We are not responsible! - 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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24 AUGUST 2013

The UPA Government has earned itself the dubious distinction of involvement in several large corruption scandals. Each time various Government functionaries absolve themselves of all responsibility. Perhaps it should admit being an irresponsible Government, which it is.

The latest is the scam at the National Spot Exchange Limited (NSEL). When a group of investors, with an aggregate Rs 5,500 crores stuck in the exchange, complained to Arvind Mayaram in the Ministry of Finance, the expected answer was that his Ministry was not responsible. It was the Ministry of Consumer Affairs that was, under whose jurisdiction the regulator, FMC (Forward Markets Commission) was supposed to be responsible for regulating the exchange. But FMC Chairman claims he is not responsible, as he was appointed regulator but without power! The question, raised by these columns earlier, and unanswered is, who permitted the NSEL to start operations, without first authorising a regulator to regulate its operations?

Imagine the chaos that would ensue if each regulator took a similar stance. What if the RBI shirked responsibility of a banking fraud and claimed it was not responsible? What if SEBI maintained that it was powerless against a company who, e.g. had raised money through an IPO and misused it? Is it any wonder, then, that individuals repose their faith in gold and not in paper assets? If the Government is genuine, it has to protect investors, else it will incur their wrath prior to a general election.

Echoing the sentiment, the NSEL says it is not responsible. The top management has been sacked, which is a gesture by the promoters of the Exchange to shirk responsibility for the actions of a management they appointed.

Let's look at other examples of shirking of responsibility.

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The Finance Minister says that it is not responsible for the state of the economy, which is in dire straits. It is not responsible for the high fiscal deficit or for the unsustainably high current account deficit. For the latter, it is the citizen, with his penchant for gold, explained above, who is responsible! For the poor GDP growth it is the companies who are responsible, for going slow on investment, and not the Government, which has blocked several permissions required for the investment. The National Highways Authority of India has had to cancel 6 road projects because of not being able to get land acquisition clearance. But, of course, the Government is never responsible.

Consider the depreciating rupee. In 1947, when India became independent, the Rupee was equal to the US $. It is now Rs 65/$. So in 66 years, the currency has depreciated 65 times. The value of the currency is related to productivity of the country. This means that India has, since independence, sharply declined in productivity. The Congress party has been in power for over 75% of the time during these 65 years. But, of course, it is not responsible!

The falling rupee will, obviously, lead to inflation. Crude oil, as well as gas, translated to INR, would be more expensive. This would mean that all petro products, petrol, diesel, LPG, kerosene, would cost more, and so will power from gas based plants. So the subsidies on the petro products and power will shoot up, and, in a bid to contain them, the Government will raise prices, with the velvet glove admonition to 'kindly bear with us'. Corporate profits will be hit by the hike in costs, combined with the higher interest rates which are the consequence of a badly managed economy. Of course, the Government is not responsible.

This is a criminal misallocation of resources. The national productivity rises when children are given a proper education and training and when laws and regulation are conducive to economic acitivity and growth. Not when subsidies are given for people to drive cars in. Annual sale of cars is under 4 m., or 0.08% of our population. The Government subsidises them instead of spending money on better education.

Only a few countries are teaching their children how to think. These include Finland, Poland, Japan, South Korea and Canada, who consistently score high on the PISA test. India scores poorly. Children become smart, and, later, productive, when they are challenged to think for themselves. In India the Government has cleared the way for all to be promoted. This does not challenge them to think. They are not as productive as they can be. Without productivity, the nation slips. The currency weakens. Other countries race ahead. But the Government is not responsible.

So tyrannical are the rules and laws in India, and so subjective, that we destroy our own industries and encourage the brightest to go abroad.

The sugar industry, one of the most controlled industries, is being killed. Prices for sugar cane are fixed by both the Centre and the States, both competing with each other to increase prices, never mind the viability of the sugar factories. They set high prices to get farmer votes; the cost is borne by the mills. The mills are going bankrupt. Bad politics drives away good economics. But the Governments are not responsible.

Another example is that of iron ore exports. These were banned after cases of illegal iron ore mining (corruption, again, in various states like Karnataka and AP) were discovered. It is easy to ban, or destroy. It is not easy to rebuild. The drop in iron ore exports is a contributory factor to the current account deficit. It has led to a loss of jobs. And to a fall in production of steel. Is anybody reviewing the export ban? Or is nobody responsible?

Well, companies like Tata Steel have, in partnership with a Canadian company, set up an iron ore project in Canada, and has already got permission. (South Korean Posco, after an 8 year wait in Odisha, has not). If a large FDI proposal such as Posco comes in it eases pressure on the rupee. But there is no thinking in Government. As this article in the Economist points out, economic activity is being shifted out of India.

America is anticipating an economic boom, predicated largely on a boom in output of shale gas, using a technology called hydraulic fracking. Now it is not the availability of technology that is preventing the search for shale gas in India. Technologies can be bought, or obtained, or developed. Rather, it is ownership rights. In the US, the land owner has the right to everything on, or under, his land. In India it is the Government. As a result, the prospectors for oil and gas, can deal with land owners and sign contracts for exploiting the gas below their lands. And finds a lot of it, lowering gas prices and incentivising producers of energy dependent steel, fertilisers, metals, etc, to relocate to the US and create jobs and growth.

In India, the Government claims right to any resource under the ground of property belonging to any individual. It auctions the right to hunt for oil/gas, creates a huge mess in the pricing of it. Production drops and prices rise. The fall in production leads to higher imports, a higher current account deficit and a falling currency.

So, what is important to the Government? Is it the ownership of resources under individual land or is it the possibility of larger oil/gas finds and an easing of economic problems? A responsible Government would know the right answer.

There is something strange happening in the gold market, as per this blog. Export of gold from London (where it is not mined, but, rather, held as a backing for gold ETFs) has zoomed, to Switzerland. In 2012 exports were a mere 92 tonnes. In the first half of 2013 it is 797 tonnes. It appears that this gold is being melted to smaller sizes for export to Asia. Presumably most of it is smuggled into India, as import duties have been myopically hiked.

There is another interesting article titled 'Hawala Logic' by Anand Ranganathan, which points to the sharp fall in the rupee versus the US $ in the months preceeding a general election, presumable to fetch more rupees when the $s stashed abroad are brought back. The only exception was when the BJP was in power in 2004 and the rupee appreciated.

It is possible that the Government may announce another amnesty scheme, in which those with funds stashed in Swiss banks and other offshore centres (which the Supreme Court is insisting on taking action agains) can be brought back with a smallish penalty. The fall in the rupee more than pays for the penalty. Then the Government will take credit for the strengthening of the rupee. The stockmarket, where the money will be invested after the recent fall, could bounce back, and everyone will sing happy days are here again. This is just a hypothesis.

Last week the BSE-Sensex lost 79 points to close at 18,519, and the NSE-Nifty dropped 36 to end at 5,471.

International factors are ominous. As per this blog 'What Happened in 1987' the current rally since 2012 in US markets is driven entirely by valuations, and not by earnings. The US Fed is likely to taper off its bond buying programme from September, and is to have a new boss who may be more hawkish. On the flip side, should PC come out with a disclosure scheme that would lead to funds stashed abroad coming back, it could lead to a rally. If not for that, the economy, the currency and the stockmarket would continue to slide.

Of course, the Government is not responsible.

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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10 Responses to "We are not responsible!"
hendra
Sep 2, 2013
What to do we have only irresposible people in India. India is missing, parliament is missing, we are responsibl Like 
rj
Aug 28, 2013
Why should we care about Obamacare? It is Obama being stubborn to keep alive his lousy proposal/llaw alive. But why is it worth mentioning heee?
Like 
rj
Aug 28, 2013
Productivity will never rise in India. Bad unions and laws. Wishful thinking.
Rupee at 70 and falling. Shame on all in control. And that includes the
corporations and all uncaring so called elite voters.
Like 
Ac
Aug 27, 2013
Wonderfully well written! 1947: 1$=1Re, 66 years later, 1$=66Rs, is the story of the year. Like 
P.S.SATHYAMURTHY
Aug 26, 2013
The reference to Hawala Logic makes complete sense. This is what I have been advocating privately.A depreciating rupee means more money during inflows. I wonder why we should pay taxes? Like 
DR ANIL K KOTHARI
Aug 25, 2013
Excellent article. recently i complaint to SEBI about three companies that are listed on stock markets i.e Ind swift ltd, Ind swift Lab Ltd and birla power about collecting huge amount of public deposits and now refusing to repay and asking for seven years repayment at 6% per annum. The reply of SEBI was that it comes under MCA and not SEBI. Now why cant SEBI and Stock exchanges delist these type of companies? Like 
J Mulraj
Aug 25, 2013
thank you, readers.

Yes, Narendra, I agree that US productivity growth has been continuous, and it will continue to gain in productivity as it is a more flexible economy. One of the reasons, as you point out, is the inflexibility of our labour laws, something that is actually slowing down growth of new manufacturing units. India desperately needs to encourage manufacturing to create more jobs and reap the demographic dividend. But, as Swaminathan Aiyar has correctly pointed out in Aug 25 TOI, the new land acquisition bill has provisions that are Luddite, and will set back growth in manufacturing. We excel at shooting ourselves in the foot.
Having said that, I believe, the same is the case with Obamacare. This is likely to reduce the number of permanent jobs in the US, and increase temporary hire.
Like 
Dr. Ketan Jinwala
Aug 24, 2013
No body wants to take responsibility. Everybody is interested in making money. Desh jaye bhaad me. Even most learned economist Manmohan is in silent mode & when he speaks rupee depreciates. India has no powerful visionary leader. Like (2)
haren khatau
Aug 24, 2013
good afternoon sir jawahar, Now in bid to rescue the rupee the rbi has made short term yields higher and probably higher than long term yields. This will itself give an inverted yield curve and in such scenario stock market will be stressed. Also as I understand RBI has raised short term rates and this has stressed the banks and its treasuries. But I have a question such that with so many foreign companies in India selling colas, burgers, pharma and automobiles, even clothings and shoes, how will a high exchange rate help them to do business. Indians will be forced to cut spending and this may impact the foreign companies. India"s plocitical class will have to learn to really work for the people and leave them with a sound economy with enough finances rather than amassing resources themselves. I hope some magic turns out and our companies manage sizeable exports, One great eg is jaguar landrover, which sold more cars in usa compared to audi and bmw. Even ford could not turnaround jaguar but our tata motors could do it. Such magic is required today. Many thanks for your reading which I do. haren khatau Like (2)
Narendra Mulani
Aug 24, 2013
Jawahir,
a very thoughtful post, i just had a comment on the US view. The anticipated productivity boom for the US is from Shale gas and the continued digitization of the economy. Over the past 3 years, US manufacturing has enjoyed an unprecedented productivity increase of 3.7%. a year. This is before the shale gas effect kicking in over the next few years. This increase is primarily driven by the combintation of robotics and analytics driving new manufacturing methods. The real tragedy for India is that we already have the engineering talent and infrastructure in India to leverage the same productivity boom in manufacturing, but thanks to our Indian labor laws its not happening any time soon. Best, Narendra
Like (1)
  
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