Andheri Nagri main Chaupat Raja - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Andheri Nagri main Chaupat Raja A  A  A

4 AUGUST 2012

Is the title of a play, which roughly translates into a crazy king ruling over a dark kingdom. The failure of the entire Northern grid, which plunged over 600 million people, a tenth of humanity, into darkness and ensuing chaos, over two days, made India literally a dark kingdom and condemned it further in the eyes of not only global investors but its own people.

Power grids are NOT supposed to collapse as they did. They are supposed to switch power off to states who withdraw too much of it. The culprits were three states, U.P., Punjab and Haryana, which overdrew, and were permitted to, thus endangering the whole system and plunging a tenth of humanity into utter darkness.

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Why were these states allowed to? As always, blame it on the compulsions of coalition politics! Their support is needed for the Congress to stay in power, even if the cost of doing so is to keep 600 m people of the country bereft of it. A chaupat raja, Prime Minister Manmohan Singh, is increasingly demonstrating his capacity to be unable to lead. Why could he not order power supply to be shut to errant states? How much would the people of India accept compulsions of coalition politics as a feeble excuse for policy inaction?

The cost to society was enormous. Metro rail services in Delhi were shut. Traffic signals failed, causing chaos. Water treatment plants stopped working. Outside of Delhi, where hospitals may not have back up generating facilities, patients suffered, and some, on life support systems, may have died.

The play Andheri Nagri, Chapuat Raja is a story about a student who goes to the weird kingdom where the king has decreed all things to be sold at the same price. Taka ser bhaji, taka ser khaja (vegetables sold at the same price as exotic dates). Thieves, intending to rob a house, get killed by the collapse of a wall they broke and the mother seeks justice. There then follows a ludicrous blame game, with the owner of the house blaming the mason, who blames the bricklayer, who blames a passing Mullah who diverted his attention, whom the judge orders to be hanged, but since his neck doesn't fit the standardised noose, the judge orders the nearest person whose neck does fit to be hanged instead, which happens to be the student. He later escapes the noose. The blame game is quite familiar in India today, each time a corruption scandal ensues.

Where India digresses from the story is in the 'taka ser bhaji, taka ser khaja'. The cost of everything is not equal. The cost of corruption is borne by the people, in the form of higher prices of vegetables, fuel, taxes, and levies, whilst the influential corrupt are free to enjoy their ill gotten gains. Not a single corrupt politician in the 2G telecom scandal, the CWG scandal, Adarsh scandal or others has been penalised, by collecting the ill gotten gains and depriving him of his freedom. Why can't the Government follow the practise Securities and Exchange Board of India (SEBI) does, to forfeit ill gotten gains?

For all the meek cowing down by the UPA Government to its coalition partners, whether in terms of financial bail outs to state Governments, or turning a blind eye to overdrawals of power, and other misdeeds, the UPA Government has got little to show for it. As Bob Dylan sang 'how many times can a man turn his head, and pretend he just doesn't see?", the Government is turning a blind eye to all the corruption scandals.

The corruption scandals have arisen thanks, again, to the compulsions of coalition politics. Each of the coalition partners is given a ministry or two to run, from which that party can extract gains by trading permissions. This has been seen in the case of airlines, railways, coal or telecom, all of which have hit the sector badly. As a result of improper allocation of telecom spectrum, the Supreme Court cancelled 122 of them, and ordered the sale of future spectrum to be conducted only through auction. The Government has used a Presidential reference to the Supreme Court to seek clarity on some issues.

In the interim, it is trying to meet the deadline for auction of end August, set by the Supreme Court, but will be unable to. The Cabinet, just on Friday, has cleared a price of Rs 14,000 crores for 5 MHz of spectrum in the 1800 band, (and Rs 18,200 in the 800 band). This adds a higher burden of cost to a sector, hitherto successful, which is reeling under the costs needed to maintain and expand its infrastructure.

Telecom companies are stating that this will significantly increase call rates, perhaps by Rs 0.30/minute. The Government is arguing the increase would be modest, citing the example of 3G spectrum, though sold at a high rate, without an increase in cost.

As Sanjeev Aga points out perhaps call rates may increase modestly, as the companies may strategically decide to absorb it, after borrowing money from banks to pay for the spectrum in the auction. But should they, over time, not be able to generate adequate returns, it would be the banks that are saddled with the problem of non performing assets. This is exactly what has happened in the airline sector. Airfares were low, thanks to competition, and it is only after troubles hit Air India and Kingfisher Airlines, leading to cancellation of flights, that airlines such as Spice Jet and Jet Airways have been able to show a profit, after 5 quarters. So, perhaps, in the short term, the increase in call rates may be muted, but that would not be a validation of the high reserve prices in auction, feel the telecom companies.

Stockmarkets are, however, increasingly concentrating on the short term, more's the pity. As CNN points out, the Wall Street Machine is Broken.

Basically, as this column has pointed out, the pumping in of liquidity by Governments, in order to sustain consumption, to spur economic growth, and investment in plants, has largely spilt over into financing of assets. This causes the asset prices to collapse when the bubble bursts, as happens, frequently, in stock markets, and often, in real estate markets. The total stock of financial assets is over $ 200 trillion, more than 3 times global GDP. Since growth in GDP is aenemic, the asset managers take short term risks in a bid to generate higher returns. Often those risks fail, and lead to collapse of the institution, such as Lehman Brothers, MF Global or, last week, Knight Capital Group, which lost $ 440 m. in a matter of minutes due to faulty software, and is on the verge of bankruptcy.

The U K Government appointed a committee under Professor John Kay, which submitted its report last week. It, too, talks about excessive short termism, and what authorities could do to tackle it.

Here is one suggestion that SEBI may consider.

Why not encourage long termism by giving preferential treatment to long term holders, in terms of voting rights (which can be graded according to duration of holding)? Today, globally, institutions hold over 2/3rds of corporate equity, and individuals 1/3rd (the ratio used to be reverse before the growth of mutual funds in the 70s). It was felt that greater institutionalisation of savings would lead to better corporate governance, as they would have more voting clout than individuals. True. But they do not use that clout! Instead, institutions vote with their feet, and exit the stock, if they find companies doing things inimical to shareholder interest. There are very few activist shareholders, like the Children's Investment Fund, founded by Chris Hohn, which has filed a suit against Coal India for underpricing coal, that take on corporate management.

In fact there is an ongoing debate about whether 'shareholder value' should be the only value which companies should pursue. This, basically, is a swinging back of the pendulum, towards stakeholder capitalism, after the various scandals that have erupted, especially since 2008.

As regards the problem of grid collapse, one solution may be micro grids which keep the power local, cheap and reliable. Until such time as micro grids are set up, grid discipline has to be maintained, even if it means cutting off power to a political ally. Politics is about doing what's best for the country, not for the party. Sadly, our political leaders ignore that.

Just like companies need to listen to the environment and to their constituents, political parties must listen to those that voted them in. The consequences of not doing so are disastrous. In the case of companies, Eastman Kodak's market capitalisation is now 0.5% of its peak, because its management failed to move fast enough into digital photography. Nokia, once a respected leader in mobile handsets, quotes at 3% of its peak market cap. RIM, the makers of Blackberry, got thrashed by I Phone and other smartphones, and quotes at 4% of its peak. Sony at 9.

Unless the UPA listens to the environment and its constituents, and starts to take steps to a) curb corruption b) really punish the corrupt, not merely eyewash c) take some serious steps towards economic reforms d) end favours to coalition partners that hurt national interest whilst protecting party interest, it, too, can witness the same fate.

Foreign investors feel hopeful that the Government will take some , measures. Despite, for example, a statement by Parthasarathy Shome, the CEO of ICRIER, that the GST rollout is unlikely before 2014. The Centre has been unable to address the long list of grievances of the States. Despite the statement by the Vice Chairman of the Planning Commission Dr. Ahluwalia, that GDP growth this year will be 6%. Of course, that's not because of poor policy and poor governance, but because of poor monsoon, right?

The foreign investors have been net buyers of Rs 10,000 crores in India equity in July, after having been net sellers of just under Rs 2,000 crores in April/May/June.

It is foreign Institutional Investors (FIIs) buying that is helping sustain the market. Last week the BSE-Sensex gained 258 points, to end at 17,197, and the NSE-Nifty added 115 to close at 5,215.

One hopes that the Government may yet take steps to show its reformist zeal, if only as a measure of self preservation. But can one really expect that, in an Andheri Nagri with a Chaupat Raja?

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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16 Responses to "Andheri Nagri main Chaupat Raja"
Aug 17, 2012
In a country if someone commites suicide the discredit goes to the king for not providing a suitable environment to live for whatever reason. Similarly when somebody achives something the crdit goes to the country head for providing all positive things. One can not say all that goes right is because of me and what goes wrong is because of something else. I need a PM who is from from Loksabha, who is a direct representative of people. Not a gentle man who has entered from the back door (it is a pity that we can not do anything,it is in our constitution) or a bureaucrat or a technocrat. Had it been so there would have been another UPSE kind of institution to recruit Ministers including PM. It is not a fashion to make our PM responsible for everything but it is like "Taba Scandhang Badhati Badhatah". It is painful to scold whom I like, who takes decission for me. People have started expressing their anger in every form they can. Hope the readers of this column are empathetic towards common man's emotions. The esteemed readers of this columns are extected to be decent and wise enough to see what really is happening and who the real culprit is. Our concise is one. Hope readers will agree. Like 
Nikhil Shah
Aug 9, 2012
We already have A Raja (telecom scamster)!! Like 
Aug 6, 2012
Dear Mr Mulraj, Why do you blame PM for everything? It has nothing to do with coalition politics.Had there been any other PM, the same thing would have happened, because the load dispatch centres do not have freedom from political masters. This is the way Indians (politicians come from within us only) work, so why single out the PM, just because he is the gentleman and does not hit back ? It has become a fashion these days to blame PM for everything that goes wrong. Like (1)
Dr. Sushil sharma
Aug 6, 2012
What a fantastic analysis.. God how i wish the people in this part of the world were not so illetretate and will be able tto grasp the facts which are soo obvious. But as we are, Ignorence is Bliss ! Many thanks sir for your wonderful research and report.. Like (1)
v p singh
Aug 5, 2012
mulraj you are spitting on the sun and you know it falls on you. MMS is best PM after Lal bahadur jee and mr. mulraj you are just a mosquito. kindly refine your language or face the court. Like (1)
Aug 5, 2012
The power shut down happened twice in two days and what action Govt has taken? Not a word from PM. Sad state of affairs indeed. There seems to be complete mess the way in which Govt is functioning. Coalition Politics is keeping a hold on many important financial reforms and till 2014 nothing is likely to happen Like (1)
Om Prakash Sharma
Aug 5, 2012
The general public's opinon is very clear. The power grid failure was a conspiracy of the congress for stopping people coming to support Anna's Agitation Like (1)
Aug 5, 2012
Sir, Very Well written. Please send this copy to the concerned ministries and PM and also to the Chair Person of INC, who is the "sutradhari" benind all the mess. Like (1)
Brij Kumar SIngh
Aug 4, 2012
Dear Sir, A simple understandable article and logical example but why the top bureaucrates who are probably the topmost brains of India,do not understand.They all are behaving like an ostrich who buries his head in the sand and thinks being safe. None can wake a nonsleeping man So the greed of chair is all supreme and media, industrialists,bruaucrates and educationist all support these politicians in their corruption who have been elected by the ignorant masses of India.Indians need to be ruled by someone as they are incapable of being governed by themselves best example being Manmohan Singh who is being governed by Sonia Gandhi.LONG LIVE MY MOTHERLAND Like (1)
Aug 4, 2012
a)any amount of such deep and sincere disappointment/consternation by the suffering public are not able to bring out any responce from our P.M.
One really wonders why.What is that he has to loose.Why does he not pick up the courage to act??
b) BJP has self destroyed itself.
c) What could be the scenario like in 2014? I shudder to visualise.
Like (1)
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