The India story has lost its shine - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
The India story has lost its shine A  A  A


For a country to become an attractive investment destination it must necessarily inspire confidence in its regulation, enforcement and transparency. La affaire Satyam does neither, reinforcing the belief that no action is ever taken against wrongdoers whenever vested interests of powers that be are involved. How else does one explain the inexplicable reluctance by the Andhra Pradesh State Government to allow the capital market regulator, SEBI, access to a person who has self admittedly committed the largest corporate fraud in Indian history? SEBI had to approach the Supreme Court for the privilege of doing its job!!!

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How can we explain the reluctance of the Government in seizing all assets of Satyam promoter, family and related firms? This is a must! SEBI must declare a scheme asking investors to indicate their last purchases of Satyam shares held up until Jan 7, when the confession letter was released. Any trades before that do not, of course, count. They should then be allowed to make a claim on Raju's assets for the difference in their purchase price and the closing price on Jan 7, because of falsified accounts. Such claims must be settled by the assets of Raju and his family/associate concerns. Instead, we see some 36 shell associate companies of Raju making a claim on Satyam for Rs 1230 crores they claim to have deposited with Satyam! This stinks even worse than a garlic eating skunk!

Little wonder that India is at # 86 (out of 180) in Transparency International's Corruption Perception Index. Politicians and bureaucrats run the country like it is their fiefdom and the honest taxpayer bears the brunt. One can see the impact of this in absurdly rising electricity and water bills. Half of the electricity generated is stolen/subsidised, the burden for which is borne by the honest user. The stolen power is a resource pool for some people, who are disinclined to reduce theft of power because of vested interest. Over time, this only encourages dishonesty which, after a point, leads to the system to crumble. India has lost its shine, because instead of using the velvet of good governance to polish the story, our political leaders have used the sandpaper of cancerous corruption. Expecting India to become a superpower in such a milieu is like expecting a chain smoker to win the marathon; the cancer has eaten far too much into the system!

The accounting regulator, ICAI, is only now beginning action against the two partners who signed Satyam's account, but not against PwC, the parent, itself. It is left to the American judiciary to punish PwC; class action suits have been filed against it in the US, where Satyam had listed its ADR. Several class action suits by ADR holders have also been filed in the US against Satyam, for falsifying its accounts. Satyam, which appointed AS Murty, a long time Satyamite, as CEO, is using well known law firm Wachtell, Lipton, Rosen and Katz to represent it. (Interestingly, Rozencrantz was a fictional character in the tragedy, Hamlet; the way the Satyam case is being handled with butterfingers one hopes it does not end in a bigger tragedy for investors).

Where corruption and self interest are the foundations of governance, instead of honesty and planning, the results show up in the economy. This is now happening. In the quarter Oct - Dec, 5.1 million jobs have been lost. True, job losses are a global phenomenon. Job losses in the US, though, since the recession bagan, are lower, at 3.6m. The difference is that the developed world has set up social nets to mitigate hardship of those who lose jobs. In India our coalition Governments have been squabbling like nincompoops about Pension reforms. The past 5 years have seen an unparalleled economic boom with generation of huge tax resources which the Government could, and should, have used, to set up such safety nets. Instead, it squandered the resources in things like subsidising car owners (for chrissake) and in schemes that sound noble and good on paper but are actually a funnel through which public money is siphoned off. It was Rajiv Gandhi who once said that less than a fifth of money allocated on welfare schemes actually reaches the beneficiaries. This is the same syndrome of public corruption, intended to benefit those in power.

Direct tax collections have grown by 11.9%, lower than the expected growth of 16.9% in the 10 months to January. Combined with the increased spending, this is surely going to result in a wider fiscal deficit. One can expect a mid February mini budget seeking to stimulate the economy, and, in so doing, hoping to garner votes for the coming general elections as way of collateral benefit.

David Rosenberg, chief economist at Merill Lynch, says that the US is already in a depression. Obama has asked for another stimulus package, which would be voted on, on Tuesday. India would also post another stimulus package. This could, perhaps, cause a rally, on a temporary triumph of hope over experience. The US, after all, has some $ 8 trillion of investible, liquid resources. Rosenberg says that the total debt of US corporate and households is 140% of its GDP, versus a norm of 80%. A reversion to the mean would result in wiping out of some $ 6 trillion of debt. This would hurt. He points to two trends. One a decline in the US, which means that the world cannot depend on it for growth as the US would have to pull up its savings rate. Two the rise of emerging markets.

Rise in emerging markets was the theme for a seminar in Goa called 'Future of Financial Markets'. Financial markets follow economic growth. When growth occurred, in the 19th century, in England, thanks to the discovery of the steam engine (Watt an idea, sirji) and the consequent industrialisation, London became the important centre of capital markets. This moved to New York and Chicago in the 20th century, when the American economy boomed after two world wars. If China and India can be the engines of growth in the 21st century, financial centres would move eastward. Financial Technologies India Ltd has set up 10 exchanges, including six in India and one each in Singapore, Dubai, Botswana and Mauritius.

India would need to increase foodgrain production from 230 m. tonnes to 320 m. by 2025, to feed its population. For this to happen, several things would need to be planned for and put in place. Terms of trade for agriculture are manifestly unfair, with 65% of the population dependent on it earning 18% of national income. Farm productivity has to increase, which, given fragmented land holdings cannot be done by mechanisation or technology such as satellite farming, which requires scale. It would need to depend on genetically modified seeds. The Government would also need to provide road/rail linkages to villages. It is an inverted priority that made our political leaders first opt for the golden quadrilateral, linking metro cities. Or perhaps it is due to their self interest in such grandiose projects.

One hopes against hope that the coming election would result in a cleaner polity. It is more likely to result in another coalition. This means that, until the coalition settles in, industry leaders would pause in capital formation.

Last week the BSE-Sensex lost 123 points, to end at 9300 and the NSE-Nifty 31, to end at 2843. If a rally ensues thanks to stimulus packages being announced, one would be advised to sell.

So, unless one sees signs of honesty in governance, and punishment of wrongdoers, one has, reluctantly, to conclude that the India story has lost its shine. Rather, that it has had its shine removed by the sandpaper of a corrupt polity.

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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