There is no free lunch

28 AUGUST 2010

The headline corporate news last week was the cancellation of the bauxite mining permission to Vedanta, in Niyamgiri Hills, in Orissa, on environmental grounds. There are several things mixed in this potpourri, including political agendas. Yes, the environment is important and yes, the welfare of displaced tribals has to be a factor in every such project. I don't know how much attention Vedanta, or companies like it, pay to environmental and local community factors; politicians certainly like to play them up for capturing votes.

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What Governments and politicians and environmentalists and everyone else must realise is that there is a cost to all this. There is no free lunch. One must look at the experiences of other countries. In the Aug 21 issue of the Economist there is an article about illegal mining in Congo. As much as 80% of mining in Congo is illegal including all of illicit $1.2b. gold exports, with no revenue going to the state on this. The illegal mining benefits those who conduct it, which are rebel groups, and thus the money goes to perpetuating tribal wars and killing.

Surely we want our states, and the people of those states, to benefit from legal mining activities? Surely ways can, and must, be found to allow mining of these riches in a manner that takes care of local communities and of the environment? Surely TV debates and posturing by politicians on camera cannot be the way forward? Surely our political leaders cannot swap good governance for good theatricals?

Or take another example. In their quest to preserve the environment, Alaska has, e.g. disallowed further exploration for oil. Fair enough. But there is a cost to this, so long as consumers have an insatiable thirst for the stuff. It has to be found somewhere. Where? Most states follow the NIMBY policy (not in my back yard). So oil companies like BP go into deep seas to look for the stuff. And accidents happen. And ok, the Alaskan environment but the Gulf of Mexico environment is tarnished. But fish don't vote; people do. If fish had the vote, perhaps the American politicians would have disallowed companies like BP rights to hunt for oil there.

Sometimes the cost is not visible. This columnist heard the wonderful monologue 'the agony and ecstacy of Steve Jobs' by Mike Daisey. One of the things he poignantly pointed out was the appalling conditions of Chinese workers making, say, Apple products in such a repetitive, robotic manner that it was a pleasure for them to deliberately drop something on the floor merely in order to be able to bend and pick it up, thereby relaxing their muscles and breaking the monotony. That is a cost, borne by Chinese workers, happy to get such a job in which they work 12-14 hours a day rather than stay in villages which don't have any, of the need of global consumers for products at cheaper prices.

Similarly, the most evident corruption in planning the Commonwealth Games has a cost, and it is the taxpayer who has borne it. When proposed changes in the direct tax code (DTC) were first announced, it was something to be bullish about. Here is the table of the changes cleared last week by the Cabinet, and the original proposal

Rate Existing slab Now proposed Original proposal
Nil Rs 0 – 1.6 lacs Rs 0 – 2 lacs Rs 0 – 2 lacs
10% Rs 1.6-5 lacs Rs 2 – 5 lacs Rs 2 – 10 lacs
20% Rs 5- 8 lacs Rs 5 -10 lacs Rs 10 – 25 lacs
30% > Rs 8 lacs > Rs 10 lacs > Rs 25 lacs

Thus, during the past 6 months, the generosity of the Finance Ministry has watered down (see last two columns). This, despite its having got more than Rs 100,000 crores windfall through sale of 3G licences, and buoyant tax collections. The extra money is being watered down in leaky subsidy schemes, which have increased, and in corruption based inflated expenditure on things like CWG. The CBI says in the Supreme Court that it has irrefutable evidence of corruption against Mayawati; why, then, does it not proceed with the investigation? Is it shades of an Orwellian Animal Farm?

Macro economically there were some warning signals. The trade deficit for 2010-11 is expected to be $ 120 b. which is high. An RBI study has shown a decline in factor productivity after reforms started, indicating that reforms have not helped improve productivity. Productivity of industry declined from 3.1% (in the period 1992-97) to 1.4% (1997-05) whilst agricultural productivity went from 3% to -0.2%. Science may show a way – scientists have created a new variety of wheat that can produce enough to feed the world. The core sector growth in July was also muted at 3.9%, better than 3.6% in June but much lower than the 7.3% in March.

It is the US economy that can create a shock. GDP growth in the June quarter was, at 1.6% lower than the 2.4% estimated just a month earlier. Its new housing starts are also poor; during previous recessions it was new housing that led the economy out of recessions. Unemployment remains high, which is what leads to lower GDP growth. The S&P 500 index is showing a bearish head & shoulder pattern, which, if the market goes down more, can take the index down to around 900. Albert Edwards, the Chief Strategist at Societe Generale, thinks it can go to 450!

Vedanta, however, may be allowed a buy-in into Cairn India but, again, there is no free lunch. Actually Cairn did enjoy a sort of free lunch because ONGC was paying 100% of royalty to the State Government despite its having only a 30% stake in the Cairn field. The Government will allow the sale of Cairn's holding in Cairn India to Vedanta if it agrees to pay its share of royalty. ONGC would save millions of dollars because of this.

Last week the sensex declined 403 points to close at 17998, whilst the Nifty fell 121 to end at 5408. FIIs have poured in $12.4 b. so far into Indian stockmarkets, even as domestic funds have been selling. Mr Bernanke, US Federal Reserve Chairman, has his hand firmly on the printing press and is printing greenbacks to support the flagging US economy; some of those greenbacks are finding their way to Indian stockmarkets. But, since there is no free lunch, there would be a cost someone would have to pay, sometime. The India story is good but be cautious about the US for something needs to give.

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 "There is no free lunch"


Sep 6, 2010

dear Mr Mulraj,

it may be that govt had forced ONGC to pay royalty. but does this make any business sense to pay royalty of 100 % wherin the share is only 30 %.
also management must have the guts to disobey govt. NTPC does not sell power cheaply even though it is a govt entity. in fact it stops giving power to state govt utility if the payments are not made.
psu oil comapnies have not invested a single rupee in oil refining since the past 10 years whereas refineries of Reliance, Essar etc have been setup. All they do is sell at a loss and cry regularly about the losses incurred by them , and all this despite the fact that oil is No 1 income for central and state govt for Excise, Sales Tax and other levies


J Mulraj

Sep 4, 2010

As per my understanding, it was the Government that decided to award energy blocks, in order to encourage production, and asked ONGC to pay full royalty. I dont think the then, or current, management of ONGC had anything to do with that decision. It is not correct, Tejas, to say that the entire oil PSU management are destroyers of wealth; in fact ONGC has created it. The oil marketing companies are, right now, in losses, but again because the Government has compelled them to share a burden of subsidies on petro products.


rakesh thota

Aug 30, 2010

ok sir



Aug 30, 2010

Agree with Tejas. If the reports in media are true then why nobody is talking about the blunder made by ONGC in paying 100% royalty. This means Cairns India was getting a huge benefit and this money should be recovered and whosoever made this decision of paying 100% royalty should be punished. Or maybe there is a "bigger picture" of money changing hands under the table.



Aug 29, 2010

dear sir,

is the management of ONGC completely nuts ? why did they agree to pay 100 % royalty in the first place.
entire oil psu management are destroyers of wealth. who beenefits from such stupidity ? how can minority shareholders remove them

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