What price, austerity? - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
What price, austerity? A  A  A

PRINTER FRIENDLY | ARCHIVES
26 MAY 2012

Europe is hurtling towards a major crisis. The likely exit of Greece from the Eurozone has started putting huge pressure on Spanish banks and regional Governments and have driven up cost of borrowing by these. Bankia, the country's largest mortgage lender, said it would need an additional $ 24 b. (see ) after a downgrade by S&P to junk status made it hard for the bank to raise more money. Regional Governments such as Catalonia (not to be mistaken for catatonia), which is the largest region accounting for a fifth of the Spanish economy, also pleaded for help.

At the centre of the debate is the growth versus austerity conundrum. When the EU was formed, in a bid to have a common market backed by a monetary union but not a fiscal union, there was a need to have rules for membership. These rules included fiscal discipline. The EU provided the advantage of a larger market, and of funds for domestic growth. In distressed countries like Greece, Spain (and others like Italy and Portugal), the ease of funds, and the lower cost, led to asset bubbles. In Spain the real estate boom fuelled by the cheaper funds has burst, which is why mortgage lenders like Bankia, are in trouble.

The more productive countries like Germany and France benefitted by the larger markets, and exports to the weaker countries boosted their economies. Now, when the weaker, or peripheral, economies are in trouble, they find themselves hemmed in by the rules. They are part of the same monetary unit, the Euro, and cannot devalue their own currencies to make imports from Germany more expensive. They have not used the cheaper funds that were available to boost their own productivity, which makes it partly, or largely, their fault.

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Their economies are sputtering and new jobs are not being created. Half of Spain's youth are unemployed, which is a dangerous social trend.

Under these circumstances, imposing austerity as the way to obtain more funds is not working, and will not work. Germany's Chancellor, Angela Merkel, insists on it France, which earlier supported calls for austerity, is itself in a bad shape and its newly elected President, Francois Hollande, now calls for growth. Angela is discovering that Hollandaise sauce doesn't go well with German food.

A bit like the Taliban, austerity can also be of two types, the good austerity and the bad austerity. This is beautifully explained by Amartya Sen in his analysis of the European crisis in which he points out that intentions can be respectable, without being clearheaded. We in India know this well.

Thomas Friedman also explains it well in his NYT Sunday review "Do you want the good news first?" He says that entrepreneurs are now far more empowered than before to do their own thing after elimination of 'gatekeepers'. For example, you don't now need to go to a book publisher to publish a book; you can do it yourself, and 16 out of the top 100 best sellers on Kindle are self published.

However, under austerity measures, the US Government is cutting back on higher education and research, thereby negating the advantage America has.

India, too, has good intentions of austerity which are not clear headed. For years the Government has been told by several experts that its policy of fuel price subsidy was triple A rated foolishness, but there was no political will to do so. Most Indian political leaders can only only act under a crisis situation, so we must first enter a crisis before we see any meaningful reform. Faced with the necessity of wearing fiscal pampers, it raised the price of petrol by over Rs 7.5/litre, in one go. Had the Prime Minister had the courage to do this earlier, he could have done it in small steps instead of all at once.

This will, of course, dent the demand for petrol vehicles (and hence for bank loans to finance them), whilst boosting it for diesel vehicles. At least till such time when diesel prices are not similarly given a big hike.

This type of austerity is the bad Taliban.

What could be the good Taliban? Several things.

Is it necessary, for reasons other than inflated egos, for Presidential, Prime Ministerial, Chief Ministerial and other entourages to have a convoy of 30 vehicles? Would not an honest and well meaning Prime Minister instantly ban these? If they assume a large convoy provides them security, they are misleading themselves. It did not provide security for Benazir Bhutto or for John F.

Why is it not possible to mandate fuel efficiency norms for vehicle manufacturers? The rate of excise duty should be directly linked to fuoel efficiency, and penalties imposed for not improving it annually. Would any coalition partner object? Why use coalition politics as an excuse then?

Why is it not possible to mandate the production of vehicles with factory fitted CNG kits? The Supreme Court made all buses and auto rickshaws use CNG compulsorily; why not mandate car manufacturers to give an option to customers? At the moment, customers take their chances with CNG kits added later; often they do not work.

Why is it not possible for the Government to reduce various taxes, which perhaps add a third of the cost of petrol? The Government of Goa has done so. Why not others?

Why is it not contemplated to encourage the growth of public transport? Why does a metropolis like Mumbai not yet have either an underground or an overhead monorail? It is simply a case of appalling governance, and people do not forget that when burdened with higher costs continually.

Besides hiking petrol prices substantially, the other major achievement of the Government last week was bringing out an oxymoronic white paper on black money. Incredulously it puts the figure of Indian black money in Swiss banks at Rs 9,295 crores, and says this is down from Rs 23,273 crores in 2006. This attracts several comments.

The figure of Rs 9295 crores as being the total of Indian money in Swiss banks stretches the credulity more than the rack used by the Spanish Inquisitors. Secondly, if the Government had the figure of Rs 23,273 crores in Swiss Banks in 2006, what was it doing about it for the 6 years it was in power?

Lastly, if this is all the money lying in Swiss banks, where is all the corruption money going?

It seems as if there is a mountain of tax-escaped Indian money lying abroad, and it may be likely that the Government may announce an amnesty scheme for it soon. Something like - pay 35% upfront and no questions asked.

This is lent credence to by the sharply falling Indian rupee. For, if the rupee were to fall from Rs 42 to, say Rs 56.70, the 35% tax comes out of currency depreciation and the holder gets the same amount of rupees after paying the tax! But wait, are we not close to that? An amnesty scheme would enable the Government to demonstrate that it is tackling black money, whilst actually helping those who have it launder it. What an idea, sirji.

The BSE-Sensex added 65 points last week to close at 16217, and the NSE-Nifty gained 28 to close at 4920.

Foreign Institutional Investors (FIIs) were net sellers. They are, rightly, disenchanted with the vagaries of official policy and the systemic destruction of all that was working well. The telecom story is over, for the time being. Spurred by the Supreme Court diktat to auction spectrum TRAI has announced floor prices for sale of spectrum which are several times higher than those prevailing in developed countries, on a ppp basis. TRAI says it will not affect call charges by more than Rs 0.04 per minute but CDMA operators say it will be Rs 1.86 /minute higher. If so, then millions of people who use cell phones for their daily trade (fishermen, vegetable vendors, carpenters etc.) will be badly hit and this would lead to financial exclusion not inclusion.

This is because raising revenue to pay for out-of-control and profligate expenditure is the prime concern of Government. For this they are doing several things; raising petrol prices to reduce its subsidy outgo is one of them.

It is probably pressuring LIC to buy out assets of SUUTI, so that it can get just under Rs 40,000 crores from LIC in exchange of shares of ITC, Axis Bank and L&T. These are good stocks to own, no doubt. But what will be the unintended consequence would be to curtail the ability of LIC to stand as a buffer against an enmasse selling by the FIIs.

FIIs sold last week, but in dribbles. Should an event occur wherein that trickle could turn into a flood, the stockmarket would go into free fall.

Back to austerity.

Whilst cutting expenditure, the Government must cut it wisely. As Thomas Friedman says in the above article, "I can lose weight quickly if I cut off both arms, but it will surely reduce my job prospects." Do not cut expenditure that will impact growth prospects. Start by cutting wasteful schemes and enforcing discipline to see that leakages do not occur in the good schemes.

The movement of the stockmarket would depend on the view of foreign institutional investors, we have cut the legs of domestic institutions like UTI and LIC. That view would change if the Government did some serious bit of reform and showed that it had a vertebrae. There are no signs, yet.

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 "What price, austerity?"
S.K.DAMANI
May 28, 2012
Great Comments : As usual from Mulrajbhai, (have been realigiously, reading his comments for the past maybe forty years, every Monday TOI and now on this mail.- Great) A few comments. First why blame PM MMSingh. See he on his own cannot do anything. He cannot even raise his arms to wave. Do not believe. Next time observe. Only after Madam has raised her hand MMSingh will also raise and wave. till than he dare not do it. I must have written this n no. of times. As an economist MMsingh WAS good, but as a PM he is just a 'katputli' in Madam's and Prince's hand. He is a shame to the community of Sardar.
Regarding austerity, rightly observed, why do this politicians require such large entourage. Except a few party workers, every one hates them and when they cross thier roads, shower choisest abuses. It causes tremendous heart burn among the public. But than will this people ever learn. And than there is Rs. 206 cr. spent by the President!!!!. and a trip every 37 days by the Speaker.Wow!!!! The motto is JOIN POLITICS AND ENJOY LIFE. to hell with the country and the people who vote them to power.
Be assured, just before the elections, all this politicians, particularly congressmen and the Gov. at the centre will throw sum freebies, and the poor people who vote for them, will FORGET, all thier miseries and again vote for the same people. The politicians have mastered this game very well, and genral public - well they are beggars, who when fed by few crumbs will forget everything and again vote for the same people.
Forget growth, forget good appericiation at the markets. If FII's invest mkts will move up or else, down down down. Less said about milching of LIC and UTI better.
Lots to say, but another time.
Thanks Damani
Like 
S.A. Ramchandar
May 27, 2012
The Govt must be able to generate sufficient revenue to extend the social service in a society. Borrowing should be limited. But what really happened in almost all countries suffering to day was that the govt borrowing ballooned to unrealistic levels. No one can survive for long if they live beyond their means. The easiest natural way is to tighten the belt and try to live within their means. When Govt tightens its belt peoples cannot live beyond their means and slowly but surely things will improve. It is time that every one think on these lines. Like 
Dilip Kulkarni
May 26, 2012
Excellent theme....yes, even the common man observes austerity being implemented wrongly, with or without insight into economics. You have mentioned examples of bad austerity at macro levels, but when the government issues the austerity fatwa, the most common people suffer first. Like, in nationalised banks, subscriptions to newspapers in the customer area used to be killed first. Insignificant items from money cost viewpoints used to be the first targer, and customer service used to suffer. What about huge ads that each government gives? Government ministers travelling in cattle class ( Tharoor fame ! ) is also a joke, because, first they never do and always circumvent, and second, that is anyway by Air India to whom the government and parties never pay for loooong ! We should advocate more transparency in implementation of austerity measures, so that janata knows what it is being preached about is also practiced. Like 
  
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