People pay the price for policy mistakes - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
People pay the price for policy mistakes A  A  A

22 JUNE 2013

The reason for most global economic problems is poor public governance and it is the people who have to pay for it. Examples abound.

The State of California reports a $1.2 b. surplus, thanks to lax accounting. If it follows the same accounting standards as those followed by private firms, it has an outstanding debt burden of $ 1 trillion, nearly 1000 times its. fictional surplus This is because all State Governments in USA have promised retirement benefits which, given higher longevity, lower returns and increased inflation, they will never be able to fulfil. It will ultimately be the people who will pay the price, when the hoped for, and promised, benefits, will be cut. The combined deficit of all States is $ 4 trillion, or a quarter of US GDP. Never can this be funded.

Political leaders have no accountability. Their tenures in office are short lived and susceptible to death by a thousand cuts. They merrily use tax payer money to make promises they know the Government can never keep, bequeathing the legacy of default to their forbears.

The Eurozone problems are well known - no economic growth, very high unemployment, which causes social tensions (youth unemployment is 50% in countries like Greece and Spain and high indebtedness.

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Japan has inflexible policies, especially with regard to labour, and companies are not allowed to fire anyone. Instead, those they wish to fire are sent to 'oidashi-beya' or banishment rooms, where they have no work and get dispirited and disillusioned. The country also discourages foreign investors, shielding their corporate managers from poor corporate governance and poor decisions. Fearful of losing elections, Prime Minister Abe is unable to take necessary reform steps

India is no different. The proposed Food Security Bill, soon to be debated in Parliament, is yet another nail in India's fiscal coffin. It will impose an untenable burden on future budgets, according to a lovely article by Sadanand Dhume in Wall Street Journal. Dhume maintains that hunger is due not to food shortage (there is plenty but largely due to corruption. "Predictably enough, India's public distribution system is notoriously corrupt. By some estimates, up to half of the food grains procured by the government are siphoned off by middlemen before they reach their intended beneficiaries." Instead of spending money on subsidised foodgrain, more than half of which are siphoned off, spend the money on education, preparing the youth to becoming productive members of society.

Poor policy prescriptions affect industries and, ultimately, the citizen. In the sugar industry, prices of cane is controlled both by the Centre and by the State, both of which compete with each other to declare, in order to get farmer votes, a high price for the sugar cane, unmindful of the economic case for it. Sugar prices are also controlled. It is estimated that the sugar industry would lose Rs 1,000 crores this year

NHPC officials are chary about clearing claims of its contractors for cost escalation, and the company faces the prospect of a whopping Rs 10,000 crores of pending claims!

The Government is now trying to get the economy moving, slowed down, as it is, by policy paralysis and poor management. Amongst the reform measures it is contemplating is to allow for an easier exit for road contractors why not hurry up clearing pending claims, instead?, raising sectoral caps for foreign direct investment in sectors such as roads and airlines from 49 to 100%, in others such as telecom from 51 to 74% and in sectors like defence, insurance, newspapers from 26 to 49%. The only thought is that this ought to have been done as good economic management, and not as a political compulsion, just prior to a general election. To get the power sector moving, power producers are permitted to pass on the higher cost of imported coal to consumers. Why not open up the coal sector to greater competition? It is the people who pay the price for poor governance.

In corporate news of interest, Aircel, owned by Malaysian Maxis, has an outstanding debt burden of Rs 24,000 crores, and the promoters have not brought in their promised share of $ 1.5b. We have seen, earlier, the inability of lenders to compel Kingfisher Airline promoters to bring in more funds. It is the banks, and ultimately their shareholders or lenders or depositors, who pay the price. As happened recently in Cyprus, and is likely to happen elsewhere, the rights of lenders to banks get precedence over the rights of depositors. The depositors have a right to a free haircut, but not to protection of their money deposited with banks. The bank managements have the right to make poor loans.

The sensex fell a whopping 526 points on Thursday when Big Ben (no, not the clock in London but the jock riding the monetary horse in Washington said that, if the US Federal Reserve found signs of economic recovery, he would slow down on the QE (quantitative easing programme.

This sounds wierd! Its like the relatives of a patient in ICU starting to wail when informed by the doctor that their patient was recovering and he may cut off the oxygen supply! It only shows that stockmarkets have become monetary junkies. This does not augur well, for, sooner or later, the stimulus must end.

The BSE-Sensex ended the week down 403 points, at 18,774, whilst the NSE-Nifty lost 140 to close at 5,667.

Some of the readers will remember how Government of Maharashtra had given a sweet deal to Enron Corporation to set up a power plant, and guaranteeing a return in US $. This became a millstone for it and pushed up price of power generated to an unaffordable level.

The Government of India is repeating the mistake in Jaitapur. It is allotting nuclear power projects to French company Areva without going through a public tender process, and based on incorrect assumptions that the cost of power generated would be Rs 4/unit. The article opines it would be closer to Rs 16/unit. The operation safety of the project has also not been independently confirmed, a worry, especially after what happened in Japan. Guess who will pay the price of Rs 16/unit?

Though each dip may be followed by a brief rally, the trend seems to be lower tops and lower bottoms. Foreign investors have been selling and its doubtful they would get too enamoured with the reforms such as higher FDI caps or easier exit from road projects, to pump in much more. Especially in the wake of a currency that continues to fall. For domestic investors to return, the economy must be better managed. And corruption, both of minds and of bodies, must abate. That seems to be somewhere in the distant future.

Selling on rallies may be a prudent course to follow.

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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5 Responses to "People pay the price for policy mistakes"
Jun 26, 2013
Mr Som you need not be surprised. Most of the modern bad habits have been promulgated by the United States and its vested interests., viz.the big corporations, corrupt politicians and greedy banks that have become all too powerful.
India is rapidly heading in that direction. Though Indian household's traditional propensity to be frugal may keep the disaster away a bit longer.
But Indian politicians are far more corrupt compared to those in the US and that is our downfall !
Like (1)
Swaminathan R
Jun 24, 2013
The lack of accountability , disregard for institutions, very very short term election oriented decisions are the bane of Indian polity; perhaps we are setting examples for other nations to follow. People are insulted by freebies, kept entertained by 3rd rate movies and TV channels; especially from where I hail, the state of Tamilnadu which is in the vice grip of film personalities.India needs to get liberation . A wistful yearning! Like (2)
swapan lodh
Jun 22, 2013
I entirely agree with Mr Mulraj`s views.Corruption has been eating into every aspect of India.Audacity of the people at the helm has been crossing perceptible pardigm.Now the situation `who cares whom?`Every one looking forward winning 2014 election.Result is whoever wins will continue having cuts in ransom increasing black money every day.No sign of silver lining for common people. Like (2)
anupam garg
Jun 22, 2013
Since the entire world's political environment leads to corruption only, I guess we shldn't feel that much bad about our own political honchos' mistake...i mean tht's the way the world goes round
but the inner voice rejects this argument and rightly so...respects to the author for bringing out more shortcomings of the inept authoritarians

keep it up...sans a few spelling and gramatical mistakes in future
Like (1)
surajit som
Jun 22, 2013
the second para of the article is astonishing. if this can happen in the most developed country in the world , what hope poor and ill-governed countries like India can have ?

quite honestly ,some African countries may be having better economy than that of California (sic) !! because nobody would give them too much loan and they cant have too much debt !!! they also don't have much of welfare !! an article by Shri Mulraj would be welcome !!
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