its staff - till recently on deputation from the Department of Telecom. Or that State Bank of India, also widely held by the public but controlled by the government, has to bail out UTI and runs the risk of being associated with ponzi schemes to raise foreign exchange for the government.

    Did you know that State Bank has 270,000 employees in India as against 90,000 employees for Citibank worldwide but SBI has only 12% of the assets that Citibank has worldwide? State Bank of India's salary costs are 3 times its profit before tax! Why are these privatised companies still run like government departments that guarantee jobs for life? Yes, I am a believer in a social net and feel that capitalism with its money objective is not the sole system to get India out of its mess. But, if you adopt a capitalist route for parts of your economy - privatising telecoms and banks - then do it all the way for those chosen companies. Don't file a 200-page prospectus that cheats investors into believing that companies will be run like profit-maximising ventures when they continue to be run as government departments. And, in the final analysis, that is what UTI ended up being: a government department. Decisions were probably made on the basis of other criteria. Add to that handicap the torturous task of managing money. Investment management is a tricky business. All of us in the buiness make wrong investment decisions.

    I, speaking from experience here, have also had the black mark of seeing some of my investments fade to zero. UTI has been in the enviable task of having government backing and being the investor of last resort. But it has also had to suffer from controls by a government eager to please business lobbies. Freeing UTI will be the best thing that this government can do. Cutting government expenditures would be on a long list of other non-stock market wishes.

    These are difficult choices which no government (to be fair to this one) has made in the past. It is cheaper to blow hot air and sound intelligent.. If the government is keen on reviving the economy it needs to restore confidence in society and in the economy. Throw crooks in jail, punish the corrupt and see how people begin to have faith in society again. Allow the privatised companies to be run independently and see how they perform. But that may be wishful thinking. In all probability, the messy lessons that UTI has thrown up will be swept under the carpet and, if the economy continues to limp along, after a few more months an ICICI, IDBI, or IFCI will face a similar rescue package. It is cheaper, you see, to blow hot air because fixing a leaking balloon can be politically expensive. If the banks and financial institutions were truly independent and made loans or investments based on commercial terms, then who would pay the election bills?



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