The cost of bad planning is paid by the future

27 AUGUST 2011

Political leaders could learn a few things watching squirrels!

Squirrels hoard nuts in summer, to have enough food for the winter. If nations did that, there would not be so many frequent crises!

Take the case of banks. The Government holds over 51% in all public sector banks and feels that going below that would pose a risk to the financial system. It won't. Now, if India is to grow at 8% or more, as the Government keeps harping it will (of course India can, with sensible policies and less leakages due to corruption) then banks would need to be properly capitalised, to fund that growth. SBI Chairman Pratip Choudhury has warned that unless a rights issue is cleared soon, the largest bank in the country will face a paucity of funds in 2012-13. And the reason the rights issue is not being cleared is because the Government owns 59% and can't pay its share of the rights nor does it want to dilute its stake.

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Now SBI is one of the best institutions in the country, with an unmatched record of over 150 years of uninterrupted dividends! No other company in the world which this columnist can think of, comes even close to such a record! It has an eminently sound business; yet, because of the dog-in-the-manger attitude of Government, its future growth is in jeopardy. The irony is that the Government isn't averse to funding Air India, a business that, in its current shape, has no chance of becoming viable. SBI, and other banks, are being asked to lend to Air India so that it can buy fuel and continue flying its planes. It's high time Air India is divested.

Or take State Electricity Boards (SEB's). The Government is unwilling to prevent the theft, or the free distribution, of power, resulting in aggregate losses of Rs 75,000 crores, expected to double by 2014-15.

Lenders have decided to stop lending to SEBs in 5 states, UP, Haryana, Punjab, TN and Rajasthan. These will then face severe power cuts which, in turn, would affect agriculture and industries like auto, for which TN is the hub.

Power shortage will be another area of grave concern. The Government had awarded some UMPP (ultra mega power projects) to companies, based on a fixed, contracted, rate for power produced by them. Tata Power's contracted rate, e.g. is Rs 2.26/unit. Yet Tata Power cannot get domestic coal for the project. It, alongwith other companies, bought coal mines in Indonesia and Australia, planning to use imported coal.

These countries then slapped an export tax, making the imported coal 50% more costly.

Given the current preoccupation of Government with the anti corruption crusade led by Anna Hazare, and his dangerously extended fast, it would scarcely be expected to have time to address these and other pressing issues.

One of the biggest challenges in the corruption issue is how to get back Indian money in Swiss banks. In this the UK has adopted a different, practical approach The Government of UK is more concerned about the loss of tax revenue to it from money stashed in Swiss (and other offshore) banks, than it is in discovering the identities of the owners of the accounts. Under the deal, the Swiss banks will deduct tax on interest/dividend payments/capital gains, and remit the amount to the UK Government. This is expected to fetch the latter 5 b. pound sterling annually. Perhaps the Indian Government can also think of such a deal. The beauty of it is that, over time, the holders of such accounts would realise that, since they are paying tax anyways, they may as well bring the money back home!

In corporate news of interest, Jindal Steel borrowed $475m. (Rs 2137 crores) through take out financing, paying 2.25% over LIBOR. Take out financing enables a bank to lend for 5 years, and be 'taken out' of the loan after that by another bank, so that the borrower gets a long tenure loan whilst the lender can keep its asset-liability tenures from being mismatched. The company plans to invest it in expanding steel making at its Abu Dhabi acquisition, Shadeed Iron, from 1.5m to 5 m tpa.

Last week the market slid 292 points on the BSE-Sensex, which ended at 15848, and 97 on the NSE-Nifty, which ended at 4747. Foreign institutional investors (FIIs) were net sellers each day of the week. The concerns of investors are the international situation (Fed. Chairman Ben Bernanke's speech at Jackson Hole did not talk about a QE3, which is fortunate) and the domestic situation (Anna Hazare's fast is dangerously extended and one hopes it is called off soon).

The Government is to debate, over the weekend, the Government and the Anna Hazare version of the Lokpal bill. Rahul Gandhi has rightly said that the Lokpal should be a constitutional authority, like the Election Commissioner. It, too, should be subjected to constitutional checks and balances.

Technically the market is oversold and ready for a bounce, as was observed in last week's column. Perhaps the bounce could come from the ending of the fast and some movement forward on the Lokpal Bill. Or perhaps it could be triggered by a fall in oil prices, with Gaddhafi out of Libya and the rebels needing to raise money to rebuild their war torn economy. It would, however, be a short term bounce and, if it comes, the market would test the 16000 sensex level again, maybe several times.

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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5 Responses to "The cost of bad planning is paid by the future"

Nikhil Shah

Aug 29, 2011

The biggest issue, rightly said in the above article, is how to get the ill-gotten money stashed away back to India. And don't be complacent and be happy with the tax at source on the interest. We should get the principal amount back. That should have been the agenda in the current crusade(rightfully initiated by Baba Ramdev few months back).

And do you think the enactment of the Lok Pal would make the country corruption free? I bet on it, it wouldn't. Corruption is in our blood. It is our life line. Otherwise, we have the finest constitution, why would we require all other acts!!. Is it not in the constitution that you can't profit personally by holding the government office??? Is it not that simple??

And who is going to head the Lok Pal? Sharad Pawar? Ha, Ha, Ha!! GOD save the Lok Pal. How Lok Pal is going to function?? The same way as Raja operated the Telecom Ministry?

So, dear Bharatwasio, don't be fooled by enactment of Lok Pal. The politicians are not going to change as they have taken the oath that they will honestly and sincerely remain corrupt and will work only for the corrupt.

We always say Britishers looted our country, but the fact is the politicians have looted Mera Bharat Mahan 60 times more in last 20-25 years (1985 to date)years compared to what Britishers did in 200 years of their Raj. Check the statistics. The politicians have put the Britishers to shame in this aspect. The politicians have performed outstandingly well in this game. I have said from 1985 as after Bofors, corruption was like an annual affair(Lalu's ghas chara, Harshad Mehat and Narsimha Rao 1 crore suite case scandal, etc. )which now has turned like a daily affair.

The real issue that should have been raised is where 176,000 crore ruppes from telecom scam vanished? Where is the CWG games scam money? These are so recent scams. Follow the trail and you will see where the money is. Bring back the money on the table and that should be the agenda if we ever want to make the fight against the corruption any real.

With no hope for corruption free India,

I remain

Nikhil Shah



Aug 29, 2011

One thought: Can Anna Hazare & civil society champions take up agitation against Power thefts ?



Aug 29, 2011

Do you suppose the mismanagement under Mr OP Bhatt, poor provisioning etc. and subsequent cleanup is part of the reason the govt is dragging its feet?



Aug 27, 2011

nice article. it is very useful for any investor at any instat of time



Aug 27, 2011

Jindal's Shadeed Plant is located in Oman. The erstwhile owners of Shadeed are from Abudhabi.

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