Unleash animal spirits, but do choose the animals - Straight from the Hip by J Mulraj

Unleash animal spirits, but do choose the animals

17 MAY 2014

The NDA has, under a Modi tsunami, got 337 seats in the Lok Sabha, with BJP being given a majority on its own. The electorate has given Modi a mandate to deliver economic growth, and jobs, and security, and will expect performance. Modi's task, not a small one, is to deliver it. It is heartening, and hopefully a permanent sign, that the electorate has turned away from the erstwhile divisive policies of dividing them on the basis of caste, creed or religion, and has focused, instead, on governance and economic growth. This is one of the most optimistic messages of the election result.

The Modi Government will need to release the animal spirits. It must, however, chose the animals it releases. Unfortunately, UPA II chose to release the wrong ones, selecting the pig, the hyena and the monkey. Thus its people demonstrated the greediness of pigs, the hyena's inability to look at, and tackle, problems but continued to chatter and prance like monkeys.

Instead, Modi may do well to release the tiger, the elephant and the owl. He needs people to have the hungry energy of the tiger, the strength and tenacity of the elephant and the wisdom of the owl. For, in the quest to achieve economic growth, there will be several quandaries. Governance is no easy thing. (writing columns is much easier).

The immediate focus would be on jobs, which would require attention to good education to obtain them, and training institutes to provide skills, plus a regulatory environment that helps create them.

The investment climate has been vitiated by a lot of acts of omission (by the hyenas) and commission (by the chattering monkeys) of the outgoing Government. Take for example the road sector. There is a crying need for good roads. A third of our fruit and vegetables are destroyed due to poor roads. Road construction leads to employment. Yet, there have been delays in land acquisition, due to, mainly, environmental concerns. GVK, one of the largest groups in this sector, has relinquished road construction projects of Rs 3,000 crores due to such delays.

This is where the owl comes in. The conflict between faster growth, but with concern for the environment, will have to be resolved with wisdom.

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The Land Acquisition Act is another legislation that would need to be relooked at. Besides giving the weaker land owners a fairer price, which is desirable, it has too many bureaucratic hurdles to cross, and impact studies to await, thus stymieing projects. Where will the bulk of future jobs come from? The manufacturing sector is one big potential provider. It hasn't been doing well; industrial production fell again in March, and growth is at a nine year low. So the owl will have to work hard to make it easier for this sector to grow whilst ensuring that land owners with weak bargaining capacity do not get taken for a ride.

The investment climate has been vitiated by the UPA II Government, which, in a scramble to raise resources, unleashed its Income Tax Department on firms, especially foreign firms, which made untenable tax demands on them. Several firms such as Vodafone, earlier, and, last week, RIL/BP/Niko as well as Nokia, which is shutting down its modern unit in Chennai. This will affect not only the 5,000 jobs at Nokia, offered a VRS, but also at its supplier Foxconn India where another 1,700 jobs are at stake. So the Modi Government will have to quickly remove the bugbears of irrational tax demands and create an environment where investors feel safe from arbitrariness and welcome.

This applies to domestic investors as well. The Modi Government will need to restore the confidence of domestic savers and investors and act swiftly to recover money from scamsters in cases like Sahara, Saradha and NSEL, and to repay the investors. Why is it that fraudsters are given a long rope by regulators, law enforcement agencies and courts? This only encourages further fraud. Punish them!

In the case of NSEL, this TV interview, of Mr Khatua, the former Chairman of FMC, the regulator, is quite revealing. The NSEL, though sanctioned as a spot exchange, was operating as a futures exchange. FMC had not got regulatory oversight over it. It sought permission from Ministry of Corporate Affairs, headed by Sharad Pawar, in mid 2011. This permission was given in Feb 2012 and, upon inquiry, FMC discovered that NSEL was acting as a futures exchange. Both FMC and Ministry of Corporate affairs slept over this for 17 months, during which time the transaction volume ballooned. This interview clearly lays culpability for the fraud on Ministry of Corporate Affairs, hence on UPA II, and on FMC. It was a fraud to begin with, a fraud wherein the NSEL and its parent FT were fully involved, and were aided by the Government. The Modi Government must bring all those involved to task. Other nations do not hesitate to send influential persons to jail if convicted of fraud.

Another important bugbear to be quickly resolved is the gas price hike, which has been postponed by the Election Commissioner pending the verdict. This will be a tricky issue, for Modi's Government will have to balance paying a price that encourages investment for oil and gas, which India needs, without bankrupting the users of it such as power and fertiliser companies. The Modi Government will also have to take a tough decision on how to phase out petro product subsidies. By compelling companies like ONGC, GAIL and Oil India to bear a large chunk of it, they are slowly bankrupting these companies. Hence ONGC's subsidiary, OVL, which seeks energy assets abroad, will need to borrow about Rs 5,200 crores which, perhaps, it may not have needed to if ONGC had not to bear the subsidy burden which belongs to the Union Budget. In welcome news, Cairn India expects substantial gas output from Rajasthan in 3 years.

Russia is almost ready to sign a deal with neighbouring China for long term supply of gas. This is serving two purposes. It reduces Russia's dependence on Europe as a buyer of it. And it sticks its nose at the Western world for imposing sanctions after its annexation of Crimea.

Simultaneously, Russia is working with other countries to de-dollarise the oil and gas business. Iran is willing to price its oil/gas in a currency other than the USD. If other countries go along, it will have a far reaching implication for the US $ and its ability to print its way out of trouble.

So to provide jobs the Government will have to make it easier for companies to invest and grow. But banks will need to be funded to have enough capital to be able to fund that growth. The Government needs some Rs 4 lac crores to pump into public sector banks. It does not have this. The Modi Government will need to divest its stake, to below 51%, in several of these banks. An RBI Committee, headed by the respected Dr P J Nayak, has recommended as much. He has also recommended that banks come under the purview of the Companies Act, as are private sector banks, and that they be given enough freedom in management and operation to allow them to grow, and, if necessary, merge. Mr Modi's Finance Minister should accept these suggestions and unfetter the banks.

The Modi Government's other major and immediate priority is water. There is a global crisis of fresh water resources. We have abused our resources and have polluted our rivers with our nonchalant attitude. Then UPA II funded a project to clean the Ganga, but after spending Rs 20,000 crores on it, the river remains polluted. The Government will have to go after those who misspent or expropriated the money, and to ensure that money is properly channelled henceforth. The electorate has given the Government the mandate to free the nation of corruption and wasteful expenditure, and will not tolerate any excuses for not doing so.

Defence is another area which will take priority. As a nation we have an amazing capacity to inflict pain on ourselves. New Scorpene submarines the Navy has acquired will be commissioned in 2016, but will not have torpedoes!. The selection of torpedoes was made in 2008; six years later its still entangled in red tape. Meanwhile other countries are developing new weapon technologies that are frightening, such as the electro magnetic rail gun. The missiles projected from these guns travel at Mach 7, and do not need an explosive to puncture a thick concrete wall.

Other than roads, the Government will have to create other infrastructure, to allow the economy to grow and the jobs to be created. Power plants. Ports. Airports. Social infrastructure like Schools/Colleges/Training Institutions. Hospitals.

This will need money. The UPA II has left the new Government with unpaid bills. Subsidies rolled over into next year. A hike in pay for Government employees. And the like.

One way which the Modi Government may adopt is a voluntary disclosure scheme, despite the moral hazard this always poses for the honest taxpayer. Some 47 countries recently signed an agreement on sharing of data, that makes it very hard for tax evaders to place money in offshore accounts. Though estimates for Indian tax evaded money lying abroad vary widely, one could assume a minimum of $100 b. This money is finding it hard, under the new rules, to exit the tax havens. It cannot be brought back for fear of persecution and prosecution. What if the Modi Government were to offer a 'no questions asked' scheme on payment of, say, 50%, of the amount brought back in? (The % may vary, depending on the authorities view). Failing this, the $ 100 b., or whatever figure there is, could well be forfeited by the holders who would disclaim it rather than bring it back and face lifelong persecution for it. Its better that the Government gets $ 50 b., or whatever, to be used for financing infrastructure, than for the offshore centres to get hold of it. The owl needs to chew this cud, if one is allowed to mix metaphors.

The Indian stockmarket did not expect such a landslide, though it did expect a NDA majority. The only pollster to get it right was Chanakya. Kudos to it! The stockmarket thus exploded when poll results revealed the results. Without coalition partners, the NDA has the elbow room to take tough decisions, which need to be taken. It would, however, have to work with other parties because of its weakness in the Rajya Sabha.

The BSE-Sensex gained a whopping 1,127 points over the week, to end at 24,121 and the NSE-Nifty added 344, to close at 7,203.

Its possible that the market would pause for breath. There are no foreseeable factors, domestic or external, that can cause a sharp fall, so a slide of over 10% is unlikely, if that.

Buying on falls would thus be advocated, and would very much depend on how Mr Modi's Government delivers on the mandate it has been granted. The electorate has awoken to the fact that good governance, honest government and economic growth with job opportunities are the crucial issues. It will remove any Government that does not deliver. This is the best message from these elections.

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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2 Responses to "Unleash animal spirits, but do choose the animals"


May 17, 2014

Just as I posted yesterday, I agree that even influential persons must be jailed (taken to task) as you so delicately put it. You say that it is done in other nations.

NOT TRUE. Not in the US under Obama ! There have been no prosecutions and hence no convictions for the financial crimes committed during the collapse of the US economy in 2007/2008.For the US political system is in the grips of the corporations.

It requires guts to take these actions. Hopefully, the Modi government will take these actions and Mr Modi will NOT emulate the US in this regard.
For India cannot afford the laxity that the US has recklessly brought upon itself.



May 17, 2014

Very nice article. Thanks Mulraj.
There should be a white paper on the various inactions and wrong actions done by UPA II to be made very accurately and with neutrality so that the we get a good and fair view at one place and never forget. UPA II pushed India 10 years back whereas our neighbour went ahead faster. We have not only become poorer but also weaker in defense term. They have robbed every citizen in a sense.

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