You can fix GDP growth with good governance, not IPL bookies - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
You can fix GDP growth with good governance, not IPL bookies A  A  A

1 JUNE 2013

GDP growth for 2012-13 came in at 5%, lower than most expected. A disappointed stockmarket collapsed, with the BSE sensex falling a whopping 455 points on Friday, after the disappointing news, to lose at 19,760.

To improve a nation's economic performance requires good governance. It cannot be fixed by bookies, a la IPL. Mulayam Singh Yadav betrayed no state secret when he opined that Manmohan Singh was not a strong leader. Sadly, the Prime Minister's focus has been to protect and preserve the coalition, rather than the economic well being of the nation. The UPA has thus allowed coalition partners the freedom to take wrong decisions (such as allotment of telecom spectrum out of turn, or of coal blocks) merely so as not to rock the political boat. Such incorrect decisions naturally have their impact on the economy, and so GDP growth has fallen.

Poor governance isn't restricted to India, it is endemic.

Most countries in the developed world are in dire straits. The Euro zone economies are badly troubled with low economic growth contributing to high unemployment rate. Youth unemployment (ages 15-24) in countries like Greece and Spain exceeds 50%, a frightening prospect for the future of these countries. Only Germany has low levels of unemployment. The common currency has only benefitted Germany, and badly hurt others. It appears to be a matter of time when the common currency experiment will be called off.

Japan has been in long term recession for a long time, which the current leader, Abe, is trying to pump prime his way out of. It won't work.

Globally, as per this blog, youth unemployment is high at 12.4%. This determines policy.

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In Saudi Arabia, the world's largest oil producer, 40% of the population of 28 m. is below 15 years. The country, which has no income tax, needs a certain amount of oil revenue to look after the needs of its population. Hence, it needs oil prices to be above $ 100.

So, as per the above blog, even if the US were to increase its production using new technology to extract shale oil, Saudi would cut its production in order to maintain the price above $100.

But many countries are now discovering shale oil/gas deposits, such as Australia, Israel, China and others, and should all of these come into production, one wonders if Saudi Arabia would be able to cut its production severely, or if crude prices would drop. Over a longer term, the latter seems likely.

The scale of the future problem of providing jobs to Indians is much larger, simply because our population of 1.2b. dwarfs Saudi's population of 28m. Therefore, it is even more pressing that our national political leaders think and plan ahead, and have sensible policies to promote investment and economic growth.

Sadly, this Government is frozen into inaction and has destroyed virtually everything that was so far successful.

The telecom success story has been derailed, because the Government chose to protect the interest of the coalition partners instead of the country.

Even after that, the Government is driving further nails into the sector's coffin. Bharti Airtel is the latest telecom company to receive a notice from DoT for the spectrum sharing arrangements it had with other telcos, via which customers got the benefit of lower roaming charges. Idea Cellular and others have already got such notices. Now, if spectrum is a scarce resource, any arrangement that helps a better utilisation of it, plus brings down cost to consumer, ought to be welcomed by the DoT.

Most Governments though, are bankrupt, and are on a revenue raising spree like there is no tomorrow. This creates an unwelcome environment for business, which does not, then, invest in the territory. The example of Shell has been given by this columns earlier.

Take the airline industry. The biggest cost for this industry is fuel cost and, thanks to the Government policy of, upto now, subsidising petrol, diesel, lpg and kerosene, the refiners tried to make up for their losses on these products by increasing the price for aviaition fuel. This drove the industry into bankruptcy. Kingfisher already is in a terrible shape, and has made a net loss of Rs 2,142 crores in the quarter to March. Spice Jet lost Rs 184 crores in Q4.

So the airline industry finds new ways to prop up revenue and curtail losses. The burden falls on consumers. The industry has, for example, reduced baggage allowance from 20 to 15 kgs. More such steps will come. Ultimately, it is the consumer who pays for the inefficiencies or bad policies of Government.

The infrastructure sector held out great promise for investment. The Government planned a $ 1 trillion investment and private sector participation was welcomed on a ppp basis (public-private-partnership, not to be mistaken for player-punter-partnership, which is IPL).

The road sector, which had taken off, because the toll collection and increase traffic flows make it an annuity investment, is now in trouble. National Highways Authority of India has sought the intervention of the Prime Minister to remove hurdles. Some of the issues where PMO intervention is sought are the high interest rates road developers are bearing, low liquidity, and an absence of an easy exit policy from previous road projects so that they can start developing new ones.

The Anil Dhirubhai Ambani group (ADAG) has many large infra projects that are stalled, almost entirely due to poor public governance. The reasons are slow decision making, a lot of red tape and legal challenges.

So after telecom, and civil aviation, which were once booming sectors, a third, the road sector, has also been destroyed.

Little wonder, then, that GDP growth is at 5% and that rating agencies are threatening a downgrade.

In corporate news of interest, several public sector banks which had given guarantees to jewellery maker Winsome, are looking at loosies, sorry losses, of Rs 4,000 crores. They would probably be saying, you win some, you lose some.

The whole sordid saga of how Ranbaxy faked data is explained in great detail in this blog. The company had gone to great lengths to fabricate data submitted to the USFDA. The erstwhile management sold their stake in the company to Japanese pharma major Diichi Sankyo, which acquired controlling interest in it for $ 4.6 b. This was just 3 weeks before legal action began in the US on recall of drugs, ultimately ending in the $500m. fine Ranbaxy has agreed to pay.

Diichi is threatening to sue the erstwhile owners for non disclosure of information, even as the Singh brothers are accusing it of badly managing the company.

Coming on top of various scandals, and coming after the scam exposed at Satyam, the Ranbaxy episode will be another blot on the Indian investment landscape.

Last week the BSE-Sensex ended up 56 points, at 19,760, and the NSE-Nifty ended up 12, at 5,985.

Only a display of good governance can help the tarnished image of India as an attractive destination for foreign investment. Sadly, we do not see any evidence of that. Such as there remains, will vanish in the run up to the general elections. So the market ought to have a downward drift, broken intermittently on the back of global liquidity being pumped in. One hopes that voters concentrate on economic performance and good governance in the next 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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4 Responses to "You can fix GDP growth with good governance, not IPL bookies"
Jun 2, 2013
No Captain will rock his own boat when entire nation is on board. The speed @ which we grew in last decade remains same for downward cycle too that is an empirical economic fact. The cost push economic sustenance has been carried forward for very survival of politicians to follow populous gimmick and the pressure is only building more & more, that is the folly of our democracy, no one can help it unless we improve the efficiency in capital expenditures. Like 
NSP. Swamy
Jun 1, 2013
Please show to all our Indians a good political party which will give us GOOD GOVERNANCE ! Like 
surajit som
Jun 1, 2013
"Poor governance isn't restricted to India, it is endemic".
the author said it !!

can India-or China,Russia,Brazil etc- can ever expect to be better governed than Europe, America or Japan ? and those countries are broke-living on printed money !!!

the twentieth century economic model-based on diabolical inequality ,ruthless exploitation , shameful and mindless consumption is collapsing(remember recent massacre of congress leaders by Maoists in Chhattisgarh?) . Gandhi said it long ago-there is enough for everybody's need but not for everybody's greed. but who will listen ? the current economic model world over is based on naked greed. collapse is inevitable._
Jun 1, 2013
There is no doubt that only good governance can achieve anything positive including credible GDP growth. The problem is what happens when the Governance is itself likely to be controlled by ""bookies""? Maybe even the GDP can be "'fixed"'?
As we can see there is no need to be brilliant in any discipline or domain to effectively run a Govt and provide good governance. Its all about common sense, courage to take a stand on principles, honest thought and action and Leadership by example and action. Compromise on any of these, for whatever reason, is a sign of failure and a sell out to "bookies"' and fixing. Period.
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