The brokeback debt mountain - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
The brokeback debt mountain A  A  A

9 JANUARY 2010

In order to stave off the global financial crisis their own bankers had created, aided by poor ratings by rating agencies and by brokers selling all sorts of junk, Governments have pumped in huge amounts of money to replace private consumption. An article on the BBC website says the cost is $ 10.8 trillion, which translates to $10,000 per person in the developed world! Of the $10.8 trillion, the US shared $ 3.6 t, the UK $ 2.4 and others $3.2. China and other countries pipped in with $ 1.6 t. As a percentage of GDP, the US bailout is 25.8%, which is enormously high. Compare it to the approximately 8% of GDP during the great depression and one sees why; the current recession is not yet over and one may see a double dip.

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But the UK figure is even more startling! Its bailout is a whopping 94.4% of its GDP, translating to $ 50,000 per person! How on earth will the UK Government get out of this debt mountain? Debt of both US and UK is enough to break their backs. This is what is worrying investors.

Also of concern everywhere is when is a good time to withdraw the stimulus packages. The US non farm jobless figures were depressing, at 85,000 for Dec 09. Look at the serious decline, over decades, in non farm employment from the website


In India, Finance Secretary Ashok Chawla feels that the Indian economy is healthy enough to start withdrawing the stimulus packages; he is also looking to the deteriorating fiscal situation. On the other hand, Commerce Minister Anand Sharma warns that early withdrawal could be painful; witness how Japan has not recovered 20 years after its asset bubble burst in Dec 1989. (see Economist Jan 2, 2010 ) In the 80s Japan used to be a contender to become the world's leading economy. Its stock market was booming, the Nikkei nearly hitting 40,000, the most expensive stock in the world was NTT Docomo, 7 of the top 10 global banks were Japanese (there is one now), Japan was buying US assets such as the Rockefeller Centre and Universal Studios. It has lost 2 decades with no economic growth and an aging population. It is now China that is threatening to take over the mantle of economic leadership. It has just overtaken Germany in exports.

India's fiscal situation is strained because of inept management. Consider this. Direct tax collections are up 8.5% in the first half of the year and corporate taxes are up 44% in December. Yet the Government has no money to pay the promised fertiliser subsidy (estimated at Rs 70,000 crores) and is seeking to further subvert its oil marketing companies by capping its share of recompense for subsidy to Rs 15,000 crores. ONGC and Oil India are asked to bear the cost of diesel and petrol subsidies whilst the Government bears the cost of LPG and kerosene which it now wishes to cap at Rs 15,000 crores. This, despite higher tax revenues!

What is the result? The three oil marketing companies, IOCL, HPCL and BPCL, are bathed in red ink and so unable to upgrade refineries in 4 regions, Kerala, J&K, North East and Bihar, to meet Euro III emission standards of fuel. Ergo, auto makers cannot sell Euro III cars in those regions. Ergo, pollution is higher (hey, what about our commitment at Copenhagen?)

The Prime Minister says that India's GDP would grow at 9%, but this would require much better governance than has been displayed. LN Mittal is chagrined at the delays in clearing large projects and says India is unprepared for large investments. Good governance is what has enabled Bihar, one of the states that used to be known as Bimaru, or sickly, to achieve an 11% growth rate! This would have been unbelievable a year ago!

In corporate news of interest, there may be a postponement of plans for an IPO by BSNL and Coal India, until their valuations are as desired by Government. BSNL's current valuation as advised to Government is Rs 58,000 crores, which is half what it used to be. This is largely due to the senseless delays in awarding of contracts to expand its network. It had completed the tender process for it when one of the (losing) contenders filed a writ petition and stalled the award. BSNL also has to bear, almost entirely, the unviable cost of a rural telephone network, and is asking for a waiver of licence fees for such loss making network, which, if agreed to, would save it Rs 1800 crores a year. Coal India is currently valued at Rs 75,000 crores, but is, according to Government, worth more.

In other corporate news, RIL has upped its bid for Llyondell by 13%, to $ 13.5 b.

This columnist was expecting an explosive start in Indian stockmarkets but the start was muted. They replaced Sehwag with Dravid. The BSE-Sensex went up the first 3 days and down the next 2, to end the week with a gain of 75, at 17,540. The NSE-Nifty ended at 5244, up 43. Interestingly, foreign investors were net buyers on all days, and domestic funds were net sellers on all days except Tuesday. It is thus the FIIs which are propping up the market at these levels.

The sensex is poised at the crossroads. It has reached the level of 17700, from whence it fell, in May 2008. It had fallen sharply to 7700 by Oct 08, causing investors to take double doses of Imodium.

It is likely that the market may meet resistance at current levels. They would not fall anywhere near the May 2008 to Oct 2008 fall. But buying on a dip may be advisable. As of now the high debt levels of the developed world have not manifested themselves too strongly. But they will, later.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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9 Responses to "The brokeback debt mountain"
Jan 19, 2010
Not withstanding the dole paid by Private Operators by way of Access Deficit Charges, it is unfair to expect BSNL to bear the brunt of having to invest in terrestrial infrastructure over vast square kilometers of rural landscape to service abysmal teledensity. Add the (guarenteed) PSU in-efficiency of BSNL and the inevitable in-built Employment Guarantee Scheme of appointing 5 people to do badly the job of one private sector staff, we have a perfect recipe for a disaster in Rural Telephony, not to mention drain of tax payers money, for years to come, a la ITI!!!

But then, are we not missing woods for the trees here?

Given the assured poor teledensity in Rural Areas (even if each person in the rural area subscribes to two telephone conx, the delivery will be strained, as the equivalenet of number of people in a Dadar local train platform of Suburban Bombay - oops, sorry Mr Raj Thackeray, I meant Mumbai - at 9am on a working day, can only be found over a 100km by 100km area in Rural India, if one is lucky!), is there not a golden opportunity to say goodbye to good ole landline, thus skipping a generation of technology and give the more swanky mobile telephony ONLY, to our rural fellow countrymen; incidentally it is economical, by manifold!?? Afterall, a tower can cover a few square km comprising few villages, without any wires. If at all, wiring is only needed between these fixed point to point towers - no ducting/planting poles/land wiring inside any village. Add to it the very likely village culture, that even if one gave telephone connectivity, it is likely that a person, possibly village munsif, may hire a conx for use by the whole community of say 50 in a village. Everyone will be more than content with that, to walk upto His house, unlike the citi folks, complaining to the God for giving them only two hands, making it difficult to handle more than two phones, at a time. Besides, like yours truly, one lives for decades in Mumbai (I got it right, this time atleast, Mr Thackeray; so, pl dont send your goons!) without knowing who your neighbour is but the well knit village culture is different; everyone knows when Chameli in the third hut is going to deliver her baby! Low Rural Teledensity is here to stay!

Hope the opinion makers will get the Govt to avoid wasteful expnditure of landline delivery to Rural areas & instead go for next gen Mobile telephony ONLY!!

Long live Jyoti Basu, Prakash Karat, AB Baradhan and D Raja. We cannot wish away BSNL. Well, let BSNL deliver the Rural Mobile Telephony. Why should we deny our Rural Folks an efficient system? Why should we make them kneel down & pray to 'Linemen' (besides Rain Gods) to fix their line at home, just because we city folks went through such humiliation since independance till late 80's?!?!
Jan 16, 2010
Sanjay Kumar
Jan 11, 2010
Hello Mulraj,

I am also from IIM Calcutta, 12th batch. Same as Deepak Mohoni. Met Shekahar Chaudhari, the current Director recently. He emphasises that we are not IIM Kolkata but IIM Calcutta. Suggest you include this change in your profile.
And keep on rolling with your analysis and comments. As a private investor, I find them useful. Will u recommend exit and holding cash for the short term of next 3 to 6 months or stay invested?
Bye. Best Regards,
Sanjay Kumar
Jan 11, 2010
"The brokeback debt mountain" was quite interesting/enlightening. Every reader would have had a hearty laugh on reading the two sentences: "This columnist was expecting an explosive start in Indian stock markets but the start was muted. They replaced Sehwag with Dravid." Absolutely true! What a superb analogy! Like 
Jan 10, 2010
The oil marketing companies information written was a good piece of information, especially for people living in states like Kerala to know that we were unable to acquire Euro III motor vehicles. It is very sad to know that our infrastructure are not growing. Atleast if the government constructs 6 lane highways (not 4 lane, we should have foresight) in a densely populated state like Kerala, much of the lives lost daily could have been saved, also commodity movement and prices could be saved Like 
Jan 10, 2010
I have been very exercised during the past week or so about whether or not to sell my holdings in India and in emerging markets generally. Your comments on the present level of the Sensex and what happened in May 2008 have greatlly helped me to make a final decision.
I shall sell tomorrow. Thank you indeed.
Jan 9, 2010
The reason why the Govt is always broke is because of three reasons:

1.The bloated size of the bureaucracy who are amply rewarded for all their "hard work" by the various pay commissions.When most of the tax revenues are sponged off by the Babus what is left for development works?
In this age of IT,where is the necessity of having an army of clerks and chaprasis? or for that matter so many IAS babus?

2.Of the money that is left,most of it is siphoned off by the cabal of corrupt politician-bureaucrat-contractors.

3.Interest payments for the sins committed on borrowed money

So,it is no surprise that we are running a huge fiscal deficit.
Jan 9, 2010
The management and efficiency of the govt in India will not improve. when a chief minister of an Indian state can amass 75000 crores or so illegally why should the politicians manage the country? Throw them all in jail and things may improve.
similar is the case in the U.S. where the bankers and Wall Streeters have ruined the U.S. and the world economy.
But if no country shows correct leadership then the limping U.S. may continue to be the so called leader of the world.
Jan 9, 2010
Dear Sir,
The behaviour of the FIIs has not been predictable. As the conditions in US & UK is not conducive they are turning perhaps to india where the debt crisis did not affect directly, except thru the banks. The FDI is also going up only by this logic. The upsurge in FII investments in stock market as such can be expected only until the condition in US & UK continue and as per the stock market logic the bulls can be bears at any point of time, thus cautious approach may be the right logic for non repetition of 2008 history.
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