Coming soon to an (operation) theatre near you - The Indian Economy - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Coming soon to an (operation) theatre near you - The Indian Economy A  A  A

23 JUNE 2012

If one walks down memory lane, one recalls how the UPA Government patted itself on the back for having adroitly managed the 2008 crisis triggered off by the collapse of Lehman Brothers and spreading to others in the financial service sector, and to the mortgage housing markets. India's economy still grew handsomely, earning the attention and the kudos of the world.

The question nobody has yet asked is if the UPA did, indeed, have great economic management skills to avert the crisis caused by the world's largest economy, the US, a $ 14.5 trillion economy, then why is it using the problems faced by Greece, a $ 300 b. economy (much smaller than India's) as an excuse for India's fading economic performance?

The UPA must admit either to braggadocio in 2008/9, or to laziness in 2011/12. It either has tremendously laudable economic management skills, and has been carelessly negligent in its duty to use them, or didn't have such skills, leading to the conclusion that the economic performance post the 2008 crisis was the results of policy initiatives undertaken earlier, whose momentum carried our economy through the crisis. Which is it, Dr Manmohan Singh?

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On each and every front our muddled policies and inaction have caused unnecessary problems.

Take power production. A fifth of our installed capacity of 178,000 MW lies unused mainly due to shortage of coal/gas. The Prime Minister's Office tried to arm twist Coal India Limited, the monopoly supplier of coal, with the largest reserves of it in the world, to enter into fuel supply agreements with power producers, which would guarantee supply of 80% of the committed quantity under threat of stiff penalty for failure.

Coal India, under a counter pressure from The Children's Investment Fund, an activist shareholder in the company, pressed for a reduced commitment of 65%, and a watered down penalty for failure to meet targets. Power producers say that a supply agreement assuring anything less than 80% is not bankable i.e. lenders are unwilling to lend against such an agreement.

Imported coal is an option, but no one wants to bell that cat after countries like Australia and Indonesia levied taxes on exports of coal, and State Governments refused to allow the increased coal cost as a pass through to independent power producers. This has put at grave risk projects of companies like Adani and Tata Power.

Imported coal, and other imports, are also running into problems due to bottlenecks at ports. A lack of adequate roads to evacuate the cargo is a major reason for such bottlenecks.

Or take gas. The Government is refusing claims of capital expenditure on gas blocks on the ground that the estimated finds were overstated. Estimating Oil and gas reserves is a horrendously tricky business, more so if it is deep sea, as in the K G Basin. More tricky, in fact, than weather forecasting in which the Government has more expertise, yet got the assumptions of this year's monsoons wrong and had to scale it down. RIL has now stated that its reserves are 1.93 trillion cubic feet (tcf), not the 10 tcf announced earlier.

RIL has announced further capex plans of $ 4 b. to exploit these reserves. Gas prices have been fixed at $ 4.2/unit and are due for revision in 2014. Since we are paying far higher than $ 4.2 for imported LNG, the developers are hoping that a price hike is affected earlier, to spur greater exploration effort. BPCL and Videocon each have a 10% stake in a gas block off Mozambique, which has estimated reserves of 1 tcf but whose gas would be internationally priced and sold.

Or take telecom, hitherto tomtommed as a successful story of liberalisation and reform, where entrepreneurial forces were unleashed to create competition, ensuring low cost, affordable mobile telephony. The story now threatens to be derailed, thanks to the shenanigans of spectrum allocation by a former telecom minister who was part of a coalition partner party. Each coalition partner gets unfettered control over a sector to exploit. It is the customer who ultimately pays the price for such poorly governed coalitions. Under instruction from the Supreme Court, the Government is repricing spectrum, something that would hike telecom rates by upto 100%. This will dent inclusive growth tremendously, for, to a fisherman of Kerala a doubling of cost matters far more than to an urban citizen of Mumbai.

Civil aviation was another sector looked after by another coalition partner and once touted as another success story, with the growth of private airlines such as Kingfisher, Jet, Indigo and others, to take on the former oligopoly of Indian Airlines, in the domestic arena, and Air India, in the international arena. Air India has been driven to bankruptcy by forcing it to buy more aircraft than it possibly needed, then merging it with Indian Airlines to cover up the goof. It is continually funded by the Government for losses caused, not in small measure, by the frequent strikes by pilots and by the unaffordable levels of debt. It is now contemplating renting out 15 floors of its landmark headquarters in Mumbai, to fetch Rs 36 crores a year, and, as per the recommendation of the Dharmadhikari Committee, is to be listed.

The objective behind listing, it seems, is to give ESOPs (employee stock options) to its employees, as a part of a retirement compensation package. But looking to its finances, and to the frequent disruption of schedules (passengers are unwilling to risk booking the airline as they are uncertain if the flight would take off), expecting ESOPs to be an incentive would perhaps be an Aesop fable.

The Competition Commission of India (CCI) has imposed fines on 11 cement companies totalling Rs 6307 crores. Commodity prices tend to be similar, since there is little to differentiate the commodity made by one producer from another, in order to justify variable pricing. But the CCI's contention is that manufacturers jointly lowered production in order to boost prices. Which is what OPEC does, for oil.

Consider what happens then commodity prices are variable. Take diesel. Government owned refineries like Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd. (BPCL) have to subsidise diesel at the pump. Now, because diesel continues to receive a subsidy, but petrol doesn't, there is an increase demand for it. It now accounts for 49% of fuel sold! This dieselisation of the economy will have an enormous cost in future, but myopic politicians, too busy trying to capture votes (from farmers who use diesel for their pumps), don't care about the future of the country.

So look what happens. In the first two months of the year, IOC, the largest, produced some 4485 tonnes, but sold 6371 tonnes, buying the difference from private companies like Mangalore Refineries and Petrochemicals Ltd. (MRPL), Essar oil, Reliance Industries Limited (RIL) etc. at international prices. In effect, the weird continuation of diesel subsidy policy leads to Government majority owned companies like IOC/HPCL/BPCL increasing their losses by selling subsidised product even as private companies gain by selling non subsidised product.

The refusal to hike diesel prices leads to its overconsumption, and a higher than justified demand for diesel vehicles. When the diesel subsidy is finally tackled, and it has to be, for one cannot argue with common sense indefinitely, the increased dieslisation of the economy will create a problem. The inventory of diesel cars would need to be, someday, junked. In the meanwhile, it is creating an excessive demand for crude oil to produce the diesel, which widens our current account deficit, which depreciates our currency.

The Indian rupee has sunk to its lowest level against the US $. This has severely increased the burden on companies that had issued FCCBs (no, not a cuss word, but foreign currency convertible bonds). These are instruments which have very low interest rates but are convertible into equity at a predetermined price. The stock prices having collapsed, there would be no conversion and the bonds would have to be repaid, but the rupee cost of repayment has gone up, making default by many increasingly likely.

Looking to all this, Fitch, another rating agency, has lowered its outlook for India to negative.

So India is hurtling towards a crisis. We have a fiscal crisis. We have a current account deficit crisis, causing a slide in the rupee. We have the likelihood of a fall in GDP growth rate, as industrial growth falters, due to policy paralysis, and agricultural growth could be hit by delayed rains. The delay in rains is, of course, the fault of Greece! A surgical operation is needed to stanch the rot.

The surgical operation is in the nature of reforms, which are long past their due date. If the UPA, however belatedly, recognises the need for urgently reforming its stupid ways, there is, yet hope. The steadiness of the stockmarket suggests faith in such a possibility.

Last week the BSE-Sensex gained 23 points to end at 16972 and the NSE-Nifty added 7 to close at 5146.

Reforms that are supposedly on the cards are - hiking diesel prices, approving more infrastructure projects, measures to boost capital inflows (such as easier norms for Qualified Financial Investors), a fair implementation of the retrospective amendment and pension/insurance reforms.

Strangely, politics may help push some of them through. The Kolkata High Court has struck down the Singur Land Acquisition Act, on the ground, chiefly, that Presidential assent was not obtained for its promulgation. Since returning land to farmers in Singur is Didi's raison de etre, she will bend backwards to ensure it. Who knows, she may even agree to permitting FDI in retail!

The market would move with the steps taken to reform. If some are taken, there would be a rally. If none are taken, it would fall.

In global factors, if the US were to go in for another round of quantitative easing, global markets would rally.

Over a one year, or longer, horizon, this would be a good time to buy. In the interim, there are too many imponderables. If there were to be a race between a snail, a tortoise and the UPA Government, it would be a close one.

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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9 Responses to "Coming soon to an (operation) theatre near you - The Indian Economy"
Nitul Bhatt
Jun 30, 2012
These power companies are complaining about the increase in imported coal prices from Indonesia and Australia due to increase in duties. When they bid at incredible low rates to get the UMPP, did not they take this aspect on account? And why should the companies who had done their homework and asked for higher price per unit should suffer by losing to companies who bid lower price and now are allowed to increase their unit price? Like 
sujoy kumar banerjee
Jun 27, 2012
sir, 28/06/2012 i meet my cm mamata banerjee 8am her home solve evewrything, so plese notice cm. thank you -sujoy kumar banerjee Like 
Jun 24, 2012
MRPL is a subsidiary of ONGC and not a pvt company.
Ragini Ghanekar
Jun 24, 2012
I hope Mr. Manmohan Singh, Architect of liberalization and prosperity, does not become the person who presided over second near bankruptcy of nation. I suspect he is interested in completing his second term and becoming second longest serving Prime Minister than anything else like Mr. Pranab whose eyes are on Rashtrapati Bhawan than what happens to the nation. Probably they know India will keep on chugging ahead despite government either at snail's pace sometime or hare's pace other time. We should have some age limit on the politicians like everybody else to have resourceful, visionary people in political arena. Like 
Jun 24, 2012
Very good & perfect analysis of present situation (ie economy of Mera Bharat Mahan). We have two great Harward graduates at the helm of affairs,but the situation seems to be worsening day by day. Why ? The answer lies in the article itself. Politics - Grid to continue as long as possible with the help of coalition partners (also changing from time to time). As per today's newspapers Tornado was a result of GAD or PWD in Sachivalaya (Mantralaya) Mumbai. Fight between Congress & NCP - again coalition partners in state politics !
Do not even dream that we will improve in future.
National interests are sacrificed for selfish motives.
Chandra Shekhar Sood
Jun 24, 2012
You are right in hitting the nail on the head. The gains in the past were the outcome of sensible reforms under NDA. Remember under NDA economy was growing and inflation was moderate. Steps in the right direction (boosting investment in infrastructure) were taken. But, UPA is committed to undoing everything--no reform, no insentive to investors, scams, no action on inflation front, scrapping infrastructure projects (both public and private when they are in advance stages of commissioning for bogus reasons like "Aviral Ganga" and environment concerns that were or should have been weighed at the time of initiation), scaring away FDI and much more. If all this is permitted to go on, INR will soon be cheaper than toilet paper. Like (1)
Jun 23, 2012
Great Article. We are thankful to you for X-ray of present Indian Economical problems. Like (1)
Col SS Sikarwar
Jun 23, 2012
What has been described is the absolute fact and what is expected to happen in the times to come. But what has been concluded is right but who knows that the worst is over, the way our system is functioning, some of us still visualise the NIFTY to touch 4500 or around that, the concluding recommendation that "Over a one year, or longer, horizon, this would be a good time to buy. In the interim, there are too many imponderables. If there were to be a race between a snail, a tortoise and the UPA Government, it would be a close one."
We are not sure as to what is going to happen to our economy next moment hence to talk of one year prospective in the present environment may not fall in right place. Yes we are all optimistic and why not but the environment as has been created appears very bleek.
Mr Pranab Mukherjee, the BRAHMASHTRA of this Govt moving to Rastrapati Bhawan, I can't imagine the right replacement for him, which too gives me nightmares when I think of the economy and future of our great Nation.
I fully subscribe to the idea that if recession of 2008 did not affect us then how come Greece has had such an adverse effect on us, there is something else behind the scene, not really Greece, which is a history now. Why blame rating agencies, when ourselves are not able to decide, as to where lies our National interest.
Like (1)
J Thomas
Jun 23, 2012
Air India should be sold to the employees for one rupee. Like (1)
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