Knock knock knocking on FM's door - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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20 FEBRUARY 2010


Bob Dylan wrote a famous soundtrack 'knock knock knocing on heaven's door' for a 1973 film. Come Budget time, and industrialists, traders et al go knock knock knocking on the doors of Finance Minister Pranab Mukherjee, asking for reliefs. Thankfully its far less than in days of yore, because fiscal and monetary policy have become far more stable that they were. Yet Finance Ministers, and their bureaucrats, can't resist tinkering around and introducing hairbrained schemes to garner tax revenues (such as the FTB, which stands for fringe benefit tax and not what you think, dear reader). Any such stupid tinkering in the forthcoming budget on Feb 26 would similarly send the market in a downswing; it would be retracted later, but the damage would be done. For example, they may tinker around with tax free dividends in a myopic bid to garner more revenue.

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The market is expecting a partial roll back of the 6% excise cuts, across the board, made as part of the package to stimulate the economy. Perhaps a 2-3% increase in rates would be announced but that, being anticipated, may not much impact investor sentiment. Last week the US Federal Reserve raised its discount rate (the rate at which the Fed lends to banks) by 25 basis points to 0.75%, signalling confidence in the economy but causing global markets to drop. Funnily, Russia dropped interest rates 25 basis to continue stimulating the economy.

The PM's Economic Advisory Committee (EAC), a think tank, has also recommended more fiscal discipline and a change in RBI's monetary stance from accommodative to neutral, which seems rather like suggesting a change in girlfriends from Monika Lewinsky to Veronica Siwik! At the moment, banks are not finding enough borrowers and have ample liquidity, so the change in stance would only begin to hurt once industry becomes confident enough to undertake large projects.

Steps towards fiscal discipline has to be roundly welcomed. The wastage in spending is ludicrous. It is justified on the grounds of helping the weaker sections, which is unarguable. But the wastage of resources due to poor delivery and downright theft by the system, cannot ever be justified. And if often ends up harming the intended beneficiaries rather than helping them.

As in the case of fertiliser subsidies, which have ballooned to Rs 1 lac crores. Not only does this harm the fisc, it also harms the soil! For, in subsidising urea, or nitrogenous, fertiliser, whilst freeing potassic and phosphatic fertiliser, the Government encourages the increased use of urea, to the irreversible degradation of soil quality. In the latest policy change last week, it altered the subsidy pattern from product based to nutrient based, and hiked urea prices. This would only be the first of more such steps.

The EAC has also asked for a higher spend on agricultural research and a clear stance on GM (genetically modified) foods. With around 2/3rds of its population living off agriculture, India cannot go the capital intensive way to enhance productivity. Farm holdings are fragmented, and would remain so. It has to find technological solutions. One such is drip irrigation, which Gujarat is embracing. It has grown sugarcane, for example, at the Swaminarayan agricultrural farm, using 30% less water and getting a crop which is double!

Several state ministers promise free electricity to farmers in order to get their votes. This, too, does farmers more harm as there is overuse of free electricity which results in a lowering of the water table. India does little to conserve water; in several developed countries, there is a daily quota per person for water usage. Having once promised free power, it becomes politically difficult to reverse the decision, just as it is for increasing the price of urea (Yashwant Sinha as Finance Minister tried raising urea prices by just Rs 1/kg and there was a furore in protest. It had to be withdrawn). And so the subsidy bills keep bloating to unsustainable levels, to fund which, the bureaucrats think of increasingly devious ways to garner revenue. Hence the realisation that past wrongs must be corrected, is welcome. Better delivery of subsidy (or compensation for higher prices) can be delivered to marginal farmers through coupons or other delivery mechanisms.

Expect a hike in prices of petrol and deisel. Part of the high pricing of these products is because of the large bite the Government takes, by way of taxes. It is loath, obviously, to cut taxes in order to ease the burden of inevitably higher prices. Again, the subsidy does more harm than good. Subsidised kerosene is used to adulterate diesel, causing pollution. It took a Supreme Court decision in Delhi to clear the mess made by the politicians by insisting on only CNG as a fuel source for buses. Moreover, subsidised kerosene is smuggled into Pakistan, Bangladesh and Nepal; hence we subsidise foreigners! And since smugglers owe more allegiance to their pockets than to their country, it also endangers security.

If India is to grow at over 8% a year, we have to deal with both food security and energy scarcity. Given that we are blessed with sunshine, we should go in for solar power, technologies for which have improved to make it both scalable and less expensive than before. "As of next year, Florida will host the world's largest solar PV plant. The DeSoto Next Generation Solar Energy Center, which will generate 42,000 megawatt-hours of electricity annually, is under construction in DeSoto County. With 240 days of sunshine and 85 percent of the maximum solar resource available in the country, Florida has proven a hub for research centers and businesses exploring next-generation solar technologies." From. We could easily do the same, and must.

Instead of planning alternative energy sources for the future, we continue with enervating subsidies, passing the burden for such on to state owned companies (PSUs). The balance sheets of the 3 OMC's IOC, HPCL and BPCL have been destroyed; forcing BPCL to contemplate shifting of its headquarters to a suburban location to release funds by selling real estate! BSNL, which 2 years ago was the world's 7th largest telco, has been deprived of the ability to grow. The CVC (Central Vigilance Commission) has asked it to scrap a tender for 93 million lines, the world's largest, suspecting fraud. The private sector companies are, meanwhile, expanding and are also going global.

Bharti Airtel is trying to acquire Zain, which has assets in Nigeria, although minority shareholders of the Nigerian company are objecting. The stock price fell on the announcement, on fears of rising debt levels to finance the deal, and rating agencies like Crisil and S&P put it on watch. Last year, Bharti tried to enter the African market, which it considers promising, by taking a large (though not majority) stake in South African MTN. In order to facilitate the transaction, the Government of South Africa put its weight behind MTN and its finance minister offered to meet ours in order to facilitate a dual listing. The Kuwaiti Government is fully supportive of Zain. We have, instead, destroyed the OMCs, are looting ONGC, OIL and GAIL's minority shareholders and are tying BSNL's hands behind its back before sending it to spar with private sector companies.

In other corporate news, 3 other institutional shareholders have sold their stock in Vedanta, after the Church of England did, in protest of its perceived poor human rights record towards displaced people when it acquired mines. Corporate affairs minister Salman Khursheed, has suggested a way to calculate the value of corporate governance and then trade it, like carbon credits are traded. It seems a ridiculous suggestion! It would imply that companies can buy their way out of poor governance! Surely that is not what the Minister intended.

The BSE-Sensex gained 39 points last week, to end at 16191, and the NSE-Nifty gained 18, to end at 4844. Interestingly, the sensex was pulled up by the HDFC group. HDFC Bank added 50 points to the sensex and HDFC added 34. The major losers during the week were RIL, which lost 64 points after Lloyendell settled with its creditors, making it tougher for RIL to acquire it, and Bharti, which lost 63 after the Zain bid.

In the coming week there are either of 2 possibilities. The market may dip prior to the Budget, in anticipation of senseless tinkering. Or it may react to such tinkering. Any such dip could be taken as a buying opportunity. The India story looks good, despite poor public governance; it is the global story that is still worrisome. According to Stephen Roach of Morgan Stanley, only half the estimated $ 3.4 trillion of toxic assets have yet been written off - the balance is yet to come as shocks.

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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Equitymaster requests your view! Post a comment on "Knock knock knocking on FM's door". Click here!
9 Responses to "Knock knock knocking on FM's door"
Randhir
Feb 23, 2010
Please watch the video segment two on the link below.
Go to cbs.com. Click on Shows and then click on 60 minutes and watch the full episode of feb 21st.
It is from last Sunday's 60 minutes program that aired here in the U.S.

K.R. Sridhar an Indian has some answers and they are NOT solar panels.
As you will learn in the video the Bloom energy boxes are being used by several prominent industries in and around California.

Like 
Rajan Nireshwalia
Feb 23, 2010
The 4th para of this article holds the key to India's future. If this could be monitored India's GDP could
rise to 12% and much more. Everything else will fall into place.

Rajan Nireshwalia
Like 
Rajesh
Feb 22, 2010
Why only kerosene? Even Sugar is also smuggled in huge quontities to Pakistan thanks to our Agriculture Minister!! Like 
Eric Pinto
Feb 21, 2010
I agree to what you write; the question is how do we get the majority to understand what you are saying and react to wiping off subsidies ? TV is a good medium and we need to get such opinions either in small ads like the govt does in road safety (and tv charges minimal for them) or we find other mass media means. A great deal of uneducated sentiment drives FMs as it does stock markets ! Like 
Kishore
Feb 21, 2010
Dear Sir,
I have a suggestion. You can highlight(in bold) certain lines of the weekly column.

Regards,

Kishore
Like 
Suresh Patwardhan
Feb 21, 2010
The government should note and act immediately in the forthcoming budget, in three critical areas as highlighted mentioned in the article by Mr.Mulraj.

1.Fiscal iscipline
The government should act now, it is high time for enforcing the steps towards fiscal discipline. We should identify and reduce the wastage of resources due to poor delivery and downright theft by the system in a planned way every year.

2.The fertiliser subsidies
The susidies not only harm the fisc, but also harm the soil and causes the irreversible degradation of soil quality should be addressed boldly in the coming budget from long term interest of the country rather selfish interest of the ruling party.

3.Solar Energy
The goverment should encourage in a very big way initiatives like " The DeSoto Next Generation Solar Energy Center, Florida" for solar power, to make it both scalable and less expensive than before.

Like 
kersi Mahudawala
Feb 20, 2010
The Government should avoid tinkering with dividend exemption proposal and dividend should always be tax free otherwise it will have very adverse effect on the market and investment in shares. Like 
Rustom Dadabhoy
Feb 20, 2010
The PM & FM both must read this. Like 
Sasi Raman
Feb 20, 2010

Since India's Independence, India is an agricultural ecconomy, so far we are not an industrial economy and may not be so for yet another couple of decades. Even though, I do not think the successive governments, both in state and centre have had only a paroachial approach to kissan and agriculture. The political bosses are not interested to technologically and economically improve our agriculture.

The solution to this is large scale contract farming by private enterpreneurs. Fragmented cultivation, small land holding, poor irrigation, age old technology are the bottleneck to the advancement of Indian agriculture.
Here government is only interested in extending subsidies, so that they steal more from such subsidies.
The trade and agricultural bodies should pressure the government to enact rules so that large scale contract farming is possible, where thousand of acres of land can be hired for a long periods from the small farmers and cultivate in large scale by private enterpreneus, using most modern agricultural technology and equipment (not GM technology). This will increase land usage, crop rotation, better technology and equipment, and and ultimately more produce. While the farmers will not loose their land, they will get regular employment, better yield, remuneration for their land.
Like 
  
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