Why can't we have a model code of conduct after elections also? - Straight from the Hip by J Mulraj

Why can't we have a model code of conduct after elections also?

24 MAY 2014

One can only hope that the next Lok Sabha will conduct its proceedings with the dignity required of this august institution and does not provide a spectacle of unruly behaviour, projectiles and an incoherent cacophony of inanities. One hopes that it enforces on itself a model code of conduct. One also hopes that the swearing in ceremony will not be followed by a swearing at ceremony, the forte of politicians.

The stockmarket, at least, has great expectations from it, judging by the fact that the BSE sensex gained another 572 points, to end at 24,693 and the Nifty added 164, to close the week at 7,367.

There are far too many issues requiring urgent attention, and the stock market is anticipating that the new Government will address these. It will probably compress the number of ministries, a sensible idea as there are far too many now. The reason for too many ministries is that each coalition partner was given charge of one to satisfy the urge to recover his 'investment', which, of course, led to the various scandals.

Thus, for example, there may be one Energy Ministry which could include Power, Coal and Renewable Energy, with Ministers of State given charge of each sector. Such a reduction of Ministries would make for better governance. The PMO is also likely to regain its lost lustre, which would be a good thing.

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To meet India's growing energy needs, the Government will need to work on several fronts. Russia and China have signed a 30 year, $ 400b. deal for supply of Russian gas to China, via pipeline, at $ 11/unit. Perhaps India can join hands and have the pipeline extended to meet a part of our gas requirements. This presages improving ties with China. It would also mean that, if we are paying $ 11/unit to Russia, the price of $ 8.4 to domestic producers may go through, even though it would mean an increase in subsidies to, or an increase in price of, user industries such as power and fertilisers.

To counter this, the Government needs to clamp down on thefts of power, to which the UPA Government turned a blind eye. Technologies are available to curb theft of power, given the will and the backbone, something that the previous Government had displayed a lack of.

The nuclear energy option also needs to be rethought. After the accident at Fukushima, which is a continuing nightmare of horrific proportions, countries like Germany decided to shut down their nuclear plants. That was easier said than done. It is time consuming (between 15-20 years) and expensive ($684 m) to shut down just one plant in Germany. So this is not an option to pursue, especially after the Fukushima accident which shows that the plant is a threat to humanity, not only to Japan. Fukushima has been dumping 100 tonnes of radioactive water into the Pacific. It was absolutely madness for the previous Government to pursue establishment of nuclear power plants based on existing technologies.

Perhaps, though, a nuclear plant based on thorium may be more worth exploring. It is both safer and cheaper, and does not have waste disposal problems, nor risks of a Fukushima type explosion.

Mr. Modi would also have to decide on how to proceed with its majority ownership of public sector banks. The P J Nayak report recommends a dilution of control below majority. This would not only avert the need to pump in some Rs 4 lac crores, which the Government does not have, as additional capital for these banks to have enough resources to lend to Indian businesses, so that the GDP can grow at 7-8% p.a. It would also help make the banks more efficient, and give their managements the freedom to take their own lending decisions not under instructions from a politician with a vested interest.

Bank employees have pointed to the Rs 70,000 crores of NPAs residing in these banks. This is after a far larger amount was 'restructured', which is essentially giving them more time to pay and taking the loans outs of the NPA list till such time as they default again. This showed a desire of the employees to curb the malpractice of directed loans. Which is a good desire.

However, the same employees are now opposing the Nayak report, and planning to go on strike from May 23 as they feel threatened for their jobs by privatisation. One could expect that the new Government would accept the sensible suggestions of the PJ Nayak Committee, and divest itself of its majority holdings in all but a handful of the big banks.

It is lamentable that an economy of India's size does not have a bank large enough to qualify in the top 100 global banks, barring possibly SBI. This is because the Government holds a majority stake in them, and is unwilling to dilute besides not having the funds to support further capital raising. In other words, it is the Government holding that stunts these banks and it is interference that spoils their balance sheets.

One also wonders why it is so easy for wrongdoers to be protected by the system and so difficult for victims to get justice. Why is it that the lender, SBI, has to 'find ways' to declare Mallya a wilful defaulter, which he is, so that he may be deprived of his other directorships and any further lending facilities.

Why is it that after several reports have castigated Jignesh Shah for various misdeeds, he still remains able to avoid meeting a payment schedule for NSEL victims, which he himself had declared 10 months ago, and which has not been met even once? A recent report concludes that he was directly involved in the affairs of another exchange in the group, MCX-SX, and several norms were breached. Yet the various agencies of Government refuse to take action, and the MPID courts do not expedite the liquidation of assets seized by the EOW to pay off the investors? Even politicians, such as the Punjab CM, do not take action, as reported by this news item.

Do we want a judicial and regulatory system that protects wrongdoers and penalises victims? Just compare this with what the UK has done. In order to deter its companies from bribing other Governments in order to do business there, it has imposed a fine of 400% of any profits made by giving such bribes. This is good governance.

The Supreme Court is providing such strictures in the case of Sahara, when it decided to keep the chief Subrata Roy incarcerated until he deposited Rs 10,000 crores, as directed by the Supreme Court, with it. Why not do the same for other defaulters and scamsters?

In foreign policy, the Modi Government is keen to sign a pact with Bangladesh on sharing of the Teesta river water. This agreement would also include India getting access to its North Eastern states through Bangladesh, cutting the distance significantly. The obstacle to such an agreement is Mamata Banerjee, as water is a State subject. Modi would need to pay a price for her acceptance, with a special financial package for West Bengal.

Modi would also have to work with China for sharing of water resources, as China controls the flow of several important rivers and India is very vulnerable to their being choked.

The new Government would also take up various issues that have sent negative signals to foreign investors. One of the main issues is the retrospective amendment to tax laws by which Vodafone, the buyer, was sought to be made accountable to pay a capital gains tax, which is payable by the seller, Hutchison. The bottom line is that Hutchison is in Hong Kong whereas Vodafone is operating in India, making it easier to twist the latter's arm than the former's. Several companies have taken the Government into international arbitration, and these issues will have to be tactfully and quietly resolved.

Globally there are interesting things happening.

One is the move to create alternatives for the US $ as a global currency. Russian bank VTB has signed an agreement with China's People Bank of China to pay each other in their own currencies, instead of in US $. Some petro deals are also likely to be signed in currencies other than the US $. If this movement gathers momentum it would have a signigicant impact on the $ as the reserve currency of the world, and thus, for the US to print its way out of trouble.

This printing of money by several Governments has created excess liquidity, intended to go towards business lending but which has actually been used to create bubbles in assets. The EU has now made a move to force European banks to lend more to businesses, than to keep the liquidity deposited with ECB and safely earning interest, albeit at a low rate. The ECB will henceforth charge banks to deposit money with it!.

The excess money supply and lack of good quality borrowers is leading to another misallocation of money. In 2008 we saw the problem of subprime mortgage lending, i.e. lending to borrowers through ninja loans (an acronym for no assets, no jobs or assets). The originators (banks) of subprime mortgage loans were not bothered about recovery, because they had securitised these mortgages and, after getting them rated by co-operative rating agencies, sold these to unsuspecting investors. This was clearly a fraud, because borrowers having no jobs and no assets had obviously no ability to repay. The bursting of this bubble caused the crisis.

Now it is subprime business lending! People never learn, and history (like wives) will repeat itself.

It started with a firm World Business Lenders LLc, which has lent money, at an astounding 125% interest rate, to businesses who have little or no ability to repay the principle or the interest. The originators of these loans hope, like the subprime mortgage lenders that the loans can be packaged, securitised and sold to investors, and thus they need not worry about recovery. Firms like Goldman Sachs are getting into this.

The market has run ahead in anticipation of speedy action by the Modi Government. Compared with its somnambulistic predecessor, any action would be speedy. The market would be watching over, and reacting to, its every move.

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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3 Responses to "Why can't we have a model code of conduct after elections also?"

AD 3

May 25, 2014

Excellent write up, Mr. Mulraj,

Appreciate that you would like to promote safer nuclear power. IMHO, hydrocarbons should not be wasted on energy. Nuclear, hydro & other alternative must be perused.

Secondly, givin that the new PM is starting off on a good note with the SAARC neighbours, wouldn't you suggest that this neighbourhood also stops denominating trade in USD and choose an alternative. The potential for inter Saarc trade is tremendous.

Iran gas pipeline, via Pakistan, was on table. Still time to go for it. Will cut effectiveness of US printing presses.



May 24, 2014

A good article. Clearly the task for the new govt is mammoth. As I have commented before, the bureaucracy will have to be dealt with and their obstacles will have to be judiciously rejected by Mr Modi himself. Hope that he has the focus to do that.

Further, after four years, I am glad to see you say exactly what I had discussed with you in person, and I quote from your column referring to the economic crisis caused by the US banks and lenders.

" This was clearly a fraud, because borrowers having no jobs and no assets had obviously no ability to repay. The bursting of this bubble caused the crisis."

The US has for far too long exploited its reserve currency status at the cost of the world community. its time there was competition.



May 24, 2014

If things will happen as we expect as in your article definitely it's the sign of change in governance & may hopefully we are going on right path on the development of our nation. Good article. Thanks.

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