The irresponsible destruction of institutions - 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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30 MARCH 2013

A wonderful edit by Pratap Bhanu Mehta says it all. The Government is pursuing an irresponsible course of destroying the independence of institutions. It is such institutions that are the bedrock of a strong democracy, and the undermining of them weakens and ultimately destroys democracy. As Mehta puts it beautifully, "In a democracy, institutions are all that stand in the way of tyranny and caprice."

The manner in which independent institutions are being misused smacks of capriciousness. The use of investigative institutions, such as the CBI, to control and subjugate opposition political parties is a bad portend; for, when the shoe is on the other foot, as does happen in a democracy, the opposition would, too. This undermines the legitimacy and authority of such investigative agencies.

Or consider how DoT is arm twisting telcos to bid for spectrum under threat of cancellation of licences! This is ludicrous! Once a business has been licensed and the company has built the infrastructure, the renewal of licences to operate cannot be subject to whims and fancies. If the renewal of licence to operate is based upon an insistence to participate in a spectrum auction it is an appalingly poor display of governance.

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And now its the turn of the Reserve Bank of India (RBI) to be destroyed as an independent institution. The Justice BN Srikrishna Committee has just submitted its recommendations for the changes necessary in the financial sector

Some of the suggestions, such as pooling 4 regulators, viz. SEBI, IRDA, PFRDA and FMC, together, appears, prima facie, to be an idea worth considering.

However, the committee has suggestions that would significantly erode the independence and the ability of the RBI, one of the institutions that we can be rightly proud of.

It recommends that the RBI be responsible only for overseeing the banking industry and for monetary policy. The management of Government of India debt as well as of foreign remittances would be directly under the purview of the Government. With these taken out of its purview, how can it manage monetary policy?

Also, for monetary policy, there would be a 7 member committee, of which only 2 would be from the RBI (including the Governor) and 5 would be nominees of the Finance Ministry. Thus RBI is emasculated. The Governor would have a casting vote, though he would have to justify it!

Bottom line is, that, if these suggestions were to be accepted, the RBI would not remain an independent institution. That would be a disaster.

Even in the US, under the guise of national security, the Government is trying to bulldoze its way through. However, a District Court judge has ruled that National Security Letters, which seek customer details en masse from telecommunication companies, are illegal orders. Governments must, of course, have the right to seek information (call records) in the case of national security, but it is not an unfettered right and must be used with discretion and wisely.

What happens when independent bodies are continually interfered with? They take action that are devoid of economic justification. Thanks to high procurement prices (to keep the famer vote bank happy) our foodgrain godowns are overflowing; yet food inflation remains high because, for reasons best known to the authorities, the stocks are not released fast enough to bring down the prices. This, at a time when global food and commodity prices are coming down. And, since food inflation is a worry for RBI, it does not bring down interest rates, which displeases the Finance Ministry.

The high inflation also means that bank deposits earn, net of inflation, a negative rate of return. This drives people to invest in gold which, in turn, makes our current account deficit unsustainably high at 6.7%. As the saying goes, 'and oh, the tangled web we weave, when first we practise to deceive'.

Governments also have a nasty habit of dipping their grubby fingers into the coffers of profitable companies under their control. In India, companies like Oil and Natural Gas Corporation (ONGC) suffer; it has had to bear a share of subsidy on petro products that belongs to the Budget. In Venezuela the late Hugo Chavez used the funds of its oil company, PDVSA, to pursue his social agenda. In Brazil, the Government has asked its oil company, Petrobras, to do several things.

Petrobras has been asked to provide thousands of jobs, which has led to Brazil having a low rate of unemployment, and to buy ships from the local shipbuilding industry (delivered with time and cost overruns) but, as a result, its oil production has stagnated and unable to meet Brazil's growing energy needs. Its market cap., which was once second only to Exxon Mobil, has fallen sharply.

In global news, the troika (European Union, IMF and ECB) have arm twisted the Cyprus banks to give a haircut (compulsory forfeiture) to those having deposits of over Euro 100,000. The haircut is probably around 40%. The new ATMs for Cypriot banks would come with a shredder attached!

At first glance this seems to be a travesty of justice. It is the shareholder of the banks who ought to take the first hit, and the depositors who ought to get protection; not the converse.

However, ironically, this would be a quirky achievement of justice. For, most of the accounts having over Euro 100,000 as deposits belong to tax evaders! Several of them are Russian oligarchs who, with political backing and skulduggery, obtained State assets cheaply on the sly. Few would shed a tear for them. The loss of 40% of their deposits would be a smaller price than that paid by another oligarch, Boris Berezovsky, who had migrated to London and was found hanging in his apartment.

Another global issue of concern is the looming global scarcity of water. Farmers in New Mexico, when informed that they would be getting only 10% of their requirement of water, voiced their objection and are legally challenging the rights of those who used water later than them (i.e. industry) to get it. We are seeing similar agitations in India too.

The problem of crude oil shortage has been technologically averted by using a technique called fracking to extract shale oil/gas. Fracking, however, uses considerable amounts of water which, as seen above, is becoming a major issue. However, technology is now emerging to use carbon dioxide, instead of water, in fracking. The CO2, after use in fracking, would be stored underground, solving another problem of its emission.

Technology is also trying to solve a third problem, that of shortage of conventional energy. Companies like Bright Source, which have already set up one project, are setting up another huge concentrated solar power projects.

Thus scientists are solving problems created by the policy makers all over the world.

India is also facing an energy shortage. It consumes some 17% of the world's energy but has only 0.8% of the world's oil and gas reserves. It must attract more expoloration, both of conventional oil/gas as well as of non conventional shale oil/gas. Now here is where good governance and vision is needed.

Just consider this. India's IT Department has raised a ludicrous demand of Rs 15,000 crores on Shell India for underpricing shares issued to its parent at par instead of at an assumed higher valuation that the subsidiary deserved, according to the Department.

On the other hand China has given clearance to Shell to invest $ 100b. (Rs 550,000 crores) to exploit shale gas reserves in the country.

Which is more sensible?

Can technology correct such problems, created by myopic policy and action? It can't.

The BRIC countries are considering setting up another development bank, a la IMF/World Bank, to serve the interest of emerging markets. They will fund it with an initial corpus of $ 100b. This would be a good move.

Indian stock markets, perhaps inspired by Cyprus, took a 40% haircut and were open only 3 out of the 5 working days last week, with holidays for Holi and Good Friday. The BSE-Sensex ended 100 points up at 18,835 and the NSE-Nifty closed 31 points higher at 5,682.

The sensex is poised just above its 200 day exponential moving average of 18,719 and a long term support line of 18,000. A breach of these levels would spell trouble. Caution is advocated for investors. It is also advocated for policymakers, particularly in their wanton destruction of independent institutions, but they are less likely to listen.

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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10 Responses to "The irresponsible destruction of institutions"
seth
Apr 5, 2013
A country like India there is no need for IPL and this should be banned;Resources should be used for improving the living conditions of common people.(Drinking water, toilets!!)Because Of independent nature of RBI only India escaped the major crisis in 2008/2009.If this is curbed India would become another Greece,Cyprus and some African countries!! Like 
Anupam Garg
Apr 1, 2013
i just realised that atlas shrugged by Ayn Rand is a timeless book...

the events outlined in that book written decades ago r still visible, as outlined by the article's author

btw, this is 1 of the best 'str8 of the hip'...lotta content in little space along with concrete articulation of personal views...good reading!!
Like 
Suresh A S
Apr 1, 2013
If Chidambaram is nominating 5 of his people in the committee of 7, he is killing the institute (RBI) which is having pulse of weaker economy section people.
I am surprised to see why people are not talking of IPL which uses huge power in 54 days at night match. (Earleir circket played in day light.) These people are enjoying on the darkness of so many villages. IPL are played in night since beer bottles are going to empty in nights faster.

Many villages does not require huge quantity of power. They want only to light from 6PM to 11PM. No big company are ready to invest in solar (self sustainable to village) because they are not getting money every month.
Like 
Borkar
Mar 31, 2013
Is it coincidence or our Destiny? The Ghost of Sanjay Gandhi should rise again. Remember the Tamasha he created after Allahabad High Court decision against High Court and then other Institutions. In Maharashtra what is happening to-day. Our head now goes down with shame and anguish and we donot know whether we will be able to raise it again. What we do? Whether the reformers like Anna and Kejriwal are/ will be on the right path or not we do not know. But at least there is begining. Let us all join to see our Institutions are protected and preserved. - Borkar Like 
Ragini Ghanekar
Mar 31, 2013
I think we should start a campaign against destruction of independence of institutions which are cornerstone of democracy and expose government ploy in this respect. Like (1)
LOVEPAREEK
Mar 31, 2013
U N BILL BONER, BOTH OF U WRITE IN A CLASS OF ITS OWN, LOGICAL N FULL OF COMMON SENSE...ALAS...WASTED ON THE SLEEPING MASSES. Like (1)
SHAH DILIPKUMAR
Mar 30, 2013
INDIAN UPA CONGRESS LED GOVT IS DOING NOTHING BUT KILLING ALL ETHICS OF DEMOCRACY IN WHICH PRIME MINISTER IS INVOLVED IN COAL GATE SCANDAL RAJA IN TELECOMMUNICATION KALMADI IN COMMONWEALTH GAME SCAM AND ALL CULPRITS ARE OUT OF JAIL ENJOYING DEMOCRACY FREEDOM HAVING NO FEAR OF LEGISLATION OF CBI OR CRAG WITH THEIR OWN MONEY AND MUSCLE POWER.EVEN ALMIGHTY IS POWERLESS AGAINST ALL THESE CULPRITS WHEN ALMIGHTY IS POWERLESS HOW CAB WE EXPECT ANY GOVT,AGENCIES MAY BE CBI CRAG OR EVEN COURT HOLDS ZNY POWER TO RESTORE DEMOCRACY THE ONLY TRUMP CARD AMONGST COMMON PEOPLE IS TO RIGHT TO VOTE FOR SUITABLE CANDIDATES IN 2014 PEOPLE ALWAYS SAY IN DIFFICULTIES LET GOD SAVE THIS SITUATION BUT I SAY UNITE TOGETHER FIGHT AGAINST ALL SCANDAL CULPRIT WITH YOUR VOTING RIGHT AT RIGHT BECAUSE ALMIGHTY IS POWERFUL IN UNIVERSE EXCEPT WORSE DEMOCRATIC INDIA OF GANDHI FAMILY Like (1)
s r prusty
Mar 30, 2013
An excellent article. Like (1)
raghavan
Mar 30, 2013
The govt is misusing institutions not only against opposition parties, but against any opposition, be it individuals like Baba Ramdev,Acharya Balakrishna, Anna Hazare,Kejriwal,the so called extremist movements,innocent face book users and so on. Atleast political opponents have a platform to fight.You should have mentioned others who are less privileged also. Like (1)
anand agarwal
Mar 30, 2013
Hiiii.....
simply an awesome article and a very thought provoking one!
Like (1)
  
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