Setting up the information highway - Straight from the Hip by J Mulraj

Setting up the information highway

8 MARCH 2014

Developed nations of the world attained their lead in development because their Governments laid the foundations for their economies to grow. In medievial times, laying of roads was important, for it facilitated the trading of goods and services, and thus expanded markets. In more modern times, it is the laying of the information highway that has become important.

Consider this. The highest market cap in the world today is that of Apple, a new age company that supplies digital products desired by many. At number 2 is Google, a digital search engine, which overtook Exxon Mobil a few months ago.

Till a decade ago, Europe was leading in investment in telecom infrastructure. As per a study by Strand Consult, the EU share of global telecom investment has fallen from a third, a decade ago, to less than a fifth. The US has stolen the lead, through sensible regulatory policies that encourage investment, and encourage operators to earn and invest. With 4% of global population, US has 25% of telecom broadband investment.

The result is a spate of innovation using the information highway that has been sensibly laid down.

It is this infrastructure, combined with a vibrant venture capital industry that funds new ventures and so encourages innovation, that has seen some of the most valuable internet companies coming out of the US. Thus 15 of the top 25 internet companies of the world, come from the US; only 1 from EU.

The success of these companies benefits the country, benefits the investors in them, benefits consumers and creates employment opportunities in them.

India used to follow sensible telecom deregulation policies, until the A Raja spectrum allocation scandal hit. After a bumpy start, in which the Government initially auctioned licenses to earn the maximum revenue from sale of spectrum for itself, the Government realised that this was not working. Due to high upfront fees for the licence, there was restricted competition, and hence high user charges. It was when the Government switched to a revenue sharing scheme instead of an expropriatory spectrum auction scheme, that the telecom revolution really took off.

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In the '50s there were only 75 million telephones worldwide, of which around 60% were in the US. It was only after mobile telephony came in, and Governments encouraged competition and investment, that teledensity shot up. India now has over 900 m. phone users and a teledensity of 73%.

But after the telecom spectrum allotment scam hit, the Supreme Court has, erroneously according to this columnist, insisted on all spectrum being auctioned at the highest price. This benefits Government, but harms consumers (who will pay for it) and harms innovation and growth. The auction ought to be based on share of revenue the operator is willing to part with, rather than on an amount.

It is the digital economy that is in the forefront today. Consider that Flipkart, an online e-commerce company in India, managed to hit a run rate of $ 1b. in turnover, in just six years. It would take far longer for most traditional companies to hit that run rate.

Exports from the US of digital goods and services are now the third largest items of export, with 2/3rds of such exports going to the EU.

The task of good government is to lay the foundations for economic growth, by setting up proper infrastructure, and also an environment that welcomes investment and innovation. In the past two terms of the UPA we have not seen signs of this. What we have seen, instead, is accommodative politics, in which coalition partners of Government are given a slice of the economic cake and freedom to exploit it. The misuse of such freedom led to the scams, whether in telecom, airlines, coal or other industries.

Such coalition partners were also given freedom from prosecution for companies which have committed huge economic fraud. The most visible of these cases is UP based Sahara group, which raised some Rs 17,000 crores from some 3 crore investors (ostensible fake ones, as witnessed by the absence of street protests by them), without the required permission from SEBI to make a public issue. It is the Supreme Court that is now pursuing the case, and has invited the head of Sahara, Subrata Roy, to be a guest of the Government in Tihar Jail, until he repays the amount. According to the Supreme Court it has now ballooned to over Rs 30,000 crores, with interest. It would be interesting to see how any group can raise this kind of money.

Yet, another, albeit smaller, scam, of Rs 5,600 crores, done by the NSEL (National Spot Exchange Limited) is not being pursued with even a fraction of the vigour displayed in the Sahara case. Nor are the cases of chit fund companies like Sarada. In all of these there are genuine investors who have lost money, not ghost investors as in the case of Sahara. This implies that the Government is keen not to protect investor interests, but to protect its own political interest and that of its coalition partners.

So the statement of P Chidambaram, Finance Minister, that he is all for speedier justice to fight graft is both incredible and laughable. Chidambaram inaugurated, alongwith Arvind Mayaram, the MCX-SX stock exchange of the same group, a few months before the NSEL scam broke. Do they really have investor protection at heart, and are they really keen to pursue speedier justice? They have enough evidence to proceed with criminal action, the latest being that NSEL indulged in hawala and benami trades.

Institutional shareholders normally do not take cudgels on behalf of minority investors. They vote with their feet, exiting a stock of a company whose management has been unfair to minority shareholders. In a rare instance, some of them have combined to oppose Maruti Suzuki's deal with parent Suzuki, which they feel is unfair to minority shareholders.

Last week foreign investors, further enthused by the fall in India's current account deficit in Q3 to 0.9% of GDP, and to the subsequent strengthening of the Indian Rupee, which went below Rs 61/$, invested aggressively, pushing up the BSE-Sensex for a gain of 799 points, to a new high of 21,919, and the NSE-Nifty to a new high of 6,526, up 249. In the Oct-Dec quarter, foreign institutional investors (FIIs) have pumped in $ 6 b. into Indian equities.

This is one of the consequences of high global liquidity, thanks to quantitative easing policies followed by Governments. The US $ 85b. bond buying programme has resulted in increasing the size of assets on US bank balance sheets by $2.1 trillion since Sep 2008, when the flobal financial crisis hit.

But an even larger growth, that of a whopping $ 15.4 trillion, is seen in that of assets of Chinese banks' balance sheets. This represents 2 ½ times Chinese GDP, a very high leverage. Banks have lent this money to a spate of industries, including realty companies, coal mines, solar panel makers, etc. These companies have also borrowed through the shadow banking system, which is outside of the regular banking channels.

It is the likelihood of a default in both the shadow banking as well as in its banking system that is making global investors nervous. Will such a collapse help or harm India? That would depend on the sort of Government the electorate throws up, and the quality of its governance. So its over to the Indian voter. With election results to be declared May 16, investors have a little over two months of torture under the scam tainted extant Government.

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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