The deed is done, what shall I do with the dagger?

17 MARCH 2012

Finance Minister, Pranab Mukherjee, quoted out of Shakespeare's Hamlet, when, before announcing a 2 % hike in excise duties (they had been cut earlier to stimulate the economy after the global meltdown), he stated that he had to be cruel only to be kind. At the conclusion, he may as well quote out of Macbeth and soliloquy 'the deed is done, what shall I do with the dagger?'

This is the penultimate budget for the UPA. Next year's budget would just precede general elections and would thus need to be a populist one, since politicians continue to believe that giveaways can replace good governance. It cannot.

Just like Sherlock Holmes got a clue from the dog that did not bark, the clue to this year's budget is what the FM did not do! He has estimated that the fiscal deficit would be 5.1% of GDP, but the past record of accuracy of budget estimation by all finance ministers has been, ahem, poor. The FM promised to cap subsidy payments to under 2% of GDP, further promising to bring them down to 1.7% over 3 years. He did not say how.

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There is no move to, as the Prime Minister later stated, 'bite the bullet'. Perhaps the UPA is seeking political consensus (i.e. removing toxic gunpowder from the bullet) before sinking its teeth into it, so that the damage to it is merely dental and not intestinal. The only, feeble, attempt in this direction is the hike in excise duty on large cars. The simplest, and most obvious, way to reduce petroleum usage and subsidy would be (a) to hike diesel prices and (b) mandate fuel efficiency norms. The former requires political support, plus noise reducing headphones for the inevitable Mamata tirade, and the latter requires a backbone, which the UP demonstrably does not possess.

Thus the calculations made in the Budget for economic growth, revenue collection and fiscal deficit would rely more on politics. If the UPA strikes an alliance with the SP, and can nullify its dependence on Mamata Banerjee's Trinamool Congress, it would get elbow room to undertake more reforms, and would be better placed to meet its budgetary estimates and targets. Were that to happen, as seems probable, the market would boom.

It would boom largely due to global liquidity. One can see that from figures of investment last week by FIIs and by domestic mutual funds. In the first four days of last week, foreign Institutional Investors (FIIs) were net buyers of Rs 1387, 907, 2075 and 183 crores. Domestic mutual fund figures were (469), (226), 104 and 128. We thus remain dependent, to a large extent, on FIIs.

The European Central Bank (ECB) has recently released a second tranche, of 520 billion euro, of 3 year loans to European banks at 1% interest. The first tranche, of 480 b., given in December, fuelled the rally. Money, like water, finds its own levels and so long as the Indian market looks beguiling to FIIs, it will flow in. This is why good governance and stable policies matter. The money released in the second tranche is yet to flow in.

Added to that is the Rs 48,000 crore liquidity released by the cut in CRR by the Reserve Bank Of India (RBI).

But FII money is as mercurial, though not as shrilly vocal, as Mamatadi, and can exit at short notice. So it is incumbent upon a good government to encourage the growth of domestic institutions to counter the negative impact of a sudden exit of FII money. Is it doing enough?

Yes, and no. In the budget, the FM announced a Rajiv Gandhi Equity Scheme which would give tax benefits for people to invest in equities and stay for three years. No, because it is allowing the domestic mutual fund industry to be killed, after Securities And Exchange Board Of India (SEBI) disallowed payment of upfront commissions to brokers marketing mutual funds. True, such a disallowance would be necessary, but at a time when the industry is large enough, and penetration of the equity cult deep enough, to allow it. The growth of the mutual fund industry has stunted after this disallowance.

No because it is discouraging competition in stock markets. Despite dominance of the two incumbent exchanges, NSE and BSE, a new entrant, MCX SX, was established, and was granted permission to trade foreign currencies, but, later, denied trading in equities, as it had not complied with a regulation that promoters should bring down their holding to 5%. This is because a stock exchange is a financial body in which the public have significant interest. But so have other bodies like commodity exchanges and banks. Commodity exchanges allow promoters to hold 26% and banks require them to bring it down to 5%, over time. SEBI should, in all fairness, give time , to bring down the holding. Last week the Bombay High Court quashed the order of SEBI disallowing MCX SX permission to trade in stock and asked it to reconsider the application.

Meanwhile, public sector banks, in which the Government owns 51% or more, are also not allowed to run competitively. Directed lending has resulted in corporate debt restructuring (CDR) requests hitting record levels of Rs 1.5 lac crores. This is appaling! The growth of the PSU banks is constrained by the refusal, by Government, to allow a capital increase. The Government does not have the financial resources to pump in its share.

Now the Finance Ministry is requiring these banks to curtail any 'non core' activities, if it wants to get capital from Government (if it doesn't get fresh capital, the bank becomes a non-player). Now consider this; in the recent IPO by MCX, banks who were initial investors, saw their money multiply 115 times in 5 years! That's 160% a year, compounded! The Government run Employee Provident Fund cut its rate to 8.25%, in contrast.

The Budget presented by a coalition Government is more political than economic. Two days prior to the Union Budget, Railway Minister, Dinesh Trivedi, of Mamata's TMC, presented the rail budget, and sensibly increase passenger fares nominally, something which hadn't been done for ten years. Mamatadi shrieked in protest, and demanded the ouster of her own partyman, which was agreed to by a spineless Government. A wag remarked that DTC was introduced in the Budget, no not the direct tax code, which is, again postponed, but the Dinesh Trivedi capitulation.

Without adequate financial resources which a modest fare hike would provide, the railways are unable to improve stock, add trains and give salary hikes (it is India's largest employer). Trivedi wanted to introduce high speed trains. A high speed train is not merely an elitist way of reaching a destination faster. Twenty years ago, the Japanese planners were searching for solutions to decongest Tokyo. One of the solutions was to introduce faster trains, so that people could live in a wider radius outside Tokyo and yet reach work in time. That is how Japan introduced magnetic levitation (maglev) trains. Faster trains thus become a way for urban planning. Our metropolitan cities are bursting at the seams, as they are magnets to attract migrant workforce.

Meanwhile China, with whom we try and compare ourselves, is introducing higher speed by ensuring that trains never stop at stations!

If UPA cannot stand up to its coalition partners and explain the necessity of sensible actions in the penultimate budget, it would hardly be in a position to do so next year, prior to an election.

Besides postponement of DTC, the introduction of GST (goods and services tax) was also postponed. This, too, depends on agreement by different state Governments. For which State Governments must take, as cabinet ministers, people who care about the country, not those with criminal chargesheets!

The belief that subsidy payments would be restricted relies, in large part on the UADAI project, which, by issuing smart cards to every citizen, will help directly target subsidies to the needy, instead of merely to the greedy. One hopes that UADAI is fiercely diligent in issuing aadhar cards. There are reports that it is not doing a proper due diligence and authentication of identity, which a body like the Census survey has been doing every decade and has experience of.

The Government is also relying on higher tax revenues from the growing services sector, and has expanded the base of people from which service tax is to be collected. Yet, as pointed out by V Balakrishnan, CFO, Infosys in an article in Economic Times the Income Tax Department is unjustly disallowing it tax exemptions. This, to an industry which will earn $ 100 b. in exports, impacts GDP to the extent of 7.5% and employs 2.8 m. people. The time spent by the industry fighting incorrect IT demands could be better spent acquiring business from a difficult environment.

India boasted of two success stories. IT and telecom. The telecom story has been badly dented, seriously so, by the 2G scam. The aftermath of the scam and of the judgement may be worse. For now the Government, whose own agent, the telecom minister, was the one responsible for the scam, it is the Government that now seeks to monetarily benefit from it!

The Government is asking the Supreme Court whether it can retrospectively hike charges from spectrum sale! Whether dual licensing for both GSM and CDMA should be cancelled! (The GSM industry body is also asking the Supreme Court the same, which will result in a continuation of a technology platform battle). And whether recently allocated 3G spectrum should revert to the Government! All these propositions are ridiculous, only sought with a view to raise revenue, never mind the impact on the industry.

Similarly, there is talk about introducing a legislation in order to make Vodafone pay for tax on capital gains made by Hutchison when it bought a controlling stake in Vodafone India from the latter. The Supreme Court had decided in favour of Vodafone. Should the Government now foolishly introduce legislation (which would also be challenged by Vodafone) in a bid to collect taxes, it would have a negative impact on foreign investment, both direct and indirect.

Last week the BSE-Sensex lost 37 to end at 17466, and the NSE-Nifty lost 15 to close at 5317.

The market could move up for two reasons. One is the liquidity generated by the ECB. The other is a realignment of political forces, with the SP joining the UPA. It could, thereafter, move down if there is another crisis in Portugal or in Spain. Or if prices of crude oil go higher, as other producers hike prices to make up for the drop, after sanctions, of Iranian production. So it will be a zig zag movement, starting with up.

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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4 Responses to "The deed is done, what shall I do with the dagger?"


Mar 23, 2012

Sir, it is easy to analyse and pinpoint faults but prudence demands
to find ways and alternatives.Regards


J Mulraj

Mar 19, 2012

James, shooting straight from the hip is a term which basically implies telling it like it is.
Om Prakash, you got it right. I think lawyers were exempt when Mr Chidambaram, himself a lawyer, was the Finance Minister.


James Mathew

Mar 18, 2012

Can you help me understand the relevance of the title:

'What comes straight from the hip?'


Om Prakash Sharma

Mar 18, 2012

Dear Sir,
Can you enlghten me why Advocates are exempted from service tax and health services were also sought to be broght under the service tax. For Advocates it had never been suggested by Govt. Is it not because most of politicians belong to that class

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