Thank God for democracy - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Thank God for democracy A  A  A

19 MAY 2008

Indian investors must thank God for democracy and its institutions. They only have to look at the plight of people in countries whose rulers are so unconcerned for their welfare as to heap on them unbelievable suffering. As in Myanmar, whose rulers shifted capital (and their families) years ago when they found that the old, coastal, capital could be flood or typhoon affected, yet did nothing to evacuate people despite a 48 hours warning by the Indian Meteorogical department. As in North Korea where famine is expected to hit and kill over a million people, even as their leader plays nuclear blackmail. As in Zimbabwe, whose leader has decimated a country once providing food to the rest of Africa but now begging for it.

Yet, despite being blessed with a democracy that works, and has seen peaceful transition of power in several elections, we still see appalling bloo blahs in governance. These affect the economy and the stockmarket.

Democracy entails elections and elections cause quixotic behaviour. One such is the actions taken to combat inflation, which Governments believe lose them elections and must be slain at any cost. A slew of measures were taken, including asking producers of steel and cement (two important components of the inflation index) to 'voluntarily' reduce price. I'd bet when the producers were given the offer they couldn't refuse the offeror must have sounded like Marlon Brando with a wad of cotton in his cheek! .It now transpires that the manufacturers believed that by being good boys and curtailing steel price hikes for 3 months, the Government, on its part, would not levy export duty on steel. It now has, to the dismay of manufacturers, who feel a sharp pain in their backs.

Profitability would of course be hit, because input costs of coking coal and iron ore, largely under Government control (strange how Government doesn't make them an offer they cant refuse) are rising. SAIL, which had good results for the year ended Mar 08 (total income 17% to Rs 41,517 crores, PAT up 21% to Rs 7536 crores) has also expressed concern on its ability to voluntarily behave good when suppliers are involuntarily being naughty and raising prices!

The same scenario is playing out in petroleum products, where the three oil marketing companies (OMCs) are straining under the burden of keeping product prices artificially low in order to, ahem, contain inflation. They are partly compensated for their 'voluntary' losses through issuances of oil bonds, with a time lag. Oil bonds, not classified as such for SLR purposes, do not have a ready market, entailing a loss. OMC's are now facing a funds crunch which will force them to curtail imports of things like LPG and to ration it. This could be called the OMC quota.

Ironically it is the Left parties who are pressuring the Government to contain prices of petrol, used to run cars, once considered elitist and conspicuous consumption by the Left. RPL, which has set up the world's largest refinery as an EOU at Jamnagar, can very profitably export petrol. Very profitably because it had the foresight to set up a complex refinery capable of using the worst crude oil and converting it into petro product of acceptable international standards. So, when erstwhile navratnas are stymied and driven to oblivion by asinine Government policy, the sector has been shown to be quite profitable.

It is the same in nitro fertilisers which because of the high subsidy element, have failed to attract investment in production capacity which has stagnated. A quarter of our urea is now imported. Meanwhile subsidising one element of the NPK fertiliser mix is damaging soil quality. Also the Union Budget.

Yet another example of knee jerk and purely symbolic response is the ban on futures trading in some agro commodities, on the assumption that this artificially raises prices and spurs inflation. As Andy Mukherjee points out in Mint (May 14), futures trading enables price discovery for future months. Potato farmers, e.g. can chose to either sell their crop in the futures market, or in the spot market, or chose to cold store the potatoes, after looking at the futures price and the storage costs. This helps farmers, not hurt them!

In fact, agriculture supports over 60% of our population but gets 19% of the income, which is manifestly inequitable and must result in better terms of trade for agriculture through higher prices.

Thus it is not surprising that Index of Industrial production for March 08 shows a growth of 3 % month on month (partly because March 07 showed a spike at 14.4%.

It is also ironical that these attempts at taming the beast of inflation haven't yet shown results. Inflation climbed to a 44 month high of 7.83% in the week ended May 3.

The rupee is also sliding against the $, funnily enough at a time when the $ is sliding against most currencies.

It is some parts of the corporate sector (which is relatively free of interference by Government) that is performing and keeping the Indian growth story chugging along. Bharti Airtel is in talks with MTN, of South Africa, to buy a controlling stake in that company. If this comes through, as seems possible, it would be the biggest ever takeover by any Indian company.

Telecom is, in fact, one of the success stories of economic freedom. Yet we are not fully harnassing this technology and the benefits it can provide especially to underprivileged people who have no banking services. Telephones have penetrated to areas where banks find it uneconomical to and technology now permits the mobile instrument to be used as a bank for transfer of funds. Many poor countries in Africa and elsewhere are already doing this and so should we. Yet the regulator is insisting on the KYC (know your customer) norms to be applied in situations where the poorest people do not have the requisite qualifications of a ration card, or an electricity bill or a voter ID card! So the benefit of technology is denied those who most need it. This is lousy governance.

The sensex went up by 697 points to end at 17434, and the Nifty gained 175 to end at 5657. The biggest contributors to the sensex rise were RIL (114) and ICICI (109). It is possible that the sensex may go up a little more but that should be taken as an exit opportunity.

For the latest inflation figure is at 7.88%, the highest in 44 months and will spur the Government into more senseless and symbolic actions. Inflation can be tamed with improved productivity and there is little thought or direction towards improving productivity.

Labour productivity cannot grow until industrial labour laws are made more flexible for it to improve in the manufacturing sector and until farmers do not get better terms of trade and better prices, in the agro sector. The former is politically impossible with a Left coalition partner. The latter is politically expedient, belying the stated love for the farmer. Capital productivity cannot improve until a restructuring is brought about in the banking sector, largely controlled by public sector banks.

Without any serious effort to improve productivity and innovation, Government has to resort to meaningless and symbolic gestures. Like banning future trading in agro commodities. Like convincing steel and cement producers why it is in their interest to curtail price increases. And like squeezing out money supply to curtail consumption but being fungible, which also curtails investment.

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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