Fog descends on Delhi and on Dalal Street

23 JANUARY 2010

Heavy fog caused confusion for travellers to and from Delhi and more confusion for investors on Dalal Street. The latter was caused by weak global cues, partly due to a factor mentioned in an earlier SFTH column, about the risk of US $ carry trade unwinding. The $ index has risen to 78.25; with each rise the attractiveness of borrowing abroad, at low interest rates, in order to invest in other markets, diminishes. Witness the sale by FIIs on each day of last week, bar Monday.

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More worrying for investors is the fog in Delhi, but not merely because of the disturbance to travel schedules, and to commerce that this causes. The greater contribution to the fog are the coal and wood fires started by poor migrants, to provide warmth from the biting Delhi cold and the sad story is that they are forced to migrate from rural areas to urban ones, and live under appalling conditions, for want of income opportunities back home. Therein lies a big failure of Government policies. Two thirds of the population live off agriculture, which gives them 18% of national income.

Government policies have discouraged agriculture by imposing severe restrictions on sale across borders, and on price, for fear of angering the more vocal urban voter. The NREGA scheme is one attempt to redress this; the bigger achievement would be the plan of the Ministry of Roads, Transport and Highways, to spend Rs 3 lac crores on a deeper road network. Because of abysmal roads, more than a third, closer to half, of fruits and vegetables are destroyed in transit. Another cause is fragmented land holdings, due to historical reasons, which denies the use of productivity enhancing mechanised agriculture. The chief statistician of India is quite right in stating that poor growth in agriculture would prevent GDP growth from rising higher than 8%.

Government has made income from agriculture free from tax, for sure, but that is more for the concealment by politicians, bureaucrats and businessmen than by farmers, the overwhelming majority of whom are subsistence farmers.

Government apathy is also visible in the destruction of its own companies, through poor policy and interference. These columns have mentioned how oil marketing companies are being run aground by being compelled to bear a subsidy burden that rightfully belongs to the Union Budget. Last week the Government capped its share of such burden to Rs 12,000 crores, thus driving another nail on OMC coffins. One wonders why shareholders, especially institutional ones, cannot sue the Government for forcing OMCs to bear this burden.

Consider two more.

BSNL had, last month, to cancel, yet again, a tender floated for expansion of its network by 93 m. lines, because of a probe by the CVC (Central Vigilance Commission). This is because BSNL being a wholly owned Government company, is subject to such probes and also to writ petitions. As a result its expansions have been stymied merely through such accusations or such writ petitions, even as private sector companies, unfettered, have grown. The Government is thus, by tying up management's hands, destroying its own value; BSNL is slated to go public next year.

Air India has also been messed with, compelled to place an order for 111 new aircraft worth some Rs 50,000 crores, of which 59 have been delivered. Here, however, poor management has bereft this company from public sympathy. It has now asked Government to allow it to raise tax free bonds and to give the bonds its guarantee, to allow it to raise money at lower rates by improving its credit rating. Government ought not to.

It ought, however, to encourage the plans by IIFCL (India Infrastructure Finance Company Limited) to start take out financing. There is a paucity of long term funds needed to invest in infrastructure, for which there is a crying need. Banks can lend for upto 5 years, else there is an asset-liability mismatch, since its liabilities (deposits) are short term in duration. With take out financing in place, IIFCL steps in to take over the debt, after 5 years, from a bank lending it for that term and so help finance longer gestation infrastructure projects.

Another example of bad policy was in the destruction of the textile industry in Mumbai in the 1980s, following a strike by Datta Samant, a union leader. Several mills shut down and were taken over by NTC (National Textile Corporation), in order to save jobs. It is only now, two decades later, that 3 of them have been restarted by NTC, which has obtained the wherewithal to do so thanks to rising real estate prices. But the damage done to the thousands of lives put on hold for two decades, is unimaginable.

Corporate results for the Dec quarter have, largely, been encouraging. The disappointments were from L&T, whose sales fell 6% (the first quarterly sales fall), though its profits, before extraordinary income, rose 15%, and ICICI Bank, whose net profit fell 13%. However, IT majors TCS and Wipro showed rises in net profits of 34% and 21% respectively, ONGC's net was up 23% (thanks mainly to reduction in subsidy burden on kerosene and LPG, which the Government took over and unilaterally capped at Rs 12,000 crores), and Reliance Industries' net profit was up 16%, despite lower refining margins, thanks to increased gas output.

Last week the BSE-Sensex failed to crack the 17,700 resistance this columnist was expecting it to, and fell back to end the week at 16,859, down 694. The main contributors to this fall were L&T (with 128, on disappointing results) and RIL (with 121, despite better than anticipated results!). The market moves on many factors and is not correlated to any one, but dependent on the direction of mass investor psychology. This has been adumbrated in a wonderful book titled 'Extraordinary Popular Delusions and the Madness of Crowds' by Charles Mackay. The NSE-Nifty fell 216, to close at 5036.

The sensex support level of 16,500 seems to be holding. Will the market try and breach 17,700 again? It will certainly make a try.

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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5 Responses to "Fog descends on Delhi and on Dalal Street"


Jan 30, 2010

Please send me your mail.


Sachin Wagal

Jan 27, 2010

True poverty ridden farmers can get a better price for their produce if middlemen are eliminated or atleast middlemen their commission is capped and regularized. Real profits are made by middle men in all types of business; they do not have to invest money or doing the toiling, just iski topi uske sir :)



Jan 25, 2010

It is interesting that you mention prevailing nil tax on agricultural income.

Taxing agriculture is a taboo. Even the stupid Left chaps like Raja, Karat (though the Left by and large are the ONLY politicians who are not corrupt to core and dont have masses of 'poramboke', read agriculture, land gifted to themselves while they were ministers or were able to fix a minister if the former did not get allotment when he was in opposition!) will go hysterical: "Well, what a cruelty? Taxing Agriculture?".

Why cant the Govt impose a modest 5% on Agri-income above Rs50 Lakhs. 50 Lakh of Agri-income, I mean, in a year cannot hurt the 'true farmer' (the kind that is forced to commit suicide, supposedly in whose cause, our great Nethas write-off loans every time an election is imminent!) since such 'true farmer' does not get to see Rs50 lakhs in entire thirty years of his working life!

Incidentally, such 5% tax on 50Lakhs and above can more than amply fund, the contruction of perenial agri infrastructure like man-made canals inter-linking rivers, cold stores, rural roads etc etc. (Well, some one said, 'dont give a fish to poor man; teach him how to fish!'...the agr-version: 'Dont give color TV sets, Dhotis, load write offs, free power which promotes only irresponsible use, instead invest & build self sustainable perenial Agri Infrastructure, that does not vanish a year from now'). Talking of loan write-offs, I wonder we cannot have a compulsory paticipatory (so that it is not misused) crop insurance part funded by Govt, from our behamoth National Insurance Companies. They can bear alternating shock of drought and preium-going-to-bottom-line bounty from an year to year, or drought in one region versus plenty elsewhere?!

But then, if we taxed agri-income, wont it not hurt the pseudo-agriculturists namely Nethas, babus who are the real beneficiaries of the NIL tax on agri fraud.

Incidentally, you forgot to include the more recent farmer-class Bollywood actors! Remember, the Barbanki Agri Land Amitabh received as gift (well, he had to drop the hot potatoes later is another story) from Thakur Amar singh (err, thru his 'friends') as a return favour for AB's help to lift personal TRP rating of Thakur Amar Singh, so that the all brawn and no brain Mulayam is kept in the shadow, till an MBA educated Akilesh, the son of The Wrestler saw thru the game to switch of power supply to TAS TV channel (Thakur Amar Singh TV Channel)! Well, well...back to Barbanki..there are more 5-star agricultarists these days - SRK, the other Khan who is also a full-time social engineer et al, feasting on the middle clas woe, of getting milked at source, to keep Govt wheels creaking forward.

Talking of which, various tax consultants, raise hoopla over the falling tax rates & pittance Rs10000 additionally exempt from tax every year under 80C (never mind, it wont even offset the annual inflation) and giving thumbs up the Fin Minister of the day, for putting up such a nice show. Reality is that since 1991, there is no effective tax reduction on TOTAL tax paid, whereas the Govt has been able to hood-wink not just the salaries & middle-class but the so called tax-consutants too. Progressively, the FMs of these years have shifted half the income-tax percent from income to expenditure, by way of Service Tax,while the effective reduction on income-tax rate is less than 50%. Singh is King: Indeed, it was The Doctor's smart idea to start taxing a small 'negative (luxury) list' at 5%. Today, we pay 12% Service Tax on anything and every thing that is basic, to fund growing Govt in-efficiencies, unwanted additional ministries & minsiters-of state (and the bunch of civil servants, majority of whom are un-productive at best, that come with it) without any work/power/performance, generated to buy Regional Satraps like Karunanidhi, Deve Gowda, Bal Thackeray etc etc and the list is endless. Add to it your 10/20/30% present income-tax rate, you will find that the effective outgo is much more than what the middle-class used to pay earlier as Income Tax. Consider against this the effective payment by way of all taxes made by the Corporates is only 19% - admitted so by none other than CII/FICCI!

Well, appease the rich (be it Corporates, AB, SRKs or Netha-Babu combines) & squeeze the middle class is the game all are playing, pulling wool over the eyes of these hapless TDS victims!!

With such vested inetersts holding the power to rule over the rest who are unfortunates, how can one expect a reasonable start to be made to tax Agri-income at 5% on all agri-income in excess of Rs50 Lakhs per annum?! Jai Hindustan!!



Jan 24, 2010

A lot of activity in life insurance business,can you kindly post your views on that, particularly in ULIP.
thanks very much for this service



Jan 23, 2010


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