Divide and Fool - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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3 AUGUST 2013

The British perfected the art of divide and rule, to conquer our country by playing off one kingdom versus another. The Congress has perfected the art of divide and fool. It is to carve a new State, the 29th, out of Andhra Pradesh. This has been hanging fire for a few years now; the timing creates a suspicion that it is now being done with an eye on electoral gains. It has, however, revived dormant demand for creation of states in other regions, such as Gurkhaland in West Bengal, Budelkhand, in UP and MP, and Vidarbha in Maharashtra.

Such political uncertainty, combined with an alarming economic situation, causes angst amongst investors. Foreign investors voted with their feet, and have, in June and July, been net sellers of $ 2.9 b. worth of Indian equities, the highest two month outflow in 5 years. They see a continuing slide in the Indian rupee, which diminishes their $ returns, they see core industrial growth at 0.1% in June, compared to 2.3% last June and they see a general election looming ahead. They see an unsustainable current account deficit of 5% of GDP, exacerbated by things like the blanket banning of iron ore exports after evidence of misuse, and environmental damage, by a few players. Throwing the baby out with the bathwater is not a good idea. Coal, which India has the largest stock in the world of, is being imported!

The economic reforms that have been announced have not yielded any positive results, largely because of the devil in the details. Thus the opening up of the multi brand retail sector, over which the UPA Government nearly lost its mandate, has not resulted in anything because of several nit picky provisions, such as not allowing them to market their sub-brands. The Government has now allowed them to do so. Its too late. The momentum has been lost.

The issue of allowing nuclear power plants, over which, too, the UPA almost lost its mandate, has not resulted in any investment.

The Government has opened up the telecom sector to 100% foreign direct investment. It is too early to have an impact, but so far there has been no whoops of joy from foreign players. The DoT (Department of Telecom) continues to lord over the sector. Having failed to find buyers for spectrum, at prices set far too high, the DoT is bullying telcos. It has levied high penalties for spectrum sharing pacts. TRAI Chairman, Rahul Khullar, says that spectrum sharing for 3G should be allowed, as spectrum is scarce and sharing of it makes eminent sense. DoT is also threatening to not renew licenses unless telcos participate in spectrum auction. Perhaps it is such actions that deters foreign investors from jumping with joy at the permission to own 100% of a telecom company.

"Nothing good in India"

It was a privilege. A pleasure.

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"In 1980s, you were still a successful country. But politicians made more and more mistakes in India. I don't see that changing anytime soon..."

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Nor are investors now hoping for RBI to cut interest rates to boost economic growth. The RBI Governor has stated that its focus will be on defending the rupee. So one cannot expect an easing of interest rates any time soon. The Governor is right to keep the pressure on the Government to take steps to bring down the CAD. It has to take sensible steps to attract investors. Tired of waiting for clearances for land acquisition, environment and other things, companies like Vedanta and Posco have called off their projects. Speed, and equity, must be the driving forces for public governance. Sadly, subjectivity and lethargy, drives it.

Lethargy was in evidence in the case of the National Spot Exchange imbroglio, last week. The Exchange was operating in a sort of regulatory vacuum. The exchange had two cycles, a T + 0, which allowed an investor to buy a commodity on a spot basis and a longer, say T + 14, through which the commodity could be sold 14 days later. The difference in prices between the two represented an interest cost. These transactions were useful to buyers of commodities, e.g. a maker of woollen garments would buy wool through the year, for use only in winter months, and need to stock it for the rest of the time. The Ministry of Consumer Affairs said that this the T+14 was forward trading, and disallowed. The Exchange shortened the cycle to T +11, which is, for some reason, not considered forward trading, and asked if that was okay. Subsequently, the Exchange, suo moto, shut down transactions, causing a small panic.

Such lethargy in responding (the transactions had been carried on for quite some time) scares investors. The first priority of the regulator is to protect the investors. Share prices of Financial Technologies, the promoter of NSEL, tanked.

In corporate news of interest, the Government has cleared the deal, after modifications which gives Jet Airways and not Etihaad, a casting vote, between Jet and Etihaad, through which the latter will pick up a stake in the former.

Hindalco has managed to strike a good deal whilst refinancing loans for its Utkal Alumina project. State Bank of India (SBI) and Axis Bank have reduced interest rates by 3% for this Rs 7,000 crore project, of which 70% is debt financed.

Oil India and Indian Oil, each of which have a 45% stake in an offshore oilfield in Gabon, have struck oil and gas there which is good news.

The big challenge for India is to find jobs for its young population. Failure to do so will be the end of the India story. Given that over half the population is dependent on agriculture¸ one would think that the Government would be concentrating on this sector. But it continues to regulate every aspect of agricultural produce, denying the farmer the best price for his produce. The acquisition of foodgrain has resulted in a huge stockpile that will ultimately rot.

Global trends in agriculture point to increasing use of mechanisation and technology, which, for a labour intensive system like in India, would be disastrous. In the US, farmers are using robots to pick, say, lettuce. A robot can do the work of 20 labourers.

Similarly, in retail, robots are increasingly used by companies such as Amazon to fulfil orders. In the auto industry the weld shop and paint shops are largely robotic. A Chinese inventor has manufactured a robotic noodle chef.

There is a lot of expectation that the US would lead the world out of recession, given its discovery of cheap shale oil and gas. However, in the case of automobiles, one of the important industries, sales are down and the industry is sitting on an unsold inventory of 3.2 m. cars, which is more that India's annual production.

The cheaper gas available in the US has led to some positive benefits. United Parcel Service (UPS) is shifting its fleet of trucks from diesel to liquefied natural gas, and is eyeing a saving of a whopping 40% in fuel costs! In India, diesel prices were raised by Rs 0.62/litre last week. Higher transport costs would make Indian products uncompetitive.

The Ministry of Petroleum decided, recently, to double natural gas prices, in an attempt to encourage its exploration. The Supreme Court has decided to examine this decision, and has sent a notice to the Government and to Reliance Industries.

Last week the BSE-Sensex fell every day, ending the week with the sensex down 584 points, at 19,164, and the NSE-Nifty don 208 at 5,617.

There is not much by way of potential good news that investors can look forward to. The rupee will continue to slide, as the issue of twin deficits, fiscal and current account, are not being directly addressed. Hence interest rates will not come down, as the RBI has stated that its primary objective is to defend the currency. The fiscal deficit would, in fact rise uncontrollably after the Food Security Bill is passed and if the NAC suggestion of universal health care is further adopted. The general election is looming, and dirty political linen will be publicly washed. Selling on rallies would be the advocated course.

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.

Disclaimer:
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9 Responses to "Divide and Fool"
Dinesh K / Bassein 401201
Aug 6, 2013
Mulrajsir,
have been a big fan since more than last 15 years of your understanding of the economy, government polices and influence on the market. What a fantastic study and understanding of the present scenerio and expected future of India. Sir, what is the remedy to come out of this mess? Why can't we in india live in peace and with a sense of brotherhood. when will the spineless bloodhound politicians understand this? everything - you name it is costly except human life. do we need an failed italian lady or her family to rule us like this for ever?
Like 
rj
Aug 5, 2013
I didn't know you censored opinions.

Well here's one more
www youtube com watch?v 5RrIhdNnBdE
Like 
J Mulraj
Aug 5, 2013
Thank you readers, for your comments.

Mr Dabholkar, your insight is quite correct. The Japanese and Germans used to follow the system of stakeholder capitalism, in which different stakeholders such as employees, financiers, suppliers and customers were given importance. To counter this, the US promoted shareholder capitalism, in which capital, or financiers (equity and debt) were given primacy and other stakeholders were subservient.

This shareholder capitalism worked to bring back US economic hegemony, but the pendulum has swung too far in the opposite direction resulting in what you observed about large dividend cheques being given as a photo op to the Finance Minister.

Mr Dubey I couldn't agree with you more. I have been promoting the idea with print media to allot a small space to someone who highlights the good that is happening. And it is! But the media is uninterested, sadly.

Mr Kapur, exactly...why should consumers not get uninterrupted service when they travel? Disallowing sharing of spectrum is lunacy.
Like 
rj
Aug 4, 2013
You keep hoping that the US will save the world.
Ironic to think thus considering it was the US that caused the world economies to be hurt in 2007 in the first place.
Like 
rj
Aug 4, 2013
You should have waited till Jim Rogers' interview was concluded before posting your column this week.
Jim makes the negative case on India and he is absolutely correct !
I commend Equitymaster on conducting this interview though Rahul Goel was was unfit to conduct the same and wasted the opportunity to as real thoughtful questions that would have prompted Jim to open up more and offer much more helpful suggestions for the Indian economy.
I wonder if any of the Indian economists such as Raghuram Rajan and the concerned finance ministry politicians met with Jim to have an honest discussion.
Your column this week only confirms what Jim says but does nothing to suggest any alleviating measures for the Indian economy.
India needs educated politicians who are also patriotic. Patriotism is something sorely lacking in the political class without that quality India will never rise.
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Satish S Dabholkar
Aug 4, 2013
I wish to make comment about the unemployment problem in India.
While in Banking sector for last three years a large section of employees-substaff,clerks,officers have retired or going to retire in coming two years.But Banks are not taking any steps to fill these posts.It is resulting in weakening the financial system.The Bank's Chairmen are seen giving hefty amount of cheque to Finance minister as Profit made in the bank (at the cost of employees).I feel that some persons are purposefully weakening Indian Financial system-Banking sector which is Backbone of Indian economy.Pl take out independent search of non filling of vacancies in Banking sector created due to the increase in economic activities in Indian economy.Pl comment what type of this "Unemployment" called, when economy wants these vacancies to be filled in and Government is not filling the vacancies.
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DARIUS BILIMORIA
Aug 4, 2013
Dear Mr.Jawahir Mulraj,
Excellent, lucid and full of clarity. These 3 are always present in your writings.
Well-explained to reach out to the uninitiated and new to the topic.
I have been reading you columns from your TOI days.
Thank you and please do keep up your good work.
dbilimoria@hotmail.com
Like 
M k Dubey
Aug 3, 2013
We are living in a very difficult time. all print and audio visual medias are highlighting negatives in everything every moment. This is very scary sometimes. Because in one year time we going to choose some of these same people who are at the source of all wrongs, as it seems most of the time now.My point is that, for more informed person like you, can't we have a daily or weekly dose of articles on the people and policies who are doing good in politic, economy and in every other walks of life. That would be sort of mood enhancer and most importantly will enable us to come to know about good performer to choose among bad ones in the coming election. Like 
Dr Rajeev Kapur
Aug 3, 2013
Thanks for a very interesting and informative article. As usual Mr J Mulraj is brilliant in summarizing key events and his analysis is logical.

Mr Khullar is right in supporting sharing of 3 G services. As a consumer I want to have access to Internet and email when I travel on business or for leisure. I do not care who provides the service as long as it is a seamless experience for me - the operators can share costs, charge extra for providing that access but should not ask me to prove my identity every time I move out of Delhi. In Srinagar neither the Airtel nor RIM worked as my 3G connection was Delhi based. Only BSNL works but it does not provide connectivity to other service providers' customers. In Assam the Airtel connection works only if you have bought a connection in that state. Delhi based 3G Airtel is non-functional in Assam but RIM does.
DOT has created countries within the country. A retrograde step. We talk of bringing down trade barriers between countries but create our own barriers between Indian States.
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