India the falling BRIC? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
India the falling BRIC? A  A  A

13 APRIL 2013

Thanks to very poor governance, India is likely to be considered a falling BRIC, which was the acronym coined by Goldman Sachs for the emerging markets that were expected to shine, viz. Brazil, Russia, India and China. The excuse lamely meted out by our Prime Minister about compulsions of working with coalition partners cannot be accepted; a leader must lead. Its that simple.

A lot has been written about the mess made in the telecom sector, once considered a success story and a matter of pride. Especially when homegrown companies like Bharti made large acquisitions abroad.

So perverse has the policy regime become that the same company, once lauded for its ability to grow internationally, is now being impeded by policy and the courts. The Department of Telecom is seeking to penalise companies from sharing spectrum, universally accepted to be a scarce resource. In order to get companies to bid for spectrum (at unaffordably high base prices set unilaterally by the Government), the DoT is insisting that telcos must buy spectrum in every circle they operate in! This is a crazy way to utilise a scarce resource!

There are some sensible voices left in Government. The Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, has raised again the need to permit sharing of spectrum. Technology permits the sharing of spectrum, in order so as to optimise the use of it. It is a logical and sensible way to utilise a scarce resource. Why, then, does the DoT prohibit agreements between telcos to do this? Any wonder, then, that India is a falling BRIC?

----------------------- Is Long-Term Investing Dead? We Are Revealing the Answer... -----------------------

Are you tired of hearing about the benefits of long-term investing but haven't seen those returns yet?

Are you beginning to doubt the concept itself?

If you're asking these questions and wondering what your next move should be, you're in luck!

Come Join Ajit Dayal, Founder, Equitymaster and Director, Quantum Asset Management Co., as he gives you the answers to these questions and more...

Register to find out the answer to the question, "Is Long-Term Investing Dead?"... Click Here! It's Free!


After emerging markets, acronymed BRIC, the attention of global investors is now focussed on frontier markets. One of these is Myanmar, which is just opening up its market after years of oppressive misrule by a military junta. Only 10% of its population of 60 m. have mobile phones, and the number is expected to go to 80% by 2016, an addition of 42 m. subscribers. Large enough of an attraction for Vodafone to team up with China Mobile to tap into and for Bharti to also tap (alone).

Now even whilst the success stories are being chased, in the aftermath of the uncovering of the spectrum out-of-turn-allotment scandal, the laggards are being rewarded! The Telecom Minister Kapil Sibal, has appealed to the Prime Minister to work out a Rs 23,000 crores package for loss making MTNL and BSNL. MTNL's net worth is likely to be wiped out (becoming not worth) this year, and BSNL is expected to suffer a Rs 10,000 crore loss.

We have seen the bottomless pit that is called Air India, into which tax payer money goes, with nary a hope of its return. Is there a hope that Air India, MTNL and BSNL can be revived, and the money put in by the Government returned? This can happen, as it did, surprisingly, for the two US mortgage banks that the US Government bailed out, viz Fannie Mae and Freddie Mac. They earned a profit of $ 17b. and $ 11 b. respectively.

But does the Government seriously expect Air India, BSNL and MTNL to return to profits If not, why does it not consider selling them?

A Government that pours tax payer money into companies which cannot become viable is one that causes the falling BRIC.

So bad has governance become that the Government tried to change the constitution in order to exempt public sector undertakings from the purview of courts!!! Un-bloody-believable!! Luckily the Solicitor General, SG Parasaran has turned this down.

Does the Government not understand that the valuations of ALL public sector undertakings would take a severe beating were investors to be told that they were out of the purview of court jurisdiction for any matter, including those of corporate governance? Does the Government not understand that its disinvestment programme would be served a nail in the coffin were such a move to be attempted?

Is it any wonder that India is considered a falling BRIC?

Car sales fell 6.7% in 2012-13, the steepest fall in 12 years. Perversely, sale of luxury cars have boomed in March, before the hike in taxes wef April 1, announced in the Budget!

Looking to the shortage of fossil fuels to drive private transport, the decline in auto sales may not be a bad thing, but provided the Governments step in with efficient and affordable modes of public transport. We are not seeing too much of that, sadly.

Technology is coming in to solve the problem of declining global reserves of fossil fuels. Thanks to hydraulic fracturing (fracking) it is possible to extract oil and gas from shale rock formations. As this article by RN Bhaskar reveals, thanks to fracking of shale rock, there is plenty of shale gas around; why then are prices rising?

Interestingly, in the northern Cantabria region of Spain, the people opposed use of fracking on environmental grounds. Fracking uses a lot of water, which gets contaminated, though technology is now developing to use carbon dioxide in place of water.

But in the US, thanks to shale gas, use of coal in power plants has dropped considerably, thereby significantly reducing greenhouse gas emissions. India is, for inexplicable reasons, not developed its own shale gas reserves as yet. We still rely largely on coal, and there is a perennial dispute between Coal India, which has the largest coal reserves in the world, and National Thermal Power Corporation (NTPC), the largest power producer in India, about the quality of coal. The latter has stopped payment to the former over this issue.

Interestingly, solar power has reached grid power parity in India and Italy which means it costs the same. The Government's goal is to set up 20 GW of solar power capacity by 2022.

The Government has also welcomed the entry of the private sector into defence. The future of warfare is electronics, which ought to be to India's advantage.

Last week the BSE-Sensex lost 207 points to end at 18,242 and the NSE-Nifty dropped 24 to close at 5,528. The fall was due to exit by foreign institutional investors (FIIs).

Excess global liquidity has percolated down into various asset classes, including emerging market equity. foreign institutional investors (FIIs) have preferred large market cap stocks, which are easier to get out of (witness the drastic fall in prices of midcaps whenever a large investor tries to exit?). FIIs sell on nervousness and, in the absence of a large domestic institution to act as a counterforce, the market falls sharply. Amongst domestic institutions capable of stanching a fall, LIC's resources are being used to rescue companies being disinvested. UTI, the other large player, has become enfeebled after the fiasco with its '64 scheme and, more recently, the absence, for over two years, of a head. Yet another example of abysmal governance.

The market is at a tricky point, and can become very volatile. It will go up with fresh bursts of liquidity. Japan is set to pump prime its economy by $ 1 trillion, and stocks of companies like Maruti Suzuki have benefitted. On the other hand, with each revelation of a scam, and with each political threat to the Government, FIIs sell on nervousness. So the market would be volatile, and one mainly for traders.

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.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
© Equitymaster Agora Research Private Limited

Get Straight from the Hip
directly in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "India the falling BRIC?". Click here!
5 Responses to "India the falling BRIC?"
Apr 18, 2013
When ever any one writes about the present govt. I just skip the whole article. No point reading an article where every one is corrupt and leading them is MMS. There are two types of corruption. corruption by way of money / Cash and corruption by way of power. MMS (Man Mohan singh falls into the second category. He may be intelligent and he is using his past reputation to the hilt. By far he is most corrupt man in the whole govt. At any cost of rebuke he is not ready to say enough and sticks to the PM post and works according to the diktats of the Madam and the prince. and now he has declared his intention for the third term as well, which proves that he is the most CORRUPT in the UPA govt. Like 
Apr 16, 2013
oops.. so many bloopers and typos. BRIK and not BRIC? And such long winding sentences. And one or two grammatical blemishes to boot. Sorry folks. As my own proof reader I'm getting pretty rusty. Please put it down to my hurry to get things off my chest. Hope to do better next time round. Like 
Apr 15, 2013
The DoT's policy in not allowing telecoms to share spectrum among themselves and asking them to bid for it in new circles where they want to enter is not without a certain logic, though it may seem to hurt the Telecoms in the short run. This logic is probably aimed at preventing the formation of cartels which is certainly harmful for genuine growth in the long run. Also, it is now more or less apparent to discerning observers that the Telecoms seem to be jointly undermining the Government's efforts in maximizing income from sale of spectrum. Their narrative seems to be “allow us to get spectrum cheaply and gain windfall profits as in the past or we are not interested in bidding. You Ministers and political parties have had your fat share of the pie in the 2G scam and we are yet to get our share; you are sitting pretty on your pile while we have to slog for several years to get our share of the pie because we had passed on our share by low tariffs to the consumers and in building capital intensive infrastructure.” There is some raw justice in this narrative of the Telecoms. I hope I am proved wrong in my surmises as above. If I am right, then the same raw justice demands that the politicians and political parties that walked away with the loot are punished lawfully and their assets seized as per law. This process is on and I hope and pray it will be seen as the first case of independent India getting back the huge revenue it lost due to massive corruption. To argue that there never was any loot at all is naïve in the extreme and is a slap in the face of the CAG and the highest court of our country, the Supreme Court. This is not good for India as a democracy whose structures and institutions are getting stronger. Also such an assertion might have won a pat on the back from the High Command in the past. But the High Command perhaps now realizes it has been kept in the dark in several matters even as the coterie surrounding it seems to have manipulated businesses and all wings of governance including the bureaucracy so several people jointly and severally enriched themselves in several ways. Add to this the “compulsions of coalition politics”, a euphemism for having to depend on corrupt allies to give some semblance of political stability, and the result is the mess we had made in managing our precious resource of spectrum. We can round off by noting that Systema wants to get back to India and there may be other international players who may follow suit when once they sense that slowly but surely India will become less corrupt and more transparent whatever be the Parties that come to power. The anti-corruption awareness gaining momentum in India will surely pay dividends in the medium to long term. We have to grit our teeth and keep moving on doing things more and more transparently. India may not be a falling BRIK.
According to Kartik Goel's online article in Bloomberg India of 15th April under the title 'India's Inflation Eases to 40-Month Low Boosting Rate-Cut Case', inflation has eased to a forty month low. The WPI rose 5.96 percent from a year earlier after climbing 6.84 percent in Feb. The median 29 estimates of Bloomberg News Survey was 6.27 percent. Consumer inflation did exceed 10 percent but the RBI is on the right path of carefully lowering the borrowing costs twice by 0.25 percetn this year.
Caps on capital inflows have been eased on aviation and retail has been opened up.
The Finance Minster is in Canada and US to clear the misgivings of the investor community and bring some clarity to the perceptions of India's true potential which are there for all to see.
The GST is likely to come through. Almost all States are on board now. Only some problems of compensations for perceived loss of revenue are to be worked out. When once this is completed, we can see more of the economy being brought into the tax net and the revenue growing to healthy levels beyond 25 percent of GDP, a World Bank benchmark.
As for our bleeding Public Sector undertakings Jawaharlal Nehru must be turning in his grave. Though Jawarlal Nehru called Projects like the Bakra Nangal Dam and the Bhilai Steel Plant as “temples of modern India”, many of our PSUs have a lot to catch up in improving efficiency and profitability and live up to Panditji's dreams. Privatization has started but it has to catch up pretty fast. We were forewarned of the dismal failure of 'State-ism', a broader term that includes PSUs, by Rajaji in the sixties and seventies. The powers that be ignored Rajaji completely. We are now paying the price through our nose for this monumental blunder. Rajaji's Cassandra's voice came long long before Margret Thatcher embraced aggressive privatization in Britain. The British media is showering fulsome praise on Thatcher who passed away recently. But even today the Congress or our country has no memory of Rajaji and what he forewarned us. What a pity!

Lastly for a topic that evokes both unease and hope for India Inc. : what are we going to do about our black economy? When we find the Will and the international cooperation, both official and unofficial, that we sorely need to track down the unaccounted wealth of India, however painful the process, India will not be a falling BRIK but a building BRIK. One hopes that all involved, from civil society activists to corporate honchos to international agencies and mechanisms to all politicians and the bureaucrats, the more we mitigate corruption and tax evasion through our collective endeavour, however painful the process, the greater will be our stature among the countries of the world and greater the chances of a more equitably prosperous India. A lot hinges on the upcoming anti-corruption legislation, the Lok Pal Bill, in this regard. Will our Parliament keep up its promise made to Anna Hazare in August 2011 enabling him to survive a gruelling fast demanding a Jan Lok Pal Bill? The world will be watching us keenly here. If the global investing community sees India in action in getting its act together seriously India will certainly not be a falling BRIK, though we will definitely have many problems to fix in many areas. My gut sense is the emerging generation of young India will rise and shine and make us proud.
Apr 14, 2013
Its heartening that the government is investing money in companies like air india , mtnl and bsnl .. which can never come up ... what is that we can do , we the literate class are we going to read , feel bad, give our comments and get into oblivion ... or is that something we can do which can save our country ... sir , people like you who know what is right and wrong , should guide the people on how to bring a change ...might be patriotic in my statement, but after reading your articles I feel very bad our NETAS behave stupidly and we are helpless spectators !
Like (1)
B. Yerram Raju
Apr 14, 2013
Strange are the arguments against the public sector Air India, BSNL and MTNL. Viewing from the point of service they have substantially improved in delivering what they promised while the Airtel and Vodafone have been consistently deteriorating. These two Airtel and Vodafone have reduced the number of towers and have been failing in networks and connectivity. Their problem-resolve capacity has also deteriorated while the response mechanism of the BSNL and MTNL has improved substantially. If the Government had been sensible they should open the investments for private participation by shedding their equity stake to all the satisfying customers. A decade back I would have toed the line of the article but certainly not now. Like (1)
Equitymaster requests your view! Post a comment on "India the falling BRIC?". Click here!