Necessity is the mother of intervention - 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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PRINTER FRIENDLY | ARCHIVES
6 AUGUST 2011


There is a joke about lawyers which asks 'what's the difference between lawyers and God?' and the answer is 'God doesn't think He is a lawyer!'. This is more true of political leaders, all over the world, who consider themselves divine on getting elected. They behave in a totally reckless fashion with taxpayer's money, getting even more reckless and generous with its use when times are good, rather than saving for the proverbial rainy day. But reality has a nasty habit of catching up, as it did in the US last week, when policymakers bumped their heads against the debt ceiling, and found that it hurt! Despite a last minute deal reached by opposing political parties, S&P has downgraded the US rating from AAA to AA+.

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The deal was the result of the necessity of avoiding a default once the $ 14.3 debt ceiling was exhausted, on August 2, and intervention was needed to raise it. Everyone recognises that the deal only pushes the can down the slippery road, always a task fraught with danger.

Prior to the US, the dominant global economy was Britain, thanks to its sea power and conquests of foreign lands and wealth. London was the financial centre and the pound sterling the global currency. Post two world wars, its financial muscle got exhausted, and power transferred to the US. New York become the global financial centre and the US $ the global currency. Being a global currency allowed the US to print money whenever it needed, which, in turn, gave its political leaders the feeling of divinity. This allowed it to build up a mountain of debt of $ 14.3 trillion, almost equal to its annual GDP.

Why the world is now in a precarious state, after the S&P downgrade, is because there is now no alternative global currency capable of stepping in to take the place of the US $. The AAA rating of US Government bonds was a benchmark of absolute safety, against which investors could gauge the rate to lend at to other borrowers. Without a benchmark of absolute safety, the financial system is in danger of freezing up. Remember when, post the Lehman Brothers crisis, the banking system froze and banks were unwilling to lend to another, for fear that the borrower may be contaminated with tainted assets? It required a Tarp programme to unfreeze the financial system. This is a big risk and one does not know how it will play out. If, for example, Spain or Italy, both teetering economies needing a bailout, were to approach markets, how would investors react? The cost of borrowing would most certainly rise, globally.

Come to India and we see that necessity is the mother of intervention here too. For years now, the Government has continued with a policy of subsidising urea, even as the other phosphatic and potassic fertilisers were freely priced. The subsidy on urea has ballooned to Rs 75,000 crores. Moreover, being subsidised, more urea is used by farmers than necessary, degrading their soil quality permanently. The necessity of changing the situation has now compelled the Government to remove urea subsidy, and allowing manufacturers to raise urea prices 10% this year. Yet it was only about 5 years ago that the same Government had booed down a proposal by Yashwant Sinha, the Finance Minister of the then BJP Government, to raise urea prices by Rs 1.

Necessity was the mother of intervention when the Government, decades after it became obvious, did away with subsidising petrol. It now wants to do this for diesel used in cars, which means that soon anyone filling diesel in his car at a petrol pump would have to pay more.

This would impact sale of cars further, they have already fallen sharply due to higher interest rates.

The Telecom Commission is intervening to make major changes in telecom policy, w.hich will include a uniform revenue share of 8.5% (now 6-10) and a limit to the maximum spectrum allowed to any company, which would mean that those, like Bharti Airtel, Vodafone and Idea, who have more, would be asked to return the excess.

Bharti's profits for the June quarter fell 28%, to Rs 1215 crores, despite a 39% growth in revenue, mainly due to higher interest charges for its African acquisition (which is losing money) and for 3G spectrum. Vodafone is fighting a case against the IT department as the latter has slapped the largest ever tax demand on it, for not deducting tax at source when it bought a controlling interest in Vodafone, from Hutchison.

Higher interest is eating into corporate profits, and will do so for the September and December quarter results. An ET study of 612 company quarterly corporate results shows that revenues increase 23.5% and profit before interest, depreciation and tax by 19.4%. But because of higher interest, and to some extent depreciation, the PBT rose by 13%.

The high interest rates are the result of an RBI monetary policy to curb inflation. One of the main causes for which is the unproductive spending by Government. So the various interventions, as a result of necessity, help in cleaning up their acts and directing Government spending to more productive uses, or socially necessary ones. India will also be greatly benefitted if the UADAI project is successfully implemented, and Government subsidies actually reach their intended beneficiaries, through the use of technology, instead of 80% of it being eaten up by corrupt middlemen, as happens now.

Which is why one is dismayed that the revised Lokpal bill, as modified and watered down by the Government, has been introduced in Parliament.

An anagram of R (for revised) Lokpal would be a parllok bill, which is symptomatic. A TOI poll reveal that over 90% of the people are against the Parlok bill and want the Lokpal bill, and, in a democracy, one would have expected elected representatives to take heed of the wishes of the people who elect them. But, go back to the top, and see why - after election they assume divinity!

The actions of the Government show it is not at all serious over the issue of corruption. This bodes ill for the future.

In corporate news of interest, the NSE and Financial Technologies have settled their dispute. When the FT group set up an exchange called the MCX-SX, (disclosure: MCX-SX was, last year, a sponsor of a conference organised by Institutional Investor, of which the author is India representative) it was allowed to trade in foreign currency. Perhaps to forestall competition, the NSE waived all fees for FX trading on its own exchange, (it had other segments from which to earn revenue, but MCX SX didn't), compelling MCX SX and others to follow suit. The latter complained to the Competition Commission, which upheld its claim. The NSE also put a software developed by FT on 'watch list' thus depriving users of it the ability to trade on the exchange. The latter filed a suit against this too. The latter has now been settled, the suit withdrawn and the exchange will allow the sale and use of the FT software.

The other corporate news of interdst was from ONGC which is to shortly commence production of gas from its KG Basin fields. However, former Chairman, R S Sharma, according to news reports, says that the price of $ 4.2 or 4.5/ mmBtu is unviable, in view of the huge costs for offshore construction and oilfield services. RIL, whose output has also dropped, is similarly claiming the price as too low. Probably this may result in another intervention.

Last week the sensex dropped a whopping 891 points, on the US debt crisis and the uncertainties caused by the downgrade. The BSE-Sensex closed at 17305, going below the support level of 17,500 with a downward gap, an ominous sign. The NSE-Nifty fell 270 to close at 5211.

If the sensex does not quickly regain the 17,500 support level, it is likely to drop to the next support level of 16,000. One should identify stocks of fundamentally sound and well managed companies and prepare to buy them on a further dip.

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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2 Responses to "Necessity is the mother of intervention"
Anil
Aug 8, 2011
The piece is well written and incisive - as always, and as is expected from Mulraj.

But why is it that spelling mistakes are not checked before publication? Doesn't Equity Master have any editors?
Like 
Indravadan R.Shah
Aug 6, 2011
You are right.Now govt.wants to reduce subsidy burden so they want to take decision which they opposed in past.This is good for nation as farm subsidy is enjoyed by rich farmers and poor farmers are suffiring Like 
  
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