The message of Slumdog Millionaire - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
The message of Slumdog Millionaire A  A  A

28 FEBRUARY 2009

Things really came to a Boyle, one could say, with Slumdog Millionaire bagging eight Oscars, and everyone was ecstatically claiming a share of the glory, including our Government. The question the Government ought to really ask is why does India have some of the largest, and worst, slums in the world? The 8 Oscars was not only indicative of the triumph of hope over despair but also indicative of an abysmal failure of public policy and governance in India. Inasmuch as changes in policy and trends provide investors with opportunity, one needs to understand the phenomenon behind the slums

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The fact is that over 60% of India's population is dependent on agriculture, which yields 18% of national income. The way agriculture is practised in India and the laws relating to it, cannot support such a large population. Hence migration to cities, in the quest for jobs, hence slums. The terms of trade are tilted badly against agriculture and most crops are denied the advantages of a pan India market by restrictions imposed by State Governments, since agriculture is in the State list.

The ratio of people dependent on agriculture is worse in India than in developed countries, which have a capital intensive, technology driven, form of farming. With a huge, and growing population, India has to practise labour intensive farming, with highly fragmented land holdings (due to inheritance) leading to some of the lowest yields in the world. In my previous column I had written that perhaps we may need to expore the use of new technologies like GM (genetically modified) foods; I was wrong, as pointed out by a reader. The technology has not been adequately tested, especially its impact on the human body. The impending introduction of BT Brinjal, and other foods, would be extremely dangerous and, as pointed out by Devinder Sharma, in a recent lecture, an unnecessary risk to take. GM foods do not improve productivity! What they do, however, is introduce a gene into the food (brinjal) which allows it to create the pesticide to fight an infestation. Being ingrown, no amount of washing of the brinjal would remove this ability which could well continue after ingestion, converting the body into a pesticide factory! Without proper scientific testing by UNBIASED scientists it would be madness to permit its introduction into the food chain.

It would only make farmers more miserable than they already are, and more indebted to foreign companies for the GM seeds they must continue, forever, to buy.

In an article way back in 2000 in Wired magazine Bill Joy, a founder of Sun Microsystems warns of the dangers of introducing technologies without properly assessing them. The investing community is willing to finance any technology that would get them a better return on investment, and outsources the assessment of risk to regulatory bodies (who are inadequately prepared for it). The investing community outsources its conscience to a small group of activist shareholders. In another article Bill Joy talks about the new technologies of GNR (genetics, nanotechnology and robotics) which can be done on a smaller scale unlike the existing destructive technologies of NBC (nuclear, biological and chemical) which can be done, because of size and scarcity of material, only by the state.

There are technological solutions available to several problems, including those of India's agriculture and poverty, but these would need to be assessed unbiasedly. Will our political class, which has taken India to becoming one of the most corrupt countries on Transparency International's corruption index, be upto the task?

Seems not. Look at the farce at Satyam Computers, whose promoter has self admitted to massive fraud. Yet the State Government denied permission to both SEBI, the regulator, as well as CBI, to interrogate him, requiring them to approach the Supreme Court to do so! What is the State Government's involvement in it? Now SEBI has allowed a buyer to bid for it at the average price in the past 2 weeks, which would be much lower than in that in the past six months, as required hitherto. The new Board, in its magnanimity, wants the buyer to make on open offer, at such low price, for an additional 20% to allow an exit for minority shareholders!

Is it a genuine concern for the rights of defrauded minority shareholders? The proper way would be to allow a claim by minority shareholders of the difference between the last purchase price of shares held to date and the closing price on Jan 7, when the letter admitting fraud, was delivered. Such claims should be aggregated. The properties of Raju and his family must be appropriated, and used to recompense such minority shareholders. Instead, minority shareholders are now being told that a price of between 45-50, average for the past 2 weeks, is likely to be offered for a 20% share, and that they should treat this as a gesture of magnanimity by a Government which is trying its best to shield the self admitted culprit! Can Governments such as these be trusted for protecting India's food security when they cannot protect minority shareholders?

The other interesting corporate announcement was the impending merger of Reliance Industries with Reliance Petroleum. The merger ratio is to be announced. This was necessary due to the slowdown in fuel consumption; US car sales in Jan 09 are 60% lower than Jan 08! RPL would get tax concessions for five years, which could be used to offset gains made in RIL, especially from the KG gas which is to start flowing from April. The combined entity would have a market cap. of some $ 46 b; Exxon Mobil is at $ 361b.

ONGC has also struck 'significant' reserves of oil in its KG basin. Ranbaxy has been hauled up by the USFDA for improper disclosure and been dragged down for it by stock markets.

So what lessons would political leaders learn, if at all, from Slumdog Millionaire? The share of agricultural income would need to go up, and the dependent population on it to reduce. For the latter to happen, alternative livelihoods would have to be found closer to home, which would need improved roads. The Golden Quadrilateral should have been started at the villages, extending outwards to metros; our politicians only verbalise concern for the kisan but act differently. Agro prices would go up, causing higher inflation in cities and increased dearness allowance demands, especially in the army of underworked Government employees.

Incidentally, the Finance Minister, who had claimed virtuosity and propriety in not making tax changes in the Vote on account, pending a change in Government, had no qualms about hiking dearness allowance by 6% for Government employees (inflation, coincidentally, is at the lowest in 14 months!). For non Governmental consumers, he was happy to offer a 2 % cut in excise duties and service tax. The Government also does not see anything improper in full page ads. in leading newspapers, released by Ministries, but with photographs of their senior party members. This is impropriety at its worst, for other political parties would need to pay from party coffers. It also influences media.

Increased inflation, the consequence of a fairer terms of trade for agriculture, would, in turn, worsen the fiscal position; the Government is averse to curtailing expenditure but very innovative in raising taxes. So expect a fresh round of taxation by the new Government which would be unwelcomed by the market.

Improved terms of trade for agriculture would also mean a large investment in a cold storage chain, to reduce wastage (over 30% in fruits/vegetables). Expect fiscal incentives for these.

The global scene is no better. The US deficit is to hit $ 1.75 trillion. New jobless claims in the US, at 5.1m. are at a 27 year high. The US Government will own more than a third of Citi and the UK Government more than 70% of RBS. Two old institutions driven to destitution by unimaginable greed and incompetence! Production has fallen in Q3, at an annualised rate of 13.8% in the US and at 16.4% in UK, as the financial crisis hits the real world. India's GDP growth is at 5.3% in Q3, lower than expected.

The light at the end of the tunnel is still dim.

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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