Policy, parochialism and paucity

13 FEBRUARY 2010

The founding fathers of our constitution wisely conceived of a federal structure for a country as big as India, one that would provide its constituent states with the economic benefits of a vast market. They also wisely gave all citizens the freedoms of unhindered travel and stay, and of expression. Europe took centuries to accept the benefits of a common market but we were years ahead. Why are we frittering away these bestowed advantages for nonsensical reasons? How can we debate, and create, sensible policy for the future if leadership is engaged in arguing over olive trees instead of planning for the Lexus?

------- FREE Newsletter -------
Dont't get tempted to gamble your savings on some 'hot tips'
Get The Honest Truth, the e-letter by Ajit Dayal, directly in your mailbox.
It's FREE. Sign Up Today.

Such planning is all the more essential if India is to achieve the promise of becoming one of the world's largest economies, in a world where there is a paucity of things we have taken for granted. Such as clean air. Water. Energy. Political leaders of other countries are doing that but ours are busy raking up non issues. In Australia and Israel, for example, water is rationed, with each household getting a quota. Israel has developed drip irrigation, providing both water and fertiliser only to the roots, where they are needed, at the right time and in the desired quantities. What our politicians have done, in order to get voted in, is to promise free electricity, leading farmers to pump water far in excess of requirement, thus both degrading soil quality and seriously depleting the water table.

The political class is also unable to garner the will to phase out subsidy on nitrogenous fertiliser (urea), even whilst it has done so for phosphatic and pottassic fertilisers. As a consequence, farmers overuse nitro, to the permanent detriment of soil quality. Producers are unable to earn enough to expand capacity, and we end up importing more expensive fertiliser. Policy, parochialism and paucity personified!

Not all policy makers get it wrong. Environment Minister, Jairam Ramesh, has thankfully put a moratorium on the introduction of genetically modified Bt Brinjal. The expert committee had cleared it, but had based its recommendation on data provided by the companies introducing it. Ramesh rightly wants an independent study to evaluate the effects on human health by consuming a genetically modified food.

Most of Europe has rejected them.

In the field of energy, most countries are moving fast towards developing renewable energy as an alternate source, simultaneously improving the technology to make it viable and sustainable. In an interview in Institutional Investor Robert F Kennedy jr., an attorney and a partner at a VC firm, says that the US could build a fully renewable energy system with the amount it spends in 3 years importing oil; after which the energy would be, essentially, free. The VC firm he is a partner of has invested in a company called Brightsource, which is setting up a 1 gigabyte concentrated solar power plant in a desert in the US.

Germany has put in place policies that encourage home owners to set up solar panel roofs, by assuring them a feed in tariff for solar power generated by them and supplied to the grid, which is twice the tariff they pay for drawing power. This policy has resulted in the creation of an army of solar roof investors looking for empty roofs and investing in them after making an arrangement with the home owners; the number of people now employed in the solar industry in Germany now exceeds those employed in the auto industry! In Australia, the Government supplies free solar panels to home owners willing to junk their existing system and to pay the price of new plumbing.

In India, too, the Ministry of Power is trying to work out ways to make solar power industry viable and has worked out a scheme to bundle the more expensive solar power with the cheaper thermal power it has on tap, in the ratio of 1:4 units, respectively, in order to bring down the cost of the 5 units. We could, however, also look at the Brightsource concentrated solar power experiment and do the same in our deserts. We could easily replicate what Germany has done, given the bounty of sunshine God has blessed us with.

The world is also running out of fossil fuels and we need to prepare for a time when we would have a severe oil shortage ergo of petro products. Instead of preparing for that time, we subsidise, for Chrissake!, petrol and diesel, making the ownership of private transport more attractive than it should be. Car sales grew 32% in January, and further in Feb, as buyers rushed in before the anticipated roll back of excise duty cut in the Budget, to be presented end Feb. We have not put in place efficient and affordable public transport systems; essentially the State has shirked its responsibility to set up such systems and left the burden of transportation on private buyers of cars and bikes. We have not even put in place norms for ever tightening fuel economy. The US has done this, driving consumers (most, but not all) away from their SUVs and pick up trucks into smaller cars.

Investors must read a book called Natural Capitalism, whose chapters are downloadable at the site www.natcap.org. The automobile industry, one of the largest and oldest industries, is horribly inefficient in its energy conversion.

According to the authors: "the contemporary automobile, after a century of engineering, is embarrassingly inefficient: Of the energy in the fuel it consumes, at least 80% is lost, mainly in the engine's heat and exhaust, so that at most only 20% is actually used to turn the wheels. Of the resulting force, 95% moves the car, while only 5% moves the driver, in proportion to their respective weights."

China is moving to address the inefficiencies through relative weights of car and passengers, by developing a single seater car, which would cost only $ 600. It is being developed by VW.

In India, Tata Motors, together with a French inventor called Guy Negre, is developing a car that would run on compressed air! These are the things political leaders should be studying, discussing and promoting through policy.

Instead, half the police force of Mumbai is busy protecting cinema halls; an excellent opportunity for terrorists to strike again! Citizens pay taxes for protection, so it is time that someone files a public interest petition asking the courts to allow them to deposit in escrow, overseen by the courts, the tax amounts payable to the Centre (such as income tax) and to the state (such as municipal tax) until such time the Centre assures the rule of law and the States assure the protection of property. It is only through such loss of revenue that politicians will learn that their responsibilities begin, not end, with their electoral success.

All these provide clues to investors with an eye to the future. Science and technology is providing solutions to the problems created by politicians with one eye on the vote bank and the other on the note bank. Would, for example, the auto industry grow at the 32% rate shown in January, if petrol was unaffordable or fuel efficiency norms made the vehicles more expensive and if there were efficient public transport alternatives? Would, for example, thermal energy become more expensive than solar, especially if a carbon tax were imposed, and the cost of producing solar power declined as demand for it grew and technology improved?

Global markets breathed a sigh of relief as the EU rallied to provide support to fiscally ailing Greece (hey! An advantage of federated unity). The 5 European economies which are struggling are Portugal, Ireland, Italy, Greece and Spain, rudely acronymed PIIGS! As pointed out by R Varangaonar and B Indurkar in Mint of Feb 12, India is actually worse off than PIIGS. Its debt at 90% of GDP is higher than the PIIGS average of 85%, and its fiscal deficit, including State Governments', is at 12% of GDP, higher than the 10% of PIIGS. Most of this lousy balance sheet situation is the result of misspent money and profligacy.

The Indian market breathed a sigh in conjunction with global markets and rallied. The BSE-Sensex ended the week at 16152, up 236 and the NSE-Nifty ended at 4826, up 69.

The rally could continue a bit more. Then nervousness would set in, prior to the Budget, end Feb. A petrol price hike (Rs 3) and diesel price hike (Rs 1-2) even though expected, would temporarily cause jitters. Banks would, from April 1st, be free to set interest rates. However capital would be better allocated if the Government were to reduce its dependence on borrowing and thus its prior claim to bank deposits through non interest bearing deposits known as CRR.

The time to buy would be in the dip that follows such announcements. In the hope that we govern ourselves for the future and not continue raking up the forgotten past.

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.

Equitymaster requests your view! Post a comment on "Policy, parochialism and paucity". Click here!

12 Responses to "Policy, parochialism and paucity"


Feb 15, 2010

excellent article
your comments on how the 'subsidy' devil is affecting the future energy scenario is revealing.
the very term subsidy hits at the root of accountability of all concerned,the govt, the industry, the distribution system etc.
behathi ganga men hath dholo
how to attack this subsidy devil and consequent corruption? if subsidy cannot be done away with in a socialistic society, how to control it?
how to educate the politicians?



Feb 15, 2010

Nice article, enjoyed reading it, it was an eyeopener in some cases. It happens to me as well, occasionally I find our existing technology too crude. Reading about fuel efficiency in auto sector was shocking. But one thing I would like to point out here, your article is fantastic no doubt about it, it could have been better if it was in simpler language. I mean very very simple words, I feel the true potential of your article remains untapped. Such revealing facts should reach the masses or at least to as many people as possible. The younger generation should continue to read such articles. Thanks for posting this article. Again please try to keep it really simple so that more people and people of varied backgrounds can get enlightened


Amin Ansari

Feb 15, 2010

In this week's otherwise excellent column the following line perplexed me: "How can we debate, and create, sensible policy for the future if leadership is engaged in arguing over olive trees instead of planning for the Lexus?" I did not know the context behind this so did a little research. I have not read Mr. Friedman's book but I think he used wrong symbolism to make a point. Olive tree to me is a symbol of hard work, prudence, caring and a long term investment that keeps giving and giving. Whereas Lexus is a symbol of excess and consumption, inefficient use of limited resources for the benefit of not only few but VERY FEW. I think India and this part of the world will be a lot better of devising and executing policies that encourage 'Olive orchards' than 'Lexus plants'.


Viren Patel

Feb 15, 2010

I am regular reader of this and appreciate the thoughts sufficient to interest and clear visions of citizens. At times, it reminds me thoughts of Late Shri Nani Plakhiwala who has contributed a lot to put complex policies and economic complexities in thoughts easily digestible by common citizens. Every isssue of E.M. is a true eye opener. Since our politicians lack will power to do any creative work [except like Mr Modi in Gujarat] I wish that Indian policy makers or at least North Block subscribe and read 'Equit master' regularly !. Next generation will be blessed if even 1 out of 100 reader implement suggestions perpatuated in this column. I suggest that Equity Master should approach / enroll key policy makers, judiciary and key commercail entities on their publicly known eMails. Best wishes.


J Mulraj

Feb 14, 2010

Readers, thank you for your comments. Mr Narender, I thought I had spelt out, quite lucidly and unequivocally, suggestions in my column. To point them out to you again, I suggested that, instead of leaders squabbling over inessentials, they should concentrate on planning for the future in which natural resources are disappearing. I suggested we emulate the policies of Germany to encourage distributed solar power, by simply granting a generous feed in tarriff for the next 20 years. I suggested we look at concentrated solar power, such as Brighsource has done in the US, in our deserts. I am not merely critical - I also pointed out to the work done by Ministry of Power in bundling solar energy with thermal energy to make the package affordable. I suggested a look at automotive design, such as the single seater car being developed by China. I suggested citizens pressurising Governments who do not provide the law and order they are meant to, with the taxes paid by the citizens. I hope you would find these suggestions to be useful



Feb 14, 2010

dear mr mulraj,

pls note that India does not SUBSIDIZE petrol and diesel. in fact the same is a media hype of gigantic proportion. the PSU sell at a loss (subsidy) but the government collects far more excise and sales tax in fact almost 25 % of central and state government revenues come from the same and bcos of the same the "subsidized" rates are far more higher than those in US and other free world countries. also the cost if calculated on a cost plus basis, hence the PSU's do not have to incentive to reduce costs. if we move to free tariffs and full decontrol, maybe competition will make up to reduce the prices and no subsidy to government. however, LPG and kerosene are receive subsidy .


kersi Pirojshah Mahudawala

Feb 14, 2010

I fully agree that someone should file a public interest petition asking the courts to allow them to deposit in escrow, overseen by the courts, the tax amounts payable to the Centre (such as income tax) and to the state (such as municipal tax) until such time the Centre assures the rule of law and the States assure the protection of property.Our politicians otherwiswe will never learn the leson of using the public money judiciously.



Feb 14, 2010

hello sir,
thanks for writing such a wonderful article,
whatever u have said is so good that everyone should know it.
keep writing the things like this so that young generation like us would try to be responsible toward environment
and resources and let other peoples know what they are doing.

thank you.



Feb 14, 2010

As a retired British Indian I share in disappointment, the criticisms you offer of Indian governance and its political class. Having lived in England for 42 years of my life and having flown the Indian flag at every conceivable opportunity in discussion, in my then host country, my frustration is palpable.
I suspect though, that you are missing a point here. My experience of living in India during the past 4 years has been that India has lost its soul. The middleclasses propelled with their new found success are ruthless in the pursuit of material gain and have no thought/ regard/respect for either their poor brothers very often slaving for them, or indeed the institutions that have made their success possible.
These people are living in islands of a vanishing delusion forgetting the interdependence which is the mark of civilisation, whilst despising everything around them that stands in the way of their gain.
Politicians who are drawn from the laiety are quick to see and exploit these ills.
I believe in the rule of law and unless our leaders can muster the spunk to deal ruthlessly with corruption and incompetence,and show true leadership by example, I am afraid we are just waiting for the day when China helped by Pakistan devours us, leading to a 1000 years of Chinese a hegemony.
We do not need the self-seeking Advanis, we desperately need the Mahatma Gandhis.



Feb 14, 2010

Interesting reading.. I was intrigued by automobile industry inefficiency till I went to the site and realized that the facts are more than a decade old..surely some progress would have been made in the last decade after the social engineering of climatic concerns

Equitymaster requests your view! Post a comment on "Policy, parochialism and paucity". Click here!