A paralysis of governance - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
A paralysis of governance A  A  A

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25 JUNE 2011


The success bandwagon of India, on which the stockmaket bullishness is based, has hit some potholes, for which Indian roads are infamous. Because of the various corruption scandals, there are no serious economic decisions being taken; in the five months to May 2011, the number of economic decisions taken were, at 31, about a third of those taking in the corresponding period of the previous year. The politicians are busy playing 'you stab my back, and I'll stab yours'. The bureaucrats are wary of taking a decision that could later backfire and could even, like Siddharth Behuria, former telecom secretary, place them behind bars.

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We have a weird situation in which the 9 persons accused of burning to death a Collector of Manmad district, for trying to prevent adulteration of diesel with kerosene, being let off on bail, because the CBI failed to file charges in time, even as corporate executives, accused in the telecom scam, languish in jail, because the CBI has not filed charges! So is a white collar crime more heinous than a murder? The CBI has been exempted from the purview of the Right To Information Act, something that makes it more useful as a tool for political expediency.

One economic decision was taken, however, last week. Prices of petro products were raised, to reduce the burden of subsidy that is blowing a big hole in the budget. LPG cylinder prices were raised by Rs 50, diesel prices by Rs 3/litre and kerosene by Rs2/litre. Ironically, the gap between diesel and kerosene prices has widened by Rs 1/litre, making adulteration of the former with the latter even more lucrative. It was such adulteration that the slain Collector of Manmad sought to prevent and was burnt alive in his attempt to do so. And it is the CBI, which miserably failed in its attempt to bring the perpetrators to justice by filing a chargesheet, that is being exempted from the RTI.

Contrast this with the plan of the British Government to make its police and crime commissioners, in each of its 41 districts, electable by, and answerable to, the public! The Government of Britain obviously believes in the dictum that democracy is for the people.

Some of the major decisions that are held up are whether or not to clear the deal by Vedanta to acquire controlling interest in Cairn India (stuck becaue ONGC has, rightly, objected in order to get a fairer deal; it now pays 100% royalty for a field in which it has a 30% stake, and Cairn pays nothing) and another deal by BP to acquire a 30% stake in the D6 block in the KG basin operated by RIL.

The latter is stuck because the Comptroller and Auditor General (CAG) has queried the increase in capex, as being an attempt to gold plate. As per the production sharing contract (PSC), operators, such as RIL or ONGC, get to recover their capex, plus something more, first. Until such time as they do, the share of revenue accruing to the operator from the sale of oil and gas is far higher. Once the capex is recovered, the operator's share progressively drops and the Government's rises.

Such a PSC was introduced in order to explore India's sedimentary basin for oil and gas (we import 70% of our crude oil and need to reduce dependency). This is very expensive and risky business. For example, the cost of hiring a deep sea rig for first testing to see if there is, indeed, oil/gas to be found and later to bring it out, could be over $ 500,000 per day! Very few companies have both the cash flow to bear such a cost, and the expertise to discover the oil/gas, and the Government conducts NELP rounds to attract them. The audit by the CAG must be expeditiously completed, and any talk of renegotiating PSC must be scotched, for investment to flow into the oil and gas sector. Having said that, ONGC has announced plans to invest $ 77b. to develop a KG basin block adjacent to RIL. It plans to file papers for its follow on offer, after the verdict of the Vedanta-Cairn acquisition.

Investment in another, hitherto successful, sector, viz. telecom, is also stymied because of the scandal. It is imperative that the chargesheet be filed expeditiously and the matter brought to trial. There are far too many operators in each circle, and few now earn decent returns on capital. This calls for a restructuring of the industry, which could happen once the telecom scam has been decided by the courts.

Then there are environmental roadblocks. For example, production of coal by Coal India cannot be increased due to environmental concerns. Meanwhile other countries, realising that India desperately needs it for its power plants, have started levying taxes. Australia has introduced a new draft mining law, levying a cess on coal exports and Indonesia has followed suit. As a result, power producers in India have petitioned the Government to allow them to hike tariffs to pass on the additional costs.

Some capex decisions are mired in local politics, as in the case of Posco's steel plant in Orissa or in the case of Tata's Singur plant in West Bengal. The Tatas have filed a suit against an acquisition of a part of the Singur land by the new Government, (a part of its campaign promise) for return to the original holders.

In other interesting news, SEBI has asked 2 companies in the Sahara group to refund money to investors who had invested in OFCD (optionally fully convertible debentures) together with 15% interest. SEBI had sought to prevent the companies from offering the OFCDs, which it said were against guidelines, but the Sahara group approached the court, obtained a stay against SEBI and issued the debentures. It apparently has a whopping 6.6m. investors! The Sahara group has objected to SEBI's putting up its order on its website and making its decision public, as the matter is pending before teh Supreme Court. Sebi is trying to protect the interests of the .6.6 m. Investors.

The stockmarket, which was drifting down, surged in the last two days, because of two reasons. One, the Europeans bailed out Greece (no, not because CBI failed to file the charge sheet on time but because the Europeans feel that a Greek collapse now would destroy many banks and insurance companies in Europe and cause another global financial crisis). Two, the US released part of its strategic reserves of oil and brought down the price of crude oil.

The BSE-Sensex thus surged in the last two days and ended the week at 18,240, with a weekly gain of 370, whilst the NSE-Nifty ended up 104, at 5471.

Both the factors are temporary. Greece has far too much debt and will have years of pain before it can pare it down; the sovereign default has been postponed, not averted. And crude oil prices would start moving up again because countries like China and India are consuming lots of it and because several of the Middle Eastern oil producers are in political turmoil.

Corporate profitability will be hit in the coming quarters, as inflation and higher interest rates take their toll. The paralysis of decision making is not helping either. Both consumer spending and investment spending is subdued. The Chairman of SBI, India's largest bank, has reduced his forecast of loan growth. And remember, QEII is running out this month.

So the bail out of Greece and the fall in crude prices are not the harbinger of spring.

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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7 Responses to "A paralysis of governance"
Prakash Gurnasinghani
Jun 28, 2011
Nice, I hope you are also publishing weekly & monthly comments and market view on coming days. Like 
jitendra
Jun 27, 2011
It said investors are being ensured that there interest is protected. It also emphasized that the matter is still subjudice and there is no direction/ order of the Hon'ble courts against Sahara. The Sahara release claimed that in last 32 years of its operation, the Group has never acted against the law or the sprit of the law or earned even a rupee illegally. The release also went to add that "unjustified acts of various regulators, departments are now forcing us (Sahara) to come out with every detail...all names...at an appropriate time."

source : timesofindia
Like 
Librawalla
Jun 26, 2011
It is a well written article based on facts and the happenings in our nation.The purpose of publishing this article ,which is lucid and lazed with sweet reasonable, if the Government wakes from its slumber and act quickly to rectify the situation before it is very late. Like 
Anil Agrawal
Jun 26, 2011
In case of Cairn-Vadanta deal, what is the argument for terming, ONGC demand for sharing the royalty on pro rata basis by both the partners as correct. To my mind, it is not. To the best of my understanding, amount of royalty is to be decided by GOI and for this there is no internationally agreed formula and is to be determined arbitrarily by GOI during the concession period. And if this cost is to be shared, no explorer can do his homework on cost benefit analysis, at the time of bidding (uncertainty of its quantam). ONGC being GOI controlled company, will not mind/ will not have say, even if it looses money but a private explorer can not afford such a situation. Like 
bhagwat saraf
Jun 25, 2011
a direct hit, but government has it's problm

no politician, no anna, no baba, to do, goes for cheap publicity

easy to comment but hard to do....

your comment?
Like 
VIJAY BAHAD
Jun 25, 2011
The total failure of governance and a alomost non-active goverment is the result of the present political set up within Congress. The PM is expert but not a politicina hence has no political mandate to take decision which always have poitical repucursions. The actual power lies at the door stps of Mrs Soania Gandhi who is not resposible for any deciions but without whose approval nothing ,moves . Its a very sad state of affairs for country like india and Size like that of india . How can the givernments run with remote contrrols with those who are constititionally accountable but wield all the actual power and the PM is a just a notional presence . Its pathetic nad thats the reason we have a governmnet which is defunc and non functional and riddled with all negative news like curruption , inaction as well as hobernation , misplaced over reaction !!! Like 
A.K.Agarwal
Jun 25, 2011
The analysis in the Straight from the Hip is very convincing and full of facts.Perhaps our leaders could take lesson from the reality and not involved in short sighted political gains at the cost of economy. Like 
  
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