Bureaucrat proposes, politician disposes - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Bureaucrat proposes, politician disposes A  A  A

4 JULY 2009

The Economic survey, prepared by bureaucrats, recommended a faster speed of economic reforms, now that the Congress party is not shackled by the infirmities of reluctant coalition partners. The Union Budget, to be presented by Pranab Mukherjee, a politician, will dispose on whether or not it is 'politically feasible' to carry out such reforms, and at what pace. Bluntly put, whether they have the cojones (or, to be politically correct, the backbone) for faster reforms.

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One feels it will be an unexciting budget, as the Government has not had a lot of time for planning its strategy, though it may contain the inevitable bit of tinkering politicians love doing, if merely to put their 'stamp' on the budget. It can then correct downwards.

The BSE sensex has already risen 93% from its low of 8047 to the latest high of 15580. The case for a further rally rests on the Government continuing boldly on the path of economic reforms, especially in infrastructure, as suggested by the Economic Survey, and for yet uninvested global investors to then rush in.

Examples of how Government has tackled infrastructure, don't lend any confidence. The recently opened Bandra-Worli sealink is an example of abysmal planning. Financially, it is a disaster. The cost of the sealink is Rs 1632 crores, and the toll expected to be collected is Rs 10 lacs/day. At that rate, it would take 40 years to recover historical cost, never mind a return on it, never mind inflation or maintenance cost. It took 10 years to finish; China has constructed several bridges in less time.

In terms of design, it is ludicrous that the sealink terminates at right angles to the road at Worli, perhaps the only bridge to be designed that way in the world! There is a traffic signal at the Worli termination point! This is a matter of common sense, not rocket science.

Or take how we have messed up perhaps the biggest bullish factor for India, viz. the discovery of huge gas resources in the KG basin. Discovery of gas in deep sea is such an enormously expensive proposition (the cost of hiring a rig is over $500,000 a day, irrespective of whether or not oil/gas is found) that it can only be attempted by companies having a huge cash flow from other businesses. India will be going in for subsequent rounds of bidding for oil blocks. Yet the price of the product has been mired in controversy which still continues!

In the RIL-RNRL case the businesses were divided between the Ambani brothers, and, in a secret memorandum of agreement, 28 mmscmd of gas was promised to RNRL, at the same price at which RIL had quoted to NTPC, which was $ 2.34/mBtu. The Mumbai High Court decided that the MOU was valid, and asked both parties for an agreement to be drawn up. However, the Government set up an empowered group of ministers, who said that gas, which is the property of the Government, should be sold at $ 4.20/mBtu, and should be allocated on the basis of a policy for allocation determined by it.

Now RIL says that, though it can produce 40 mmscmd of gas, it has buyers only for 28, and asks the Government to allow it to use it for its refineries. Both RIL and RNRL have appealed to the Supreme Court. It is usually the courts which clean up messes politicians get themselves into, such as the diktat to use CNG in buses in Delhi.

So now we are in a piquant situation. We have huge gas finds, which have the potential to solve a lot of our problems. It will hugely reduce the budget deficit, thus giving elbow room to Manmohan Singh to spend on a more inclusive society. It will reduce our dependence on foreign oil. It will reduce the cost of fertiliser and of power. But the price of a product which is the output of huge investments, is yet unclear. How can the Government hope to attract serious players for future rounds of exploration? Why should so much be left to discretion instead of being initially spelt out?

Yet another example of absence of long term planning is in royalty for natural resources, charged by State Governments. On iron ore fines it is as low as Rs 4/tonne, even as prices of ore are $70/tonne. Natural resources are irreplaceable, God has stopped producing new resources. Getting a pittance for it, State Governments are unable to spend on local communities; hence insurgencies such as the recent Maoist one. A committee of secretaries has now recommended an increase.

In short, politicians keep discretionary power with themselves, perhaps due to inverted priorities. If only they were to think of the country first.

Those who have yet to invest are doing so through QIP issues, Bajaj Hindustan raised Rs 723 crores last week and Hindalco plans to raise $ 500 m. GMR Infra, however, withdrew its $ 500 m. QIP issue, perhaps due to poor demand at the price it was expecting.

There are equally divergent views on stockmarkets. One view says that emerging countries like the BRIC ones would take up the slack, and grow their economies, even whilst those of the developing world are shrinking. China is expected to grow strongly, at 8% and India between 6.5-7%. However, an interesting article in the Telegraph maintains that Chinese banks are an accident waiting to happen. The trillion dollars the Government of China has pumped into the banking system, has been used more to speculate in stockmarkets (the Chinese are notorious gamblers).Thus, whilst the composite index is up 70% since November, imports are down 25. China is an export dependent economy, with 40% of its GDP coming from exports, which are down 26%. As a result, 20m. workers have gone back to the rural hinterland. Rating agency Fitch is worried about the health of Chinese banks.

India does things more sedately because of our culture of investigating anyone for a decision which goes wrong. So we try and build up a broad consensus before taking a bold decision. So it would be wrong to expect economic reforms to hit turbo.

The good news is that the current account deficit turned into a surplus, in May, and that 6 core infrastructure industries grew 2.8% in May 09, albeit lower than 3.1 in May 08. What dragged down growth was a -4.3% growth in the petroleum refinery segment, and -4.7% in crude oil. Now that petrol prices have been raised by Rs 4/litre, and diesel by 2/litre, the petroleum refinery segment should start showing positive growth. OMCs like HPCL had, often, stopped supply of petrol (pump attendants blamed it on non arrival of tankers but it was truly for economic reasons).

The fiscal deficit in the first two months is Rs 90,000 crores, up from Rs 54,000 in the same period last year, thanks to the economic stimulus packages. It is possible that Pranabda would try and find some new ways to tax, or may even try and increase rates. The market should be steadily rallying upto the point where he would serve the bitter pill.

Last week the BSE-Sensex rose 148 points to end at 14913, with ONGC and HDFC scoring half centuries each. The NSE-Nifty rose 48 to end at 4424.

Better to be cautious, and allow the market to digest the 93% gain it has made. That would be some burp!

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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6 Responses to "Bureaucrat proposes, politician disposes"
Jul 8, 2009
thanx for presenting such a clear veiw of all the current economic issues.
J Mulraj
Jul 7, 2009
Dear Shri Mankodi, thank you for your kind words. One tries to clear a bit of the clutter - there is a lot of information available.
Mr Apte, I dont think I blamed China (I am hardly in a position to) I just drew reader attention to an interesting article. The gas agreement between the Ambani brothers is a secret docutment so the terms are not available but it is generally believed that Anil Ambani is to obtain the gas at the same price as it would supply to NTPC once their dispute is resolved.
Thank you, Mr Balasubramanian for your comments and wishes.
Mr Som, I do hope I am not always apocalyptic but also humourous and, when I feel the situation warrants it, optimistic.
b h mankodi
Jul 6, 2009
mr mulraj, like many other readers, even though i have very little to do with the stock markets, your articles
are a treat to read ! your language and fluency and lucid treatment of complicated financial subjects is something nobody can beat. thanks for enriching our lives.

on a more personal front, my belief, which gets confirmation everyday from real happenings is that population and corruption are the banes of India and we Indians have repeatedly been exploited by politicians and religious leaders. but for these hurdles we can conquer the world sooner than expected
sudhir apte
Jul 5, 2009
For gas price hassle, who is to be blamed ? The govt or Ambani brothers ? What was the wording of the agreement between the brothers ? Was gas to be supplied at the same rate at which it was to be suplied to NTPC or at $2.8 ? Is gas ready for exploration and the country is losing it because of the dispute between 2 brothers? Can govt or the courts ever resolve this issue ?

You blame China for its reckless and gambling ways for their banking crisis and India for its sedate ways but stable banking in the same breath or article. in that case, what is the right way? I think China would be in serious trouble because of its excessive dependance on American consumer. I fail to understand how the financial experts all over the world are not reading this writing on the wall.
Jul 5, 2009
Your analysis of the current status of the nation's economy is thought provoking. It has helped a layman like me to get a grasp of the situation in a lucid manner.Your articles have helped me to steer away from stockmarket bubbles/storms. Thanks and best wishes to you in your endeavours.
surajit som
Jul 5, 2009
shri mulraj,

your apocalyptic and high-voltage style suits very well the current economic scenario all over the world.i think most guys -except those professionals doing research 24 hours a day-would go mad if they try to read even a fraction of materials available on the subject. effectively a turbulence of world war II magnitude is raging on the economic front. and it will go on for years. then we shall have the finals like we had in 1945. but nobody knows what it will be . but a few hiroshima and nagasakis are guaranteed-lehman brothers was a dress rehersal. we indians should await our fate. we deserve no better on the the dinner table-eat whatever is served or starve!!!!
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