UPA passes gas price hike - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
UPA passes gas price hike A  A  A

29 JUNE 2013

In matters of public governance, there is often a conflict between idealism and practicality. Most often, practicality wins, but after years of traversing a tortuous and unnecessarily painful path. Case in point is the decades it took for the Government to see, when at the edge of a fiscal cliff, that it was folly to subsidise petrol and diesel.

The Government is still at the edge of the fiscal cliff. Even though petro product subsidies have come down, the UPA Government has embarked on other welfare schemes. All welfare schemes have two common features. All are well intentioned, to help the weaker sections of society, so no political party wants to be seen publicly opposing them. But also, all of them are conduits for a huge siphoning off of tax payer money, with very little of the funds reaching the intended beneficiary. And this is why welfare schemes are touted, not out of genuine empathy for the downtrodden.

What cheap petrol and diesel has succeeded in doing, however, is to spur demand for private transport. A myopic Government unable to see beyond the tip of its nose (the side of its trouser pocket is included in this periphery) has criminally neglected the establishment of a public transportation system. The growth of the private transport industry (cars, two wheelers) has, in turn, spurred demand for petrol and diesel, and hence of crude oil. This has caused the current account deficit to go up to over 5% of GDP, although the latest figure is a more encouraging 3.6%.

The CAD (please note, dear reader, that by CAD I mean an abbreviation of current account deficit and not a person in charge of Government policy) causes several problems because the country needs foreign exchange inflows to bridge the deficit. The Indian rupee has declined sharply and, against the US $, has, by crossing 60, achieved a senior citizen status. Foreign investors in equity, viewing the weaking rupee, reach for the exit, since a weakening rupee reduces their $ return. This causes stock markets to fall, as they have been doing. Foreign investors in debt markets have also been selling on this concern, and on the improving debt yields in their own country.

The Government had to act, and it did, with two decisions. It had to tackle the two biggest imports, viz crude oil and not so crude gold.

For the latter, it hiked import duties to ludicrous level. Like a good magician creating illusions, this created the illusion that gold imports have come down. *Applause*!

In truth, gold imports have gone to smugglers. The law of economics states that demand goes up when prices go down, as they have, for gold. The reduced quantity of official imports belie economic common sense, so it is safe to presume that demand has gone up, but is being met through illegal imports. *Esualppa*

For the former, one of the things the Government is attempting to do is reduce dependence on imports by making it more attractive to look for energy resources in India. To attract investors, the price of gas had to be raised. It was, by doubling it, effective April 2014.

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This is going to raise prices of power and of fertilisers, amongst other things.

The ">Indian stockmarket, which seemed headed, as Chris Rhea would have sung, on the 'Road to Hell', during the first three days of last week, suddenly took a U turn, reverting to Led Zepellin's 'Stairway to Heaven'. The Cheshire cat smugness shifted from the faces of doomsayers to those of the diehard optimists, both little realising the effects of shifting sands of time on investor psychology.

Reliance Industries Limited (RIL), which had shown an alarming drop in gas production in the KG basin will doubtless, after the doubling of gas price, be encouraged to look harder, and restore the drop in production. Its stock price zoomed after the gas price hike was announced, driving up the Sensex, of which its stock is a heavyweight. On Friday, the sensex, fired by the gas price hike, zoomed a whopping 519 points.

The announcement, the previous day, of a fall in CAD (again, the deficit, not the person), had prompted a rally of 323 points on the sensex. The week looked like a cricket match won by the night watchmen.

The BSE sensex, which had lost 222 points on the first 3 days on the road to hell, added 842 in the last two, climbing the stairway to heaven, and ended the week with a net gain of 621, at 19,395.

But is everything hunky dory?

Not quite.

If the Olympics were to introduce a shooting sport in which the target was the foot, India would win several medals!

There were several examples last week.

The telecom sector has been converted from a shining success to a whining failure story. It started to unravel when former telecom Minister A Raja allotted scarce spectrum out of turn. A chagrined Supreme Court cancelled some 122 licences, some of which were legitimately allotted, thus throwing the baby out with the bathwater. It also asked the Government (erroneously, this columnist opines) to issue all future spectrum only through the auction route.

The Government ensured the failure of such auctions by keeping an unreastically high auction price, discouraging bidders. When there were no bidders, a miffed Government resorted to 'refarming' of spectrum, i.e. changing the frequency band for allotted spectrum to a less efficient one, at a cost to telecom companies.

Last week, it has invoked 'security concerns' to enforce PMA or preferential market access and the Department of Telecom (DoT, even though it is far larger) plans to make it mandatory for telecom companies to source 100% locally. Hey, but there does not exist a local manufacturing ecosystem! Firms like Bharti, which have outsourced the management of their telecom network to a foreign company, will ostensibly have to outsource it locally.

This appears to be the last nail, driven by a sledgehammer, in the sector's coffin. One does not believe, or understand, the nature of such ludicrous policy.

Take another example. Mumbai has been long awaiting a new airport, to take care of hugely rising demand for air travel. The one planned in Navi Mumbai, which was to cost Rs 4,700 crores in 2006, when work began, has already cost Rs 14,500 crores, with some land yet to be acquired, and is a long way to completion. Sensing the urgency for expansion, the Civil Aviation Minister, Ajit Singh, suggested expansion of the Juhu airport. However, the Environment Minister has objected, as expansion would violate the Coastal Zonal Regulations. Practicality versus idealism, again.

It is only when political self interests are involved that practicality wins instantly. The UPA gave support to Kanimozhi and A Raja, both tainted in the telecom spectrum allocation scandal, in their bids for election to the Rajya Sabha, and both won.

Consequently, the UPA will get DMK support in the monsoon session of Parliament, and, very likely, also from Nitish Kumar's JD U, after its split from the NDA. If the combined support, together with that of the BJP, which has promised to lend it, results in the passage of the Food Security Bill, the additional burden this would impose would spell the end of the India story. It would be a never ending leaky conduit.

What happens to a country that ruins its fiscal house based on leaky welfare schemes? Just see what is now happening in Brazil, where millions have taken to the street in protest . The article says "What started as a protest against a 9-cent fare hike on public transport fireballed into a gigantic public protest against political corruption, high taxes and lousy public services - and the government itself." It could easily be India instead of Brazil. Do political leaders not see what is happening elsewhere?

Don't they, before conceiving of the Food Security Act, follow what happened in Thailand?. The Thai Government, seeking farmer votes to win the election, promised high rice prices, and, in so doing, has killed rice exports. Its own agency is sitting with mountains of unsold rice, bought at high prices. Sounds familiar?

Head of Emerging Markets at Morgan Stanley Management, Ruchir Sharma, puts a lot of the blame for the slowdown on public sector companies. He says "To get their mojo back, governments in emerging markets would do well to also count the mounting costs of state capitalism and start cutting back the role of the state, and putting more of their state-owned companies in private hands. Otherwise, these companies will keep destroying wealth, and undermining the economic growth prospects of emerging nations".

On the principle that it is better to teach a man how to fish instead of giving him one, the Government would do well to spend money on giving people a proper education, instead of on leaky welfare schemes designed to suck money out of the system. In an alarming survey results showed that half the graduates from India are unemployable!.

This is alarming! One of the reasons touted for bullishness on the Indian stockmarket is that the country produces hundreds of thousands of graduates every year, and the income from jobs given to these graduates will propel the economic boom for decades. How will it, if they don't get jobs, because the quality of education is so poor that half of them are unemployable? And this is happening not in Brazil or in Thailand, but in our own country!

In short, the Government does not seem to be doing anything substantive towards solving the structural issues. It has done nothing about improving the quality of education. On the contrary, the edict that schools must not fail any child, is doing a lot to deprove the quality of primary education. Ultimately, half of the graduates are unemployable. You can't pass an edict that they should be given jobs, even if they don't possess the requisite skills.

On the CAD (yup, dear reader, you got it right this time) the Government has done nothing to curtail demand for private transport either by building an efficient and affordable public transport system or by things like enforcing fuel efficiency standards.

Instead, the Finance Minister is exhorting people not to buy gold, and has hiked import duties, and forced lenders not to lend against pledged gold. Now consider that 2 out of 3 citizens don't have access to banks. The savings are mainly in gold and silver, which they carry on themselves. Denying them the benefit of pledging, in time of need, this asset, because the Government has mismanaged its fiscal position, is both unjust and unkind.

So investors would do well to remember the shifting sands of time.

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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17 Responses to "UPA passes gas price hike"
Jul 8, 2013
Your article clearly highlights the 'Art (or is it Science?) of Mis-governance'. In regard to govt. asking banks not to lend against gold, it is indirectly pushing the common man to knock at the gates of the rapacious money lender. Like 
Nikhil Shah
Jul 4, 2013
Do we have an alternative to this scandalous govt or to any govt of any political party?

All are corrupt and rapist.

I think even GOD would not be able to save this country.

Mera Bharat Mahan!!
Rajesh Sutaria
Jul 1, 2013
Increasing the gas price is like writing a will before dying . Why the present govt. should increase the gas price in 2013 for the year 2014! This govt. has implemented laws effective past dated. Why post dated law!
Jul 1, 2013
awesome read!! Like (1)
J Mulraj
Jul 1, 2013
Apologies on making the mistake about Raja. Thank you readers for pointing that out. Like (1)
Jun 30, 2013

UPA passes gas price hike : I had read this article but I feel it is short of your view with regard to a new article i happened to read which highlights how come the price is having reference to international prices???, this is the resource of the country, the price should be linked to the cost of bringing the gas out and ofcourse the royalty or proft, etc. Also worth noting that few hundred kilometers away from the KG basin another country had recently concluded a 25 year agreement at 25% of this revised price with few of the partners who have interest in KG Basin.

Pls let us know your views
Like (1)
Vishwas Mehendaley
Jun 30, 2013
Excellent analysis!
Its frightening though!!
Like (1)
Jayanth T.S.
Jun 30, 2013
Such articles should find place either in news media/TV shows and highly circulated magazines.

Not to be published.
Like (1)
K. Mani
Jun 30, 2013
Former Minister A. Raja is a member of Lok Sabha. He is still an MP and will continue until the next general elections. Mr. Raja who was elected along with Kanimozhi in last week's upper house's election belongs to CPI and was elected with the support of Ms. Jayalalitha's (TN's Chief Minister) party.


K. Mani
Like (1)
Jun 29, 2013
Dear J Mulraj,I am reading your articles since early eighties in TOI.First cash subsidy direct in your a/c.this tax payers money is used for non productive purpose.Second,Gold is bought by Indians for marriages of their daughters.It is bought to park black money by wives of rich husbands.Go to any big jewelers,you can see yourself. Like (1)
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