The inevitability of structural changes - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
The inevitability of structural changes A  A  A

PRINTER FRIENDLY | ARCHIVES
26 JUNE 2010


Much like an obese person would, sooner or later, be compelled by his doctor to go on a diet, so, too, would a profligate Government be forced by economic reality to undergo structural changes. A world torn asunder by a global financial crisis born out of foolish action, is necessarily having to correct its ways. The British and Italian Governments announced strict austerity measures to rein in their fiscal deficits; Greece had to do so in order to get funding to stave off (at least for now) a bankruptcy.

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China agreed to let its currency, the yuan (or renminbi), appreciate, leading a wag to aver that if you've seen yuan you've seen them all. The US has been pressuring China to delink the yuan from the US $ and allow it to rise, as warranted by the huge current account surplus of China. Over time, the yuan will appreciate and a global trade imbalance will partially correct.

The recovery in the US economy is weak, prompting the Federal Chairman to keep, for a long time, a low interest rate regime. US GDP grew 2.7% in Q1 2010, less than half the 5.6% rate of Q4 2009. The Eurozone economies are more anaemic than a malnourished albino who has seen a ghost.

Not to be left behind, India, too, did a bit of structural reform. The Ministry of Petroleum finally took the bit between its teeth and hiked petrol prices by Rs 3.5/litre, diesel by Rs 2, kerosene by Rs 3 and LPG by Rs 35/cylinder. The losses borne by the three oil marketing companies, IOCL, BPCL and HPCL, will decrease from Rs 75,000 crores to Rs 53,000 crores. The 'under recoveries' (a eupheism for daylight robbery by the Exchequer of OMC revenues) in petrol would virtually vanish but those for kerosene and LPG would remain significantly high. The remedy for this, as everyone and his uncle knows, is a better targeting of essentials to those who truly need it instead of to all and sundry, at the cost of the OMCs and ONGC/GAIL. Why this is not done is a Rs 53,000 crore question.

Share prices of the OMCs, as well as ONGC, shot up after the announcement. The political fallout will be seen on Monday with opposition parties lamenting the impact on inflation, of the petro product price hike. Inflation is expected to go up by 0.9 to 1%. But this is merely reflecting the true picture, since petro prices were artificially lowered through a subsidy which was borne by others who were later compensated by Government. Since there is no free lunch, the cost of these subsidies was being borne by someone (minority shareholders of OMCs who had nothing to do with Government's decision) and the Government itself, which had to increase its debt to pay for car owners' reduced fuel bills.

The Government's fiscal position would improve considerably, thanks to the reduced petro product subsidy bill, the revenues garnered from sale of 3G and wireless spectrum and thanks to improved tax collections from an economy growing at nearly 9%. This improvement would be noticed by FIIs, who should increase allocations to India especially when seeing the performance of the developed economies.

In corporate news of interest, RIL and RNRL have to signed a new gas sale agreement, as directed by the Supreme Court, under which gas supplies from the former to the latter will recommence, at the higher rate of $ 4.2/MmBtu. RIL is going to invest heavily into power (thermal, hydel, nuclear and solar) and in shale oil/gas assets. It has acquired a stake in another US shale gas field, investing $ 1.3 b. for a 45% stake in a Texan field owned by Pioneer. Together with the previous investment in shale assets, RIL has invested $ 3 b. Shale promises to be a major alternative to fossil fuels and the US has large reserves of it; which would, over time reduce its dependence on the Middle East/Russia/Venezuela and other oil rich states.

The BSE sensex rose, along with global markets, when China agreed to allow the yuan to rise. But the rise was shortlived and the sensex ended the week up 3 points, at 17574, whilst the Nifty rose 6, to end at 5269.

The India story gets better, even as the developed world's story gets murkier. Institutional Investor (which this columnist represents in India) carried a story 'Emerging Markets: New World Order'. The IMF predicts that emerging markets, led by China and followed by India, will cumulatively grow 6.3% this year, compared to an expected 3.1% growth in the US, 1% in the Eurozone and 1.9% in Japan. The global stock of financial assets is a multiple of global GDP and, in recognition of this disparity in growth rates, would naturally increase allocations to emerging markets. It depends on emerging markets how they are able to gear up to accept this increased flow, by being, themselves, better managed.

The petro price hike indicates a new ability of the Government to take tough decisions. There will, inevitably, be a political backlash next week. But the realisation that the Government is not invertebrate will help, in the long run.

The dichotomy between China/India and some other emerging markets, on the one hand, and the continuing problems of over-indulgent developed markets, on the other, will lead to volatility. Each time there is a dip, on global cues, investors should buy, looking to the long term growth potential of India. A growth potential that can only be derailed by inept governance.

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 "The inevitability of structural changes"
vinod k jhunjhunwala
Jun 26, 2010
The ruling class in India (Politicians, Bureaucracy, Media, judiciary and their friends) is largely self serving . They have been fooling and looting India taking full advantage of stupidity and gross ignorance of masses for last 63 years. Until, unless we have fearless intellectuals who start educating masses about their real rights and duties in a true democracy India will remain as bad and as underdeveloped as it was. Like 
R K SHARMA
Jun 26, 2010
I am of the humble view that the petro products can be made cheaper by 25% without the fiscal deficit soaring at all.
HOW IS THIS POSSIBLE IS A 53,000 CRORE QUESTION...MAYBE MORE?
The government collects Rs 23 by way of Exice duty and taxes per liter of the combustible stuff and then says that the OMC's are running into losses.
Why cannot the mighty Government charge just Rs 10 per liter...... aaha the government expenses are to be met with.
So why cannot the mighty Government review the subsidy schemes that are going waste and just creating development on paper.
Now that's a political imperative..... you know.
FINE....
Therefore we are paying more and letting loose Inflation by keeping the cost of governance high, that's taxes + dubious subsidy and employment schemes etc.
I think that 60% to 70% of us pay taxes to keep the 30% of the remaining happy and on the side of the government.
Let the people who matter do an audit of the real worth of the subsidies and retain only those which have helped the underprivileged to find honest relief while contributing to national development which is tangible.
I am sure we will find enough money to sell the petro products at a cheaper rates without raising the fiscal deficit one little bit.
A Day Shall Come When Good Economics Shall Be Good Politics.
Like 
Om Prakash Sharma
Jun 26, 2010
Indian people are weak kneed and corrupt which can not be corrected.Let even a person like Man Mohan be there in pivotal role.So Governance is a day dream.Now about our Finances. We have earned the spendable money from the Developed Nations(Doing their back office job.Hardly any Original R&D.Developed Nations induldulged in over spending Through Credit Cards.The result is visible. The higher class does not suffer in any country.Poor/'Aam Admi'are born to suffer and compensate for the Rich people to drive their cars. Like 
Sachin Wagal
Jun 26, 2010
WHO SAID INDIAN GOVERNMENT WAS SUBSIDIZING PETROLEUM PRICES. Check facts before making such comments.
Btw J Mulraj never expected such a view from you, you should have at least put forth real facts.
In fact Indian Government will make more money now by way of taxes on petroleum prices.
Before talking subsidy one should calculate the difference in taxes collected against the losses booked booked by OMC's.
Like 
Navin
Jun 26, 2010
Its also quite apparent that this whole thing is stage managed. Non Congress will make some noises to show that they opposed the decision of the Government and will then merrily continue on their money making ways. What I am really surprised about is that a man of Manmohan Singh's stature is bearign all this in silence. Is it that Gabdhis have a share in every rupee which a constable makes across the Indian roads, as well.. and similarly moving upto each contract doled out by the Government?

How much money is too much, Mr Pawar, Mr Patel, Mr Raja, Ms Sule, Ms Dutt, Mr Yadav, Ms Gandhi?
Like 
Navin
Jun 26, 2010
I am not sure what you meant when you said that car owners dont need subsidies. Actually there is no SUBSIDY. Consumers in India probably pay amongst the highest oil prices in the world. More than 60% of the value perhaps is from the various taxes, duties, cess which all seem to go into the bottomless pit of government's dole to its own in the name of aam aadmi.

This country needs a far more vigilant media which can expose all the various ways in which the various arms of the Governance structure in India, judiciary, bureaucracy and above all politicians loot the nation's resources.
Like 
girish shah
Jun 26, 2010
CLICK ON GOOGLE AND FIND OUT THE LOSS MAKING COMPANIES IN INDIA AND THE TOTAL WASTE OF CAPITAL BY THE GOVT OF INDIA BEING WASTED BEFORE CLAPPING FOR THE PETROL PRICE HICK

ALSO WHAT ABOUT TENDULAKR PANNELS VIEW --EVERY THIRD INDIAN IS POOR

COME OUT OF THE STOCK MARKET AND COMPLETE INVESTMENT LEAD THINKING MULKRAJBHAI
Like 
girish shah
Jun 26, 2010
Iwould have loved to hear the govt will not support indian govt owned airlines losses also no govt company will be given any financial bailouts (robbing the people for benfit of the politicians)-Taxes on the agriculture on incomes above 5 lakhs etc AND MOST IMPORTANT REDUCTION OF EXCISE DUTIES AND OTHER SALES TAXES ON PETROL ---IF ALL DUTIES ON PETROL ARE REMOVED THEN PETROL MAY COST RS 20/LT????--A HUGE CUT IN GOVT EMPLOYEES ETC
WE WILL NEVER HEAR OF ALL THESE THINGS YOU WILL ONLY HEAR INCRESE IN TAXES AND WAYS TO INCREASE REVENUE
INFLATION ONLY INCRESES THE PERCENTAGE OF PEOPLE BELOW POVERTY LINE
Like 
Manoj Menon
Jun 26, 2010
Mr Mulraj, Appreciate your lucid argument regarding why the government should subsidise car owners. Agreed. However, there are studies which indicate that in a city like Mumbai, a vehicle consumer 40% more fuel just because of traffic snarls due to non-availability of roads (euphemism for encroachment!!!). Is it not an indirect way of compensating for that loss (for car owner) by keeping fuel prices low? Like 
  
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