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
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?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407