Borrowing from the future - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Borrowing from the future A  A  A


Power outage halted the Super Bowl in New Orleans for over a half hour. For the uninitiated, the Super Bowl is America's biggest football tournament, and is not, as cricket lovers with a bad accent may feel, an exceedingly well delivered over. The outage points to the crumbling power infrastructure in the USA, and brings to mind the collapse of the northern Indian grid, last year.

Governments all over the world have been buying their way out of economic problems, by printing more money. German economist Kurt Richebacher had warned, in a newsletter in 2005, that creation of excess credit in relation to current savings causes asset bubbles. He pointed out that in the 4 years since 2004 "a credit expansion in the United States of close to $10 trillion-in relation to nominal GDP growth of barely $2 trillion over the last four years since 2000-definitely represents more than the usual dose of inflationary credit excess. This is really hyperinflation in terms of credit creation."

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The result of this was the collapse of the housing market, the stock market, and various banks, in the crisis of 2007.

Since then, Governments have pumped in even larger amounts, through quantitative easing, and the US Federal Reserve has expanded its balance sheet with printed money. The money has gone into purchase of, largely, US Treasury Bills, in a 'flight to safety', driving down yields on Government bonds to absurdly low levels and Government bond prices absurdly high (an asset bubble which, when it bursts, will cause calamity). Not enough money has gone into rebuilding creaky infrastructure, including power infrastructure.

Hence the outage at the Super Bowl.

A bigger, looming, problem, will be shortage of drinking water. Although 75% of the Earth's surface is covered by water, about 1% of this is potable water. And this comes mainly from rivers. In 1935 President Roosevelt had the Hoover Dam built on the Colorado River, with 2050 MW of electricity generation capacity, enough to power 1.75 m. homes. Damming of the Colorado River created an artificial Lake Mead, which supplied the water to surrounding areas.

What then happened was Las Vegas, a town wholly devoted to gambling and, lit up by flashy neon signs, guzzling electricity like there is no tomorrow. Las Vegas eats up 2 times the electricity produced by the generators at the Hoover Dam. Lake Mead also supplies the water needed in arid desert climate by the 42 million annual tourists to Las Vegas. The lake is shrinking.

This shrinking water supply is bound to increase tensions between various states and could even lead to water wars.

It's the same situation in India too.

We have not created enough jobs to go around, due to various pulls and pushes and pressures, and not enough of a firm hand to deal with them. Over 50 percent of our population lives in rural areas and is dependent on agriculture, which does not provide them a fair living.

The Government thus faces a lot of challenges. In order to mitigate rural unemployment it has come up with welfare schemes, such as NREGA, and various subsidy schemes. These add up to a fiscal problem and leave little money with the Government to spend on the physical infrastructure of power plants, ports, roads and on the social infrastructure of schools, hospitals and colleges. India, too, is starting to see inter state issues over water resources; the Supreme Court just ordered the Karnataka Government to release more water to Tamil Nadu.

There are technological solutions such as water filteration, desalination plants, reverse osmosis and others, that are being developed for dealing with water shortage.

Fortunately, the Indian Government has developed a new resolve to act on economic reforms. It would be far better to facilitate economic growth through a proper policy framework and environment, and help create jobs, which would then reduce the amounts it would need to spend on its welfare schemes.

This is what has led rating agencies such as Standard & Poor and Fitch to not downgrade, as threatened, India's rating from investment grade to junk.

The increase in foreign direct investment limit in civil aviation has led to an impending deal in which Etihad Airways to acquire 24% in Jet Airways, the due diligence for which will be completed in a week's time. Its also what has led to a revival in talks between Singapore's Changi Airport to acquire a stake in GVK's airports business.

Shortage of coal was one of the main reasons for a lower power production. Last week Coal India signed a deal with the Indian Railways under which the former (which has surplus cash on hand) will lend Rs 7,500 crores to the latter, to help finance construction of railway lines to access inaccessible coal mining areas in Jharkhand, Chattisgarh and Odisha.

An FDI project proposed by Korean steel maker POSCO, to set up a steel plant in the state, has been stuck for 8 years due to protests by locals over various issues. The Government has to evaluate the economic benefits from the project and the costs, in terms of various factors, social, environment and public sentiment, of the same. But such an evaluation cannot take 8 years! It seems that the Government of the State and the Centre have decided to go ahead and land is being cleared for the purpose.

The Petroleum Ministry is also proposing to the Cabinet that prices of natural gas be increased, prior to their revision in 2014, from $ 4.2 to between $ 8-8.5/ mmBtu, so that exploration firms are encouraged to look for more oil and gas. That, in turn, would bring down the current account deficit.

Several countries have used the fracking technology to exploit shale oil and gas reserves. Last week we mentioned a huge find in Australia, of shale oil. Now Mediterranean countries are looking for shale deposits.

Israel may have shale reserves of between 100-250 billion barrels of oil, almost equal to Saudi Arabia. This would have geopolitical implications. It would also have an impact on the other alternative, offered by companies such as Better Place, for an electric car option, to reduce Israel's dependence on oil which is largely supplied by neighbours hostile to it.

Sometimes technological innovations can have unintended consequences. Because price of shale oil/gas has fallen sharply in the US, its energy intensive companies have become more competitive than European ones. Europe is reviving its coal industry to reduce its energy cost!. This would have adverse environmental impact.

In corporate news of interest, the stock price of rating agency Standard & Poor after the US Government slapped it with a $ 5 b. lawsuit. The Government, it seems, feels that the term standard and poor reflects the quality of its ratings on CDOs (collateralised debt obligation) products.

Rating agencies are belatedly coming into the limelight for their roles in the 1987 financial collapse. One recalls an article in the Economist which talked about a review exercise undertaken by Moody's, of the ratings it had assigned to Alt A instruments. At the end of a 5 day review, Moody's downgraded over 90% of the ratings it had issued, from AAA to junk...... in one step! Now, ratings upgrades and downgrades are normally one notch at a time. The fact that it went from highest to lowest in one go indicates that the original rating was unscientifically given.

In other corporate news, the Supreme Court has asked Securities and Exchange Board of India (SEBI) to feel free to attach the properties of Sahara Group companies. Two of them had raised money by issuing OFCDs (Optionally Fully Convertible Debentures) from some 30 m. investors, without issuing a prospectus. SEBI has passed an order for a refund of the amount, with interest. This article in Business Standard explains how the money raised through the OFCDs was transferred to enable the group to buy Grosvenor House, a landmark hotel in London. One of the assets of the two companies that had issued OFCDs is the equity shareholding in Amby Valley, which, in turns, has controlling interest in Amby Valley (Mauritius) through which Grosvenor House was purchased. Would SEBI, cleared by the Supreme Court, attach these shares of Amby Valley?

Last week the BSE-Sensex fell 296 points to end at 19,484 and the NSE-Nifty declined 95 to close at 5,903.

What next? The sensex finds support between the levels 18,500-19,000 and could, at worse, reach there. Foreign investors are reducing their holding of low yielding US Treasury Bills and are willing to take higher risk in emerging markets equity. India got an inflow of $ 2b. in January, and can expect $ 30 b. in calendar 2013.

The key to higher inflows will be, as Narendra Modi put it, less Government and more governance. Better governance is the key to election victories. Has that message got through to all political parties, loud and clear?

If it has reached most of them, then we can expect the sensex to go past the 21,000 resistance level in the sensex and start a new bull run.

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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6 Responses to "Borrowing from the future"
Feb 21, 2013
Why compare US to India, I dont see what is the common factor apart from both being countries. It is fashinable to say these days that US is bankrupt because of wrong policy making and then the example of housing bubble is given. Something like a housng bubble is a new reality because of excess grees and too many finance authorities always running towards being a larger entity than other and that is something which is not country specific rather it is a peculiar trate of human race rather modern human race.
As far as the other things about US spendings are concerned there is noway we can measure it against any country like India. US spends in Social security and things that improve the standard of living for common public, they spend on counter-terrorism and things like war efforts in Afganistan . These are things which are either today's necessity to stand against muslim extremist of give a better life to someone in the country.
Countries like India will always keep themselves entangled in problems of 18th century like water and electricity and cant even stand a comaprison.
Example like outage in SuperBowl are one-of instances and shouldnt read too much into them let alone comapre them with electricity condition in India..
Feb 10, 2013
By the way nice joke about the Super Bowl and cricket.
How many understood it is questionable though.

And also no one has yet owned up to the cause of power shut down at the Bowl.
Feb 10, 2013
I appreciate the suggestion by Mr Shivramakrishna about the water supply. However, it allows the government to abdicate its own responsibilities and dump them onto the builders and hospitals and schools et al.
If the gove is incapable and unwilling to perform clean drinking water to its citizens then its not fit to govern.
And instead of penalizing the private sector in fact it should provide incentives to the industries et al that do provide safte and clean drinking water to its residents, patients, students et al.

But the public doesn't vote. Last year in February elections in Bombay the percentage of voter turnout was around 45% !!
Feb 9, 2013
Shrinking water supply : The author says India too has the same problem.

1. Why the Indian government has not taken any action to build self sufficient water treatment plants in all big apartments and MSME Sectors in all major cities? This could reduce a lot of pressure on water shortage during severe droughts and shrinking rivers.

2. The government must take on a first priority basis to build such plants for treating waste water of kitchen, washing machines, and bath rooms (and not toilet water). What I mean here is water that flows to open drainage and not sewage.

3. Construction vendors can be identified immediately with knowledge on plumbing to separate or decouple the pipe lines of waste water from sewage lines to flow into water treatment plants that can recycle for usage of the same purpose like kitchen, bathing and washing.

4. As pre-caution all future projects on apartments must have this facility even before the flats are sold. The government should make it compulsory.

5. Similarly all MSME industries that do not have a water treatment plant must be given a time frame to adopt this policy decision immediately. A penalty should be imposed on industries that fail to comply within the time limits. This time limit also applies to residential complexes and commercial complexes as well.

My request to the author is to pressure the government to speed up this process of decision making in the coming budget session.
Feb 9, 2013
The US government is bankrupt and not able to borrow any more to rebuild the infrastructure but the Indian government is fiscally too conservative. They should spend liberally on infrastructure modernization because the future of the economy depends on it. It is also hard to understand why there are not many more high value infrastructure bonds sold to stimulate construction. There is a lot of money on the sidelines and banks are benefitting the most. There is a bank on every street corner. In the Indian economy, there is need for more balance. There are too many service jobs. We need more infrastructure construction and more manufacturing.

It is great to see you raising these issues. I hope the bureaucrats in the government are paying attention and will do something to improve the quality of life for their citizens which is what they were hired for.
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Feb 9, 2013
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