The new Rolls Royce at RBI - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
The new Rolls Royce at RBI A  A  A


The stock market, and the rupee, rallied sharply after the new RBI Governor, Raghuram Rajan, gave his inaugural address. His plan to facilitate banks to raise foreign deposits, caused their stocks to rally sharply. Investors were enthused by his declaration that he would maintain the independence and integrity of the institution.

This is reassuring. The UPA Government has, like a wildfire, been destroying institutions, unmindful of the harmful effect of such a scorched earth policy on future generations. There is a debate on the urgent need to make the Central Bureau of Investigation (CBI) independent of the Government, because its investigations are more often than not guided more by political compulsions than by investigative ones. Few are the institutions, and the men heading them, who are able to stave off Governmental pressure and it is hoped, and welcomed, that Raghuram Rajan is to be one of them.

There is, however, only so much that Rajan and the RBI can do, on the surface. The structural problems have to be addressed by the Government and there is little evidence that it is doing so. The RBI Governor can find funds to tide over, for the short term, the current account deficit (CAD), and thus tackle, again, for the short term, the falling rupee. But for a longer term solution to the CAD the Government will need to find ways to boost exports and cut imports.

The two main items of import are crude oil and gold. The Government has attacked gold imports, by hiking import duty to 10% and by making it almost impossible to obtain loans from banks against pledge of gold. Recently, SEBI has discouraged creation of new gold ETFs. All these steps would merely drive demand underground, both for the product as well as for its financing. Demand and supply are dictated by the price of gold, investors' view of the future, and the price and return expectations of alternate assets. At the moment, the future is looking bleak to them.

For alternate (mainly paper) assets to be considered as an attractive investment to gold, the Government has to make the system more responsive and to come down harshly on criminals. Its response in the case of NSEL (National Spot Exchange Limited) scam has been slow and uninspiring. It is the Government that had granted permission to NSEL to operate. When a Government grants permission to a body like an exchange, which deals with investors, the underlying presumption is that the Government is overseeing and regulating it. It wasn't doing so!

A recent audit by a Swiss company has found that stocks in the NSEL warehouse, against the security of which investors had lent money, are less than 20% of the stated stocks. What was the regulator, the FMC (Forward Markets Commission) doing? As a regulator was it not responsible to oversee the stock position? But more importantly, why did FMC allow NSEL to also own the godowns? This is an open invitation to collusive fraud! Just consider that the Swiss company found no shortfall of stock in the E-series (ETF based commodity transactions). Why so? Because the depositories were CDSL and NSDL which were outside the ownership of the exchange.

The separation of conflicts of interest only requires honesty of intent and a modicum of common sense. The fact that FMC did not think of separating the two is suggestive of its absence of both. If the UPA Government wants to wean Indians out of gold, then it has to reassure them of its honest intention and its ability to protect them. The first thing a responsible Government ought to do when presented with fraud is to attach the properties and passports of the perpetrators.

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The Government has done little to curb imports of the largest item on our list, viz. crude oil. It has, for years, pussyfooted on the raising of prices of petro products, subsidising the price of petrol and diesel (used by car owners, who do not deserve subsidies). It is now contemplating raising them significantly, which will, besides boosting inflation, further depress demand for the auto industry. In contrast, sales of new cars in USA, buoyed by low interest rates and lower fuel prices (thanks to gas production using fracking) are booming. The Government has not made any move towards legislating fuel efficiency norms; the developed world tightens them every year, forcing the auto companies to innovate to reduce fuel consumption.

The issue of high import of crude oil can also be tackled by trying to increase domestic production of it. Petroleum Minister V Moily, tried to encourage more players to enter offshore oil and gas bids by doubling the price of gas but so far there has been little new interest. In a piquant situation, the Petroleum Minister has now written to the Finance Minister to say that, unless the Government is satisfied that the fall in gas production in the case of Reliance Industries was due to causes outside its control, Reliance should get the old price of $ 4.20/unit and not the recent, doubled one. Reliance claims that the fall was to geological complexity. Satisfying the Government on this count would be in its hands.

As a nation we have lost direction. The manufacturing sector , on which India will be largely dependent to provide jobs to the millions of graduates it produces each year, is being given step motherly treatment. The recently passed Land Acquisition Bill would mean that large projects would face a time and cost overrun. Then there are issues, often created, over environmental grounds. JSW Steel's Sajjan Jindal, in an interview in the Economic Times, laments that its aluminium project had to be shelved ostensibly at the instigation of NGOs by rival corporate, and in order to save tribals. India, which is blessed with a large supply of bauxite, the raw material for aluminium, produces 2 m. tonnes of it a year, whilst China, which has no bauxite, produces 20 m.

In contrast, Chile, with no such impediments, is witnessing an economic boom in copper, resulting in high employment and prosperity for workers (see Business Week article 'In Chile's Copper Boom, Miners Spread the Wealth', Sep 5). Its per capita income has risen from $ 4,780 to 16,300 in ten years, making Chile the wealthiest country in Latin America. Those working at the mines are not tribals, and do not wish to remain so. One can appreciate the need to protect the interests of weaker sections of society. But surely there can be found ways to do so without killing all enterprise.

The sharp fall of the Rupee is due to loss of confidence in this Government's ability to protect anyone, be it investors, or the currency or the women. It is also due to the fact that foreign banks and foreign investors can speculate in the Indian currency, on the NDF (non deliverable futures) market, but Indians can't. The RBI which has the ammunition to do so, has not stepped in to protect the currency. Oh yes, the Government does protect one class of people - those with foreign bank accounts! Despite a Supreme Court direction to pursue them!

The Government can't protect its employees' pensions, either. The EPFO (Employee Provident Fund Organisation) has a Rs 54,000 crore deficit! The next generation will not be able to enjoy the promised defined benefits.

To be fair, almost all States of USA face the same problem, of being underfunded to meet 'defined benefits' obligations. These pension funds used to be able to earn the 8% return that would enable them to meet the obligations, but with interest rates on Government bonds running far below that, they are unable to. Hence they are moving larger chunks of their funds into riskier assets, including equities, hedge funds and, lately, into property in order to be able to earn the 8% return! This has made pension funds riskier than they started out with.

The NPS (new pension scheme) will give employees the option to move out of EPFO and into privately managed, state approved funds.

Last week the BSE-Sensex rallied 650 points to end at 19,270 and the NSE-Nifty gained 208 points to close at 5,680. It was, largely, a RR rally (no, not Rolls Royce but Raghuram Rajan, the new Rolls Royce at RBI).

But for the RR rally to sustain will take action, not just words and good intentions. And the action is to come from the UPA Government which, sadly, believes in another RR when it comes to economic decision making. Namely, rest and recreation.

There lies the tragedy of India. The Government has squandered a legacy of a booming economy and has succeeded in killing enterprise.

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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3 Responses to "The new Rolls Royce at RBI"
Sep 8, 2013
Sir, Its so crisp & clear information on prevailing current situation on CAD & and its driving factors. In disclosing the real scenario on current financial miss-management of government & their real interest of going with populist schemes to grab next election MP seats are so clear by your article.Your style of using language is superb & very much elegant.
With Regards : Chandrasekaran
Like (1)
Amit Sengupta
Sep 7, 2013
I think that time has come for the right-minded youth of India to cry out and demand that these old politicians must vacate the political arena. They will, for sure receive all out support from the common senior citizens. These oldies are eternally greedy, highly short of any moral standing and caught in a time wrap. Beyond economy, we are now deep in to geopolitical problems. Pakistan kicks us at any time and in any manner they like. China is surrounding us on all sides- flooding our markets with cheap merchandise. India is a huge market and they are growing from a toe-hold to a foot-hold to significant ground. They won't like to give this market a miss, no matter what the costs and their nature are. Internally, we have too many militants challenging our sovereign entity. What the polity has been doing, irrespective of the party- scam after scam- doling out money to Government employees and spposedly to the so-called EWS- a section of the society, at a huge cost to the other section- a sure shot recipee to keep them EWS perpetually. A clear example of subservient activities. The youth must rise as otherwise, I am afraid that we will continue to struggle to protect the value of Dollar- thru war and peace. Like (1)
Sep 7, 2013
So if the US states are not protecting the pensions then its OK for India to be in the same position?
If all ills with India point to the govt and the corrupt politicians then let the voters vote them out if they can overcome their lethargy and go vote.
No point in crying and complaining having not voted.
Recently the judiciary has taken up the task of disqualifying convicted politicians from holding office again.
This can be extended to any politician that was EVER involved in a scandal.
Age limit should also be set on politicians who can run for office and the worn out horses like Sushil Shinde, Sharad Pawar and others should be kicked out. The age limit should be 70.This would reverse the brain drain or the drained brain.
Reduce the number of rules and regulations and watch the progress.
Mr Rajan can help if he does not get suffocated of the corruption and hindrance from the politicians.
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