Will practicality finally prevail? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Will practicality finally prevail? A  A  A

11 AUGUST 2012

If investors, asked in a quiz - who runs Indian Oil Corporation? - were to answer R S Butola, Chairman, they would be factually correct but analytically wrong. The correct answer may be S. Jaipal Reddy, the Petroleum Minister of the UPA Government, that insists on destroying the oil marketing companies by compelling them, as a majority owner, to incur losses on all its products. Only a small part of these losses are borne by the Government, in the Union Budget, with upstream companies like ONGC, GAIL and OIL India bearing the rest.

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Last week Indian Oil Corporation declared a loss of (you may hold your breath only if you are near a hospital) Rs 22,451 crores for the quarter ended June! Hindustan Petroleum Corporation Limited (HPCL) posted one of Rs 9,249 crores and Bharat Petroleum Corporation Limited (BPCL) Rs 8,836 crores. Thus the three oil marketing companies made losses of just under Rs 40,000 crores. These losses have to be funded, for operations to continue. The funding comes from banks, mainly public sector banks.

To put the figure in perspective, India's largest public sector bank, SBI, posted a June quarter profit of Rs 3,752 crores. In other words, the losses at the three OMCs are equal to 11 times the profit of the country's largest bank, and it is banks, or public deposits, that will fund the losses of the OMCs.

State Bank of India (SBI's) profits more than doubled over the previous year's Q1, but provisioning for bad loans has also significantly increased, as it has with almost all PSU banks. The increased provisioning is thanks to directed lending to Air India, and to State Electricity Boards; all of these are perpetually loss making.

Now, to be fair to Government, it has, like any leader, to balance various interests. One of the objectives of providing a subsidy on kerosene or LPG is in order to reduce the dependence of poor people on firewood, to cook their food. Thus the objective behind the subsidy is not only socio-economic but also environmental.

The flaw is in the delivery mechanism. For every Rs1 that reaches the deserving beneficiary, perhaps Rs 9 gets eaten away by corrupt mafia. It is these vested interests that are proving to be obstacles to a solution. The delivery mechanism would improve after the Unique Identity Project takes off.

Besides the above, laudable, objective, is an unlaudable one, viz. to woo the votes of the beneficiaries. Political leaders of all parties turn a Nelson's eye to wrong doings, in order to get votes. Witness the ugly urban slums that are allowed to spring everywhere but in the backyard of the politicians (NIMBY); you don't see slums on Malabar Hill or Carmichael Road in Mumbai, e.g. Witness the supply of free/hugely subsidised power to sections of people considered to be vote banks, never mind that it results on power blackouts for 600 million people, a tenth of the human race.

In other words, political parties are very happy to announce 'welfare' schemes so long as they don't have to pay for it personally, and so long as they feel it gets them votes. Since all political parties resort to this, how can it be solved?

Perhaps someone can propose a law requiring that a small part, say 10-20%, of the amount spent on such welfare schemes, are paid for by the MP or his party, in proportion of the voting pattern for it.

One of the ways to reduce petro products subsidies is by having good roads. Barring the golden quadrilateral, Indian cities like Mumbai have perhaps the worst roads in the world. This is, again, thanks to vested interests which retain the system of allocating the work to the lowest bidder, thus ensuring poor quality and an annuity income from repair. However, all vehicle owners pay tax for maintenance of good roads. Someone should file a public interest litigation, seeking permission to deposit the tax with the court, until such time as the court decides the roads are worthy of its release.

There is, in any organisation, including a country, need to balance various conflicting and competing interests. Often decisions are taken which lead to unintended consequences, but in the end practicality prevails. Last week we saw some signs of practicality prevailing in some areas.

The rules for permitting foreign investment in single brand retail called for local sourcing from small suppliers, with a cap on investment by such suppliers. In effect it served to stunt the growth of the suppliers, and served to prevent a build up of long term relationships. (IKEA would wish its good suppliers to grow and continue supplying, but with growth the cap would be breached). The Government has relaxed these norms to make it easier for firms like IKEA to come in. Why does it need a fiscal crisis for common sense to prevail?

Similarly, the fall in gas output by firms like Reliance, and the consequences of reduced gas supply on, for example, the generation of power, was apparent only after the grid collapse last week. RIL has agreed to open its books of accounts to CAG and the Government has given it conditional clearance for incurring capital expenditure to increase gas output. Practicality prevailed.

Or take the criminally inordinate time (18 months) taken to appoint the head of UTI AMC, once India's largest mutual fund, because of a favoured candidate who was politically connected. The AMC Board has narrowed to a choice of 3 candidates for the job. Common sense prevailed.

Securities and Exchange Board of India (SEBI), which had banned the 2% entry load on purchase of mutual funds, (most of the 2% was paid as commission to agents, who passed most of it back to the investor), is now contemplating its reinstatement. The growth of the fund industry has been stunted. To the extent that investors do not opt for investing in mutual funds, they look at other avenues and one of them is gold. This increased demand for gold weakens the rupee and causes the current account deficit to widen. Practicality prevailed.

Worried about a poor response to the auction of spectrum, after it fixed Rs 14,000 crores as a base price for 5MHz, the Government has now permitted foreign firms to bid for spectrum, on their own, without a partner, and has given them 90 days in which to find one. Telenor's partnership with Unitech has broken down and the latter has used the judicial process to stall sale of assets in Uninor, but this would make it possible for Telenor to bid for spectrum. Practicality prevails.

Finance Minister, P Chidambaram, has announced his intention to make tax laws friendly and transparent, and not to have retrospective amendments. This is to further encourage FII inflow which, in turn, would strengthen the rupee.

Ironically, despite the perception, not unjustified, of policy paralysis and slowing growth, Foreign Institutional Investors (FIIs) have pumped in $10.8 b. into India in 2012, the highest in any Asian country. Next is South Korea with $ 6.7 b.

This, however, ought not to be taken as a sign that foreign investors are happy with our governance. It's more likely due to the fact that the global institutional system is flush with funds which need to be parked somewhere, and because US Treasury Bills are not providing adequate returns (2%).

Finance Minister Chidambaram has also announced his intention to spur PSU divestment, in order to make public shareholding at least 25% as mandated. Companies will have to dilute stake to hit the 25% mark, Metals and Minerals Trading Corporation of India (MMTC) by 24.3%, Natinal Mineral Development Corporation Limited (NMDC) 15%, Steel Authority of India Limited (SAIL) 10.8% and National Thermal Power Corporation (NTPC) 9.5%. That's good.

However, investors would wish clarity on how the Government, as a continuing majority shareholder, would view minority shareholder rights.

Minority shareholders in the OMCs are suffering losses for no fault of theirs, because, as majority owner, the Government has compelled the companies to absorb losses on petro product subsidies.

What, then, is to prevent the Government from saying, for example, that SAIL must provide steel at subsidised rates to lower income housing projects, or to pay a higher royalty for minerals of politically important states?

The conflicting pulls can be handled, provided the thinking is right and intentions are clear. The various fiscal issues created by profligate spending also can be solved, with determination and foresight. India can achieve its potential, with good leadership and courage. Will the UPA deliver, even at this late stage?

The BSE-Sensex rose last week by 359 points, to end at 17,557, and the NSE-Nifty gained 114 to end at 5,320.

There are some signs that the Government is taking practical decisions. Will it be emboldened to take more of them? If so, the rally will continue.

Will PC be practically correct or just politically correct?

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 "Will practicality finally prevail?"
Aug 13, 2012
Why partly? Any political party or person offering bribes to the voters in the name of subsidies/freebies, free power etc. to get votes in their favour/in favour of any specific political party shall be asked to deposit the money required to meet the promise with the Election Commission or in an Escrow Account. Who are they to spend tax-payers'/public money for getting votes? Ultimately we all have to share the burden but why should we do it to enrich these politicians whose sole aim is to grab power and steal money from the public. No individual or political party shall be allowed to take any credit for extending such populous measures. Let all the political parties join and take a decision on welfare measures and let it be known to the beneficiaries that it is the tax payers who are funding it and not any individual or political party. The Election Commission shall not allow mass bribery to get votes. Like (1)
Aug 11, 2012
Your comments are very very precise.Unfortunately our Ministers are pretending that they are deaf & blind.As you have rightly said that Rs.1 to reach to the deserving Rs. 9 go in air. About PSUs & Banks ( PSU banks) less said is better.No accountability . If UTI can carry out without CEO/MD for 18 months why you need even President & Vice President ? (White elephants).
Days not far for situation like anarchy.Once again for Prime minister "Now or never".. UPA is very sure that no other party is there to defeat them & this type of Governance will continue for next generation of their children/daughters & sons. Example of U.P. minister and uncle of present Chief minister is fresh who openly advices Engineers & other senior officers to grab money in small portions quietly ! Concept of PSUs be burried once for all .No bailouts for AI,Electricity boards,state co-op banks, Co-Op. sugar mills & so on .But that will never happen. Distant dream of a common man like me & many others!

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