Allow free markets to function - Straight from the Hip by J Mulraj

Allow free markets to function

17 APRIL 2014

After the crisis triggered by V P Singh's fatuous remarks 'our coffers are empty', India unleashed the power of free markets by liberalising its economy, and cutting the bonds of excessive controls under the license raj. The economy responded, and India had years of positive growth, far ahead of the 3% GDP growth when things were controlled, derisively termed the Hindu rate of growth.

But freedom comes with responsibility, often not well exercised. It thus requires strong regulation and a competent and responsive judicial system for those that abuse it. We have learnt that India needs to catch up in the latter. Two recent cases are those of Sahara and of NSEL, respectively, in order of magnitude of the fraud perpetuated.

In the case of Sahara, the regulator, to be honest, did try to stanch the fraud, and had passed an order debarring Sahara companies from raising money from the public. It was the judiciary, in the form of a lower court, that failed, by passing an order which stayed SEBI's restraint and permitted the fraud to be carried out. It has, with the passage of time, blossomed to a staggering amount of over Rs 22,000 crore, which causes a systemic problem.

In the case of NSEL it was a failure of regulation, most likely in collusion with vested political interests which not only permitted the setting up of the exchange but also exempt it from any oversight! This is surely an open invitation for fraud on an investing public which believes that any institution which is allowed to be set up and function and which deals with the investing public, must be regulated.

In the case of NSEL, the perceived collusion of political interests is exemplified in the impossibly perverse statement of the Ministry of Corporate Affairs, who is still 'seeking proof' of wrong doing in order to take over Financial Technologies, the parent of NSEL which committed the fraud, and dispose off seized assets in order to be able to repay investors. There are any number of committees, set up by the Government, which have investigated the fraud and have made allegations of all sorts of improprieties. Yet the Ministry of Consumer Affairs still seeks proof! It is difficult to prove something to an ostrich!

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The free market is oftentimes not permitted to function freely. Take the case of the sugar industry. Using technology, some districts of UP have, under a scheme called Mitha Sona (white gold) managed to boost sugar cane production by 25%. That's great! However, as pointed out in these columns earlier, the UP State Government has interfered in the free market by putting an unviably high minimum price for cane (in order to hope to get farmer votes), which led to protests by sugar mills. The mills found the price to be unviable, because the selling price of sugar is also controlled. They decided not to accept cane for crushing. Aghast at the prospect of losing farmer votes instead of gaining them, the Government arm twisted public sector banks to offer interest free loans to sugar mills. This is how a free market is interfered with causing a mess in the industry.

Its the same in the power sector, which, under the New Electricity Act of 2003, sought to give greater freedom to consumers to purchase power from any source, and to producers to sell, through power trading exchanges, the power they generated, at a negotiated price. Two State Governments banned the open access system, one of them being, surprisingly, Gujarat! Politicians interfere with free markets.

So is the case of foreign direct investment (FDI) in multi brand retail. The election manifesto of BJP, the party generally expected to form the next Government, says it welcomes FDI except in multi brand retail. It supported it in its previous manifesto. The change in stance is probably in order not to alienate the kiranawala (local grocer). The feeling that he would be alienated is a misnomer, as this article points out. The local grocer has faced competition from domestic organised retail and has thrived. Why should he worry about a foreign owned organised retail outlet?

The telecom sector, which was one of the showcases of success of liberalisation, went into a downspiral when erstwhile telecom minister A Raja interfered with the working of the free market, by altering the system to allot spectrum to a chosen few. The subsequent intervention and cancellation of the allotment by the Supreme Court has had its consequences on the sector.

The coal sector is also highly regulated, a sector in which private industry is unwelcome. Both the production and the allocation of coal are subjective, and, without a proper planning, has led to disastrous results. It is appalling that 70% of coal stocks are unusable, often due to non availability of railway wagons to evacuate the stock! Don't they plan and coordinate production with supply bottlenecks?. This raises another question. What is the reliability of the P&L account if 70% of the coal stock is unusable but shown in the books as valued at cost or realisable value, whichever is lower?

A big part of the reason is the quality of our leadership. It is distressful to read that two electoral contestants of Porbandar, the birthplace of Mahatma Gandhi, have a history of criminality. The slowness of the judicial system, which permits prolonging the cases filed against them, thus allowing them to continue in office until convicted, is the cause. It is thus heartening that one political leader says he would, if he came to power, ask the Supreme Court to ensure that all cases of appeals against MPs and MLAs be disposed off in one year's time. This would lead to a long overdue cleansing of the political system, corrupted to its root.

Governance is by no means an easy task, for it requires making of difficult choices.

ONGC is to make one. It had made an investment in Iran's Farsi gas field, which has made huge discoveries. It also wants to tap the technology, from the US, on how to extract tight oil/gas from shale rock. The US is asking it to choose between the two.

Or take the auto industry, one which provides a huge number of jobs. The recent slowdown has led to cuts of some 200,000 jobs. On the other hand, as these columns had pointed out, the design of the automobile is such that is uses less than 5% of the energy contained in crude oil to move the passenger.

There is an interesting TED talk that readers should listen to, called 'The walkable city' by Jeff Speck.

The next Government is planning to establish several new smart cities. This would provide jobs which would reduce the burden on rural agriculture to support half of India's population, which, incidentally, earns less than 15% of national income. It would need to design cities, as in the TED talk by Jeff Speck, where one can walk to work and recreational areas, or use public transport, and where the need to use private transport is minimal. City planner Amanda Burden, in her equally fascinating TED talk says that she helped re-zone New York City in a manner where 90% of the people lived within a 10 minute walk to a subway, and, therefore, did not need to own a car.

Our planner have failed to design our cities. Mumbai does not have a subway and has, only recently, started an overhead train system in a part of the city. Kolkata and Delhi have an underground railway system covering only a part of the city. The failure to build encourage public transport but to encourage the growth of private transport is costing India dear. Its oil imports lead to a high current account deficit and a falling currency.

The new cities being planned by the next Government will, hopefully, be based on sensible planning for the long term. The NY subway was built 80 years ago but such was the foresight with which it was initially planned, that it has served the needs of a growing population 8 decades later.

A failure of planning leads to harsh consequences after decades, making it impossible to relate the failure, decades later, to the initial improper planning. Take the pension system in the US. This (mostly state pension schemes) did not have enough foresight in initial planning, and made commitments for retirement benefits far in excess of their abilities to meet. Some 85% of pension funds are slated to fail in the next 30 years. The reason? The pension funds earn some 4% on their assets whereas they need some 9% to meet their obligations. The city of Los Angeles is, essentially, already bankrupt. In order to meet European Union guidelines on budget deficit, France is reneging on its pension commitments.

Over the past week the market has remained flat. The BSE-Sensex closed the week on Thu (Friday being a holiday for Good Friday) at 22,628, unchanged, and the NSE-Nifty at 6,779, up 3.

In corporate news of interest, Ajay Piramal, who recently exited from Vodafone with a brilliant return, has invested in Shriram Capital, to pick up a 20% stake, which looks like another stroke of genius.

TCS, HCL Technologies and Infosys declared quarterly results, with TCS leading the way, with the best performance and the best forward guidance.

The biggest concern of global investors now is the situation in Ukraine. Chagrined by imposition of sanctions by the US, and now supported by Germany, Putin has written letters to 18 European countries, threatening to stop gas supplies. As these columns had mentioned, he is seeking to sign a deal with China to supply it with gas over a long duration. This could slow down Europe's growth rate even further.

The market is awaiting results of the general elections, due May 16. The BJP hopes it will get a majority for itself, and a larger one together with its allies, to form a Government. Investors, indeed all of India, are disgruntled with the compromises necessitated by coalition politics, which often leads to corruption scandals as coalition partners seek to extract a value for their co operation. So a result that would throw up a strong Government not fettered by coalition partners, would be cheered by the market. It would then have to prove that the faith reposed in it by the people was justified.

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 "Allow free markets to function"

J Mulraj

Apr 21, 2014

Dear Mr Athmanthan,the choice between encouraging the auto industry, for the jobs it provides, and to encourage public transport, for better use of energy and for the environment, is a difficult one. And, as I pointed out 'Governance is by no means an easy task, for it requires making of difficult choices.' Those designing new cities are discouraging the use of private transport. not least because we are running out of fossil fuels, even though we have found a technological solution to extract oil/gas from tight formations. Personally, I would prefer India encourages efficient and affordable public transport.
I hope you heard the two Ted talks I gave links to. Both are worth listening to and will help clarify the dichtomoy.

Prof Ratnam, IBM was not thrown out to promote a nascent IT industry. Together with other FERA companies, they were given a choice to dilute their stakes by offering 40% to the Indian public, or to leave. IBM and Coca Cola opted to leave. Moreover, IBM was, at that time, known for its prowess in hardware. Not in software, which India has develped its prowess in. So Im afraid your arguments are untenable.

Mr Shah, as a lover of freedoms that we enjoy in a democracy, the alternative of declaration of emergency rule is not one that appeals. Ours is a vibrant democracy, with a smooth transfer of power based on the judgement of an 820 m. strong electorate. We should be proud of it



Apr 20, 2014

The newsletter regrets that a huge erosion of employment has happened in the auto industry. Again you argue for public transport in another part of the letter. There is a huge dichotomy between the two and you need to reconcile this for clarity of ideas.


Prof. NV Ratnam

Apr 19, 2014

Your view on FDI in Multibrand retail is against the national interest. To say that "The local grocer has faced competition from domestic organised retail and has thrived. Why should he worry about a foreign owned organised retail outlet? " I would turn the question the other way like Why shouldn't we first facilitate our own organised Retail to get strong first before we invite the predatory competetion (like Walmart) as we did when the IBM was thrown out to promote the nascent domestic IT industry?


CA Parimal shah

Apr 19, 2014

Excellent article...nobody can summarize present Indian democracy in such a nice words within one page.According to me ONLY SOLUTION is EMERGENCY RULE(as Indira Gandhi did) under Mr Modi for at least 10 years.I can bet this is the only PRESCRIPTION for your DIAGNOSIS.
Otherwise,believe me,India is heading towards DISASTER on all fronts irrespective of ruler/govt

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