Planning for the future - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
Planning for the future A  A  A

PRINTER FRIENDLY | ARCHIVES
21 JULY 2012

Whilst our political leaders are busy playing childish games such as musical chairs (sulking after having been denied a favoured one) or pin the blame on a donkey, those of other countries are busy preparing for the future. Unless our so called leaders start addressing global concerns with the seriousness they deserve, and start planning for the future, the India story, which has so much potential, will be nipped in the bud.

One of the severest global crisis is the disappearance of fossil fuel reserves, and the consequent shortage of energy all nations would face in the future. Different countries are planning to meet the inevitable challenge of energy shortage in different ways. Germany, for example, is concentrating on promoting renewable energy. It has already encouraged, through subsidy, the growth of renewable energy which now provides 20% of its energy needs, up from 6% in 2000.

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How did Germany do this?

It assured anyone who could generate solar power and supply rit to the grid, a price which was double the price a consumer would pay to buy power from the grid. This was assured for 20 years. Almost overnight a huge solar roof industry sprang up, as home owners covered their roofs with solar panels. Interestingly, a new industry, that of solar roof investors, also sprang up. These were investors who would 'rent' roofs from a house owner, incur the cost of installing the panels and provide, by way of 'rent' free electricity to the home owner upto an agreed quantum, selling the rest to the grid at the State assured price. This legislative change not only encouraged the growth of the solar power industry, but it provided employment. There are more persons working in the solar power industry in Germany now than in its auto industry.

How was the subsidy cost borne?

The subsidy provided for buying the more expensive solar power was added on to the electricity bills of those consuming regular power. This spurred conservation, and an inclination to shift to solar power, using their roof. In essence, the roofs of homes replaced costly land which would have been used to house a power plant. Germany hopes to generate 35% of its energy through renewable needs by 2020.

Not every country is going the renewable way. Britain believes in gas, and its Chancellor, George Osborne, is fighting calls for a new subsidy regime for renewable, believing that gas, which is also environmentally friendly, is the way forward for Britain

China, amongst other things, is encouraging the growth of its electric car industry. Besides reducing its dependence on fading reserves of petro products, electric vehicles reduce carbon emissions by 40%.

An Israeli company, Better Place, did even better! It realised that the main obstacle to popularising electric vehicle was the need for the battery to be recharged, overnight, thus reducing the vehicle (and its owner's) flexibility and range of travel. What the founder of Better Place did was to de-link ownership of the battery from the vehicle, and make the battery replaceable, at several thousand stations. The car owner drives into a station where the vehicle is winched up, the old battery removed and a recharged one inserted, all within a matter of minutes; less time than it would take to fill a gas tank.

And what is our Government doing?

We have not thought of or encouraged the growth of an electric vehicle industry. We continue to subsidise, and thus encourage, consumption of diesel. This is meant for the benefit of farmers, who use the diesel to pump water for irrigation. It, however, ironically, sometimes harms them. Because diesel is subsidised, and electricity is free, farmers over water their crops, degrading the soil and reducing the water table. A bulk of the subsidised diesel goes to subsidise truckers. Further, it is adulterated with even more subsidised kerosene, which creates a huge pollution problem, and health issues.

We have not even had the wisdom, or the courage in the wake of opposition from the auto industry lobby, to mandate fuel efficiency norms. We do not have the wisdom, or the courage, to impose penal rates of duty (ideally to ban) gas guzzlers such as the Humvees. We do not have the wisdom, or the courage, nor yet the ability, to set up an efficient public transportation network, and simultaneously discourage the use of private transport.

For we are too busy deciding who should sit where.

Another emerging crisis is a global food crisis, because of poor rains in the US . Corn and soya prices have shot up to levels higher than they were in 2007-8 which had sparked riots in over 30 countries. Wheat prices have shot up 50% in 5 weeks. Thankfully we have more stockpiles of foodgrain than the capacity to store them, and hopefully these stocks will reach people before rats reach it.

The higher prices of corn, and its scarcity, will also adversely affect production of biofuels, thus putting a floor on crude oil prices.

The agri sector is the most controlled one in India but no Government has had the wisdom, or the courage, to change laws which everyone knows are senseless. Nobody wants to bell the cat.

In the Oil and gas sector, the Government is contemplating changing the basis of sharing revenue. The New Exploration and Licensing Policy (NELP) was meant to provide a level playing field between public and private sector players, and the first round of blocks was offered in 1997-98. India has 3.14m. sq kms of sedimentary area of which 57% is deepwater (more than 400 m. isobaths) and 43% in shallow water or inland. Deepwater oil exploration is a very expensive propostion (the daily hire of an oil platform can go up to $ 800,000) and so, initially, the Government had a scheme under which the operator (successful bidder for a block) could recover his capital cost, plus some more, and only after that would the share of the Government in the oil/gas discovered, would increase.

This gamut of things has, inevitably, led to accusations of gold plating. There was no incentive for the operator to reduce capex. He would be fully compensated for it, whatever he spent.

The Government is now thinking of moving to a revenue sharing scheme, so that the operator is free to spend as much as he wants on capex, without any scrutiny, and the Government will take a percentage of the oil/gas discovered. This system would obviate the kind of dispute which the Government is having with Reliance.

In corporate news of interest, Naveen Jindal led Jindal Steel & Power is close to acquiring a controlling stake in a Canadian company CIC Energy which owns large undeveloped coal assets in Africa, which would be immensely valuable for its steel and power businesses. Jaypee Cement is in talks with CRH Plc of Ireland to sell its cement plants in Gujarat and AP, with a capacity of 9.8 m. tpa, in a deal reportedly of Rs 800-900 crores. It will use the proceeds to reduce debt.

The gruesome and totally unpardonable burning to death of a manager at Maruti Suzuki's Manesar (Haryana) plant is very disturbing. The Government has to act swiftly against the perpetrators, lest industry flee the state. Whatever the dispute, this inhuman brutality has to be roundly condemned.

The BSE-Sensex fell 59 points last week to end at 17,158 and the NSE-Nifty feel 22 to end at 5,242.

The Presidential elections are over and, despite the error by Mulayam Singh who almost voted for P A Sangma instead of Pranab Mukherjee, it is expected that the latter will be declared winner on Sunday, causing a wag to comment that the winner sang song, the loser sang ma.

It is widely expected that the Government will now move ahead with long overdue reforms. One can expect a hike in prices of diesel to kickstart the demonstration of resolve by Government to reform. This ought to be followed by a more investor friendly finalisation of GAAR rules, and perhaps, an announcement that cases decided by the Supreme Court would not be affected by any retrospective amendment of law.

There are news reports of an amnesty granted by the Government to 100 HSBC offshore account holders, on the condition that the money is brought back, and tax paid on it. The tax amount will, of course, come out of the depreciation in the rupee (perhaps the rupee was allowed to slide in readiness for this). If the Government is serious about this, and the money in these accounts comes in (thus paving the way for more accounts in other banks) then it would lead to foreign exchange inflow, a strengthening of the rupee and collection of tax, thus reducing fiscal deficit.

Fiscal deficit will also reduce once spectrum is auctioned again, expected to fetch around Rs 40,000 crores.

So one should expect a sudden burst of economic reform starting next week. That would cause a sharp rally.

If, however, the Prime Minister has still not discovered he actually has a backbone, and does not act, then one can write off both the stock market and the UPA in 2014. Thanks to poor rains, onion prices are up 16%, which will bring tears to people's eyes.

It's now, or never, Mr Manmohan Singh.

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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5 Responses to "Planning for the future"
Jose
Jul 22, 2012
G8 write Mulraj..I only wish your weekly blogs are sent to our Law makers as you have pearls of ideas and share the best practices followed to get the economy out of this rut we are in. India's opportunity to flourish is JUST NOW, When the developed world is looking at growth and don't know what to do with their money (- Ve Bond Yields in Germany). We need to Just get it to India..some good news is the GOM Recommendation on Telcom, SAIL disinvestment, talks of reducing LPG subsidy by controlling the No. of Cylinders etc. As you rightly said. Hope the government & PM have the spine to take these decisions..Its now or never ! Like 
S.R. Jagganmohan
Jul 21, 2012
Absolutely hard hitting, no, Straight from the Hip, and entirely to the point(s). Like 
Bimal Kundu
Jul 21, 2012
Please make sure that a copy of this article is urgently sent to all Policy makers starting from the President to all members of both Houses and similarly to all State Governors to all members of the state houses,all ministers in each state and Central Government and widely published in all newspapers which will wake up Sri Manmohan Singh. Like 
MJJ
Jul 21, 2012
Your column points out the dysfunctional behavior of the Indian government over and over. When will they start to do what people elected them to do? There are so many examples of enlightened governance that they could emulate. It takes inspired leadership which does not seem to exist in any of the politicians. May be we have to wait for the next generation.. Like 
AML
Jul 21, 2012
We at India lack forsight.We will respond only after every aportunity is lost.Our leaders (Ministers) offer free electricity to farmers first & afterwards express concern about lowering water table. First they enhance MSP of necessary commodity & then worry about rising inflation . At the moment we do not have visionary leaders.Majority of ministers are busy in attending selfish motos. Take example of buying aircrafts for AI, Spectrum allocation,Land sacmas,Adarsh society scam & so on.Millions of children are unable to get two time meals ,clothing & shelter forget about primary education. In this context you are absolutely right in your advise "Now or Never" Like 
  
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