Danger of wrong policy decisions on public uproar

4 JUNE 2011

The two most valuable anatomical parts of a politician are his nose and his skin. He uses the former to smell the public mood, and then uses his office to save the latter! In saving his skin, he often cares little about national good. In at least three areas, we are at risk of taking short term decisions that would not be good in the long term interest. ---------------------------------------------- Don't Miss! ----------------------------------------------

He's the Oracle of Omaha.

He's the world's most successful investor.

Your guess is right.

The Warren Buffett Quiz. Click Here to participate. It's Free!


The first is in the telecom scandal, which, at its root, revolves around pricing of spectrum, an asset owned by the Government and needed, for growth, by all telecom companies. There has been a debate, for over 20 years now, on how spectrum is to be treated, and priced. One view is that it should be treated as 'commons', or a national resource for public use, in a similar manner to parklands. The Government policy on telephony did, in fact, treat spectrum as commons, and gave it at a low cost, so that telephone companies could offer their customers affordable service.

The other approach is to treat spectrum as a valuable resource, and obtain for it the best price, by auctioning it to the highest bidder. This is, in fact, what India did when it first embarked on mobile telephony. In order to fetch the highest price, it gave the buyer the advantage of a duopoly, restricting each circle to a maximum of two players. In order to recover the high cost of buying spectrum in an auction, telcos charged Rs 16/minute, to both calling and receiving party, and mobile telephony was headed for extinction. It only became a revolution, because spectrum was treated as commons and allotted, at reasonable rates, to telcos, allowing India to have one of the lowest rates in the world (with only calling party paying! Even in the US today, both parties pay).

Now, thanks to the public angst after the 2G scam, the Government is thinking of going back to treating spectrum as a scarce resources, and auctioning it. That would be a mistake. Unfortunately, we never learn from our mistakes, probably because the two most valued anatomical parts of political leaders are the nose and the skin, instead of the brain and the eyes.

Another area is the draft of the Lokpal Bill. There is, rightly, a tidal wave of public anger against the never ending eruptions of corruption scandals, and the ease with which senior people in both Government and industrialists seem to get away with it. Two people's movements, first by Anna Hazare and now joined by Baba Ramdeo, are seeking to introduce a new Lokpal Bill to strengthen the hands of the Lokpal (ombudsman) in his fight against corruption. The new Bill has some good features, and is being debated before being introduced as legislation. The danger is that, succumbing to the signals of the political nose, and in an effort to save the political skin, the Lokpal is made into an extra-constitutional authority. The Indian constitution is one of the world's best, with inbuilt safeguards against any branch of Government overstepping its boundaries. The Lokpal must also be within the ambit of constitutional safeguards.

The third area in which we are in danger of, perhaps, making a bad long term decision, is in going ahead with an aggressive expansion of our nuclear power generating facilities. The need to generate more power is undeniable; if India is to grow its economy at over 9% p.a., which it can, it needs power. Thermal power, which is the main source, has environmental concerns. Last week a news report stated that Coal India's production could be lower by 11.5 million tonnes because of environmental reasons; it has to get approval to clear forest land. At the same time, our transmission and distribution losses are unacceptably high. This is a euphemism for theft of power. Obviously, political leaders in states have to take steps to stop the theft of power, but that's a matter of their skin.

Prime Minister Manmohan Singh must surely have talked to Angela Merkel, the German Chancellor, when she visited Delhi last week. Germany has decided to shut down its nuclear power plants by 2022. It generates about 11% of its energy needs through nuclear power now, and about 8% through solar energy. It plans to increase renewable energy capacity to meet 80% of its needs by 2050! India, which is better blessed than Germany with abundant sunshine, is, instead, planning to move ahead with nuclear energy. Nuclear plants are susceptible not only to the sort of unexpected calamities as at Fukushima in Japan, but also to terror attacks (imagine the calamity if a 9/11 type of terror attack by an aircraft crashing into a nuclear power plant occurred!). In fact, Germany found that its nuclear power plants had enough safeguards but not against such a type of attack, and recommended closure.

But there is a risk that, guided by the nose, to save the skin, we may ignore the potential of solar energy and instead. Investors should view the video which explains how the German revolution into solar energy occurred. It simply passed a law, giving producers of solar energy (produced on rooftops, thus saving the cost of land) twice the rate for any power they supplied to the grid as the cost of power purchased from the grid by them, guaranteed for 20 years. As a result, there was an explosion in demand for solar power, bringing down its installation cost to an extent that it is now equal to a thermal power plant installation cost. Plus, there are more people employed in the German solar power industry than in its automobile industry!

In corporate news of interest, Air India has been forced to shut down 50 of its flights, because it has no money (and no credit) to buy fuel to operate them. The reason it has no money (and no credit) is because it has been saddled with unaffordable debt which it cannot possibly service; the debt being taken to buy more planes than it needs, which are now lying unused because it has no money! The Government should investigate the decision which compelled Air India to buy more planes than it needed, if it is serious about governance.

ONGC's results are interesting. The profit after tax was Rs 18,924 crores but would have been Rs 14,247 crores higher had it not been asked to share a subsidy burden that actually belongs to the Budget. Do the math. Assuming a P/E multiple of 10, the Rs 14,247 crore drop in PAT translates into a lower market cap. of Rs 142,470 crores. The Government owns 75% of ONGC, so has forfeited Rs 106,000 crores. ONGC is shortly to go in for a follow on offer and its valuation would be far more attractive if it were not saddled with a foolish burden of sharing subsidy, which, as pointed out, is against the Government's own pecuniary interest.

The BSE-Sensex gained 110 points last week to close at 18,376 and the NSE-Nifty added 40 to close at 5516.

Other than our own problems of various scams and of dealing with fasting swamis, globally too there are severe problems. The Eurozone is in trouble and the US recovery weak (job growth was disappointingly poor). Being patient is better than being a patient.

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.

Equitymaster requests your view! Post a comment on "Danger of wrong policy decisions on public uproar". Click here!

6 Responses to "Danger of wrong policy decisions on public uproar"


Jun 7, 2011

Nice article Jawahar, say hei to Dad. Civil society consista of all people including SwamijiS nothing wrong.Our politicians looting the country,hide under constitution & parliament. They forget thet get voted to power to improve & govern the country not to put down opposition & civil society views with an iron hand by a p.m who is appointed not elected.
many more scams are round the corner,air india, coal mining 75000cr, bellary, nuclear 150 billion dollar deal to buy untested reactors,& become guinea pigs.



Jun 6, 2011


I agreed with you the fact. Today we need a revolution in every sphere of our Society and good people to lead the country. Good governance is lacking and no hope for the same in near future.


Sanjay Saini

Jun 6, 2011

I too disagree with Mulraj over the issues brought out. Fristly the decision for auctioning the spectrum may raise the telecom products rates (which would be nominal in view of huge numbers of subscribers in India), however the money generated by auction would be usable for public interest for some other purpose of even higher priority. Moreover the loopholes of illegal earnings of telecom companies as were during last scam would be blocked.
Secondly over Lokpal, I fully agree with Chadrashekar that ous is not the best constitution as is evident from contineous scams and exploitation of public resources since independence (we have started to notice them only after they started to emerge in media over last 10+15 years).
Thirdly on Nuclear power, its our only way out at this junction of time. We have no other option. Sloar energy technology and infrastructure is still too costly for us. The other option of thermal energy (by coal or natural gas) would eat up our natural resource within two decades. It would be interesting to know that developed countries are saving their own resources and importing from countries like us. India should parallely work on Nuclear power, which would solve immediate power requirement necessary for growth and in the mean time develop better feasible solar option.



Jun 5, 2011

I dont agree our constitution is the best,when scamaster after scamster is let loose, Poor governance is the order of the day. Non functioning Parliment, Authority without accountability, near Police State existence,Public servants who cannot be Punished easily, Sleeping Judiciary, Jokers as Ministers ( Sic Fertilizer, Former MOH) Sorry Mulraj, ours is simply a State of GoondRaj.


Dilip Kulkarni

Jun 4, 2011

This is an excellent exposition of the need to set fundamental principles in long term policy making. It is cucid, giving easy-to-understand logic. There are a few more sets which do need well thought out, sound economic and strategic principles ( in an world economically and politically troubled ) in other key areas like mining. Very soon another sensitive area called envirnoment clearance will also follow the same path of corruption and political convenience. Any common resource capable of comemrcial use controlled by executive authority with a corruption susceptible bureaucracy to support it, will be a goldmine for corruption. It is not only the policy settig triggers to be blamed but also the well-oiled and well-entrenched machinery which bleeds the nation which needs to be overhauled.


Dilip Kulkarni



Jun 4, 2011

j mulraj has given lot of info' on various sub. we have to hope and wish that indian govt follows angela merkel in toto abt solar and n energy. ask its brave, retired, and intelligent n. scientist, kakodkar to follow her steps.

Equitymaster requests your view! Post a comment on "Danger of wrong policy decisions on public uproar". Click here!