Is the India story derailed or just dented?

24 MARCH 2012

Poor governance, or no governance, has seriously dented the India story. Some say it's been derailed. Last week saw a few examples. Rail Minister, Dinesh Trivedi, resigned with damaged eardrums after hearing the tirade of his party chief Mamata Bannerjee, for having the temerity to do his job. He had raised passenger fares, after a decade, in order to set the Railways, India's largest employer, on a proper financial course. His decision was supported by the Unions and by all others except Ms Bannerjee. Compulsions of coalition politics made him resign and the new Minister promptly rolled back the hike.

The problem lies in the fact that political leaders of all parties use public money for perceived popularity. Mamata, or her party, lose nothing if the fare hike is rolled back; it is the nation that does. The loss has to be borne somehow, and so new taxes or surcharges or whatever will be introduced. In other words, the subsidy given to the passengers will be borne by others.

The solution, perhaps, would be if a law could be passed making it mandatory for the party or parties who succeeds in opposing a measure, were to be asked to bear, say, 10% of the cost. Perhaps the Supreme Court may order a referendum, and pass a law, if the majority of people approved. It is high time politicians do not treat the national exchequer as a pot into which they can dip their grubby hands.

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One had hoped that the UPA Government could entice the Samajwadi Party to join it, which would pave the way for it to take bolder economic reforms. The SP has, however, refused to join it, figuring, probably correctly, that its chances would deprove if it did. So, as far as reforms are concerned, the UPA Government and its coalition partners would charge ahead, until the next general elections, with the speed of two lame ducks in a three-legged race. One can't expect too much of it.

Just how unable the UPA is to withstand pressure was also seen in its support of a UN resolution against Sri Lanka, at the behest of DMK and AIADMK.

Last week the BSE-Sensex lost 104 points to end at 17361. The NSE-Nifty lost 39 to close at 5278.

The fall, on Thursday, was both on weak global cues (investor nervousness about high prices of crude oil) and on the new, leaked, CAG (Comptroller & Auditor General) report on coal. The report says that CAG claims the Government lost revenues of Rs 10.7 lac crores by giving away coal cheaply.

Unlike in the case of telecom, where cheap spectrum led to cheap call rates and benefitted the consumer, the cheap coal benefitted the allotees of coal mine and not their consumers. Failure to introduce adequate competition is ruining this sector and since most of our power plants are thermal, needing coal, we need to invest much more into producing coal. Production of gas, an alternative, has fallen sharply but can be expected to revive after the 2014 revision in gas prices.

Several power producers had bought, or negotiated long term supply contracts with, coal mines, to feed their power plants, and had offered a fixed rate for supply of power to state electricity boards (SEBs) for 25 years. These producers are now in trouble, after countries such as Indonesia and Australia imposed taxes which hiked the cost of the imported coal to such an extent that the projects turned unviable. The SEBs are unsympathetic to pleas of the producers, and are demanding power at the negotiated rates. In the case of Reliance Power four states, AP, TN, Karnataka and Maharashtra, are threatening to encash bank guarantees, and to discontinue the power purchase agreements.

The Vodafone case has taken an interesting turn. The Government had slapped it with a tax notice, for its failure to deduct tax at source on the capital gains that Hutchison Whampoa, a Hong Kong based firm over which Indian taxmen have no jurisdiction, had made, in an offshore transaction for sale of a controlling interest in Vodafone by Hutch. Vodafone went in appeal to the Supreme Court, and won. The Government filed a review petition against the appeal, and lost. It now wants to retrospectively amend the law, in order to show that it always intended to tax such transactions, if the underlying assets which were acquired, resided in India.

The issue is one of form over substance. As per the form of the law, the assets bought by Vodafone were shares of a company and, since the sale was done oversees, was not subject to tax. As per the substance of the law, which the Government now wants to clarify, Vodafone is liable, because it is acquiring assets in India which have benefitted from the policies and the advantages conferred by the Government. The crux of the issue is this – was Vodafone aware of Government's intention to collect tax from it, on behalf of Hutch, before it made its last payment? If so, Vodafone would be liable, once the law is changed. If not, it wouldn't.

The telecom story, cited as the biggest India success story and an example of an economically liberated Government, has been severely dented. The shenanigans of former telecom minister, A Raja, who allocated spectrum out of turn, led to an en masse cancellation of 122 licences. Worse still, the Supreme Court is compelling the Government to follow only an auction method to allocate spectrum, something, this columnist feels, is not within its purview as it is in the domain of policy making. This could lead to problems between the legislative and judicial arms of Government, which is a dangerous portend. Because one of the biggest plus points of the India story is that it has a strong constitution and a rule of law.

Another sector which has seen explosive growth, with a trebling of passengers to 150 m. is the civil aviation sector. Yet its larger players Air India and Kingfisher, are in huge financial difficulties, which are now the difficulties of the banks who have lent to them. Air India gets equity infusion from the Government, which dips into your and my pockets for it. Kingfisher doesn't get such infusions and has now lost the confidence of the Ministry, which is asking it to pay now and fly later.

The problems of the airline industry stem from two factors. One is unequal competition, with one player getting almost unlimited Government funds to play with. Why not privatise Air India, is the obvious question. (Because then connected politicians will not get free air travel, is the obvious answer).

Similarly, banks have been saddled losses for loans of Rs 8100 crores given to Hindustan Construction Company Ltd. (HCC). Its project to build a hill station at Lavasa ran into environmental issues. The delay in getting them has resulted in a Rs 134 crore loss and delay in paying Rs 90 crores by way of interest, which would keep it as a standard account not a delinquent one.

In other corporate news, Mahindra Satyam and Tech Mahindra are to merge, in the ratio of 17 shares of the former for 2 of the latter. The combined entity will have sales of $2.4b. and a market cap of $ 3.1 b. This is a wonderful story about a company rescued after the erstwhile management admitted to fraud, and now thriving. This is what strengthens investor confidence in the India story.

What lies ahead?

The Reserve Bank of India (RBI) is to announce its credit policy soon and will most likely cut interest rates. That would boost investor sentiment a bit. On the flip side are rising crude oil prices and the 2% across the board hike in excise duties, both of which will increase manufacturing costs and reduce margins.

In the absence of reforms the market would continue its drift, with a downward bias. For now the situation in Europe seems to have settled and the fear of spread of contagion has been replaced by the fear of rising oil prices. The bigger worry, however, would be China, if the bubble in its real estate sector bursts. Tread with caution.

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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1 Responses to "Is the India story derailed or just dented?"


Mar 24, 2012

Good analysis - it is mpt dented but India is a story of great disaster or you can say a comlete derailment. Where is the integrity of the leaders? In fact we are deprived of leadership. Pl tell me a single name who can be called a real leader or who is interested in India's development. Sorry to say NONE. We have leaders now who don't have any shame in accusing Mahatma Gandhi or Nehru but they don't do any introspection. Only God knows where we are going.............

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