Licensed to kill - 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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14 SEPTEMBER 2013

For over 4 decades after Independence, India's Government relied on central planning to drive economic growth. Economic growth was, as a result, anaemic, derided internationally as the Hindu rate of growth, far too inadequate to lift its billion people out of poverty. The production of anything had to be licensed, which served to enrich those granting them, as well as those obtaining them, at the cost of the consumer (in the form of shoddy goods and abysmal after sales service) and the saver (in the form of low returns on capital saved and invested by him).

This model ultimately drove centrally planned countries to ruination. The Soviet Union was broken into several nations, China's economy was in shambles until it was opened up. It then grew by leaps and bounds after the Chinese embraced capitalism (guided by the aphorism 'I don't care if the cat is black or white as long as it catches mice'). India almost went bankrupt and had to pledge its gold to tide over the crisis. It is only in times of severe crisis that policy makers turn to common sense for economic policy making, and put ideologies into cold storage.

The ideologies ought to have been buried, instead. For, they seem to be re-emerging, in India, as policy makers are resurrecting licenses, controls, guidelines, micro management and such, so as to bring back the levers (and the moolah) in their hands. As the UPA slogan goes, 'Aapka paisa, aapkey haath'.

The UPA 1 Government realised that instead of licenses they could control the allotment of things like telecom spectrum and coal blocks and oil and gas blocks, and thus get back the levers of graft into the hands of its functionaries. Today every infrastructure project would need around 50 approvals. Each of these represents an inverse ATM machine. Put in money and the permission is ejected. It is a sad commentary when leading companies such as Shell, Cairn and Dell have to approach the Prime Minister's Office, via the Cabinet Committee on Investments, to help clear the logjam of various approvals, in order to make foreign direct investments in India. FDI is badly needed by the country whereas the power to give 50 approvals is needed by the party, for obvious reasons. Sadly, with this Government, the latter wins.

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In this Government, everybody and his uncle has the power to hold up project clearances and its a crying shame that the PMO has to intervene to get the engine of growth moving.

And so it moved last week, to clear some projects, including power projects that were stuck for want of coal. Signing an order is the easy part but does not, in itself, guarantee that coal will (a) be produced in adequate quantity or, if produced, (b) will reach the power plants. As per this article in Business Standard the Railways have increased their coal transportation at an average rate of 8% a year, during the last four years. The rate required over the next two years, to fulfil the 'order' signed by the PMO would be 53% over the next two years. The capacity of ports for handling higher quantities of imported coal is also missing. Ironically, more than 3.5 m. tonnes of imported coal are lying unclaimed in ports because importers are unwilling to take delivery.

The absence of governance is being increasingly written about in foreign press, and the European Commission Standing Committee on Global Foreign Direct Investment has not included India in the top 20 countries to which its 27 members will direct investments. This is what German press writes "India has never had it so bad. Stealing in government has never been this brazen. Government officials are now so audacious in their corrupt practices that they do not give a damn about who is watching".

"Supreme Court directives are routinely flouted. Crime rates are up and security of life including women's safety, which is the first responsibility of every government, is at its lowest ebb. India must then be more than qualified to be called a failed state."

Fortunately, the perpetrators of the heinous rape in Delhi have been awarded the death penalty for committing the rarest of rare crimes. This penalises the crime but not atone for it. Perhaps society may consider passing a law by which perpetrators of such rarest of rare crimes have to donate their body parts (kidneys, eyes) to society as atonement. The rapists showed no respect for body parts of the victim, destroying them in the most brutal and atavistic manner. Why, then, should they expect their own to be respected?

So we are now in a situation where the UPA Government has brought back permits and controls, requiring the greasing of palms, which has stymied growth and has resulted in an economy growing at under 5% a year. Social welfare schemes are introduced with the objective of getting voter support, but, because of their design and because of the leakages, have blown the Budget to smithereens. The MNREGA scheme, which is the flagship of the UPA, has no money, in the state of UP, to pay salaries to its 40,000 workers. So what, then, can the UPA claim as its achievement?

It is estimated that projects worth US $200 bn are stuck for want of permissions. Based on a thumb rule of US$10 m per new job created, this means that 2 m jobs which would have been created, have not been created, because of the silent return of the license permit raaj. This is a tragedy of immense proportion, one that the Government has to answer for.

Ultimately, poor governance leads, as it has, to low economic growth and, combined with profligate spending, to empty Government coffers. It is then that the policy makers dig into their resources, and find the hidden one viz. common sense.

For years the Government was treating telecom spectrum as a sort of golden goose that was supposed to lay for it golden eggs for ever. They messed up a thriving sector by allocating spectrum out of turn. The Court frowned upon discretionary allocation of spectrum and ordered that it be henceforth auctioned. Continuing in the belief that it remained a golden goose, despite having been butchered by Raja, the Government retained an unaffordably high base price for spectrum to be auctioned. There were no takers, naturally. Last week TRAI recommended that the base price of spectrum to be auctioned should be cut 60%. Why did they not look for common sense earlier?

Similarly, faced with an unacceptably high current account deficit, the Government is planning a 3 pronged attack. One of the steps includes instructing the concerned Ministry to expedite the export of huge stocks of iron ore lying at the ports. Well, hello!! Is this not common sense? Why not use this resource?

The Government is also guilty of criminal neglect. Take the latest scam, viz. NSEL. This was an exchange that was authorised by the Government. Investors can assume that, being authorised, it would be regulated and supervised. It was not. Neither by Forward Markets Commission nor by the Warehousing Development & Regulatory Authority, which is supposed to verify that the godowns under it have got the commodities in the contracted in the quantity and quality contracted. It did not.

This makes the Government equally culpable and responsible for the losses borne by investors. As the editorial in Economic Times says, the Government must come down hard on everyone concerned who was negligent. This includes the Exchange, its promoters, and also Ministry of Consumer Affairs, the FMC and the WDRA. Why is the Government, instead of penalising, agreeing to extend the license for MCX-SX, to operate for another year? Also, will SEBI grant Financial Technologies, the parent of NSEL, permission to raise Rs 1,000 crores?

Who says crime doesn't pay?

The UPA Government has to realise that ALL investors would protest if it does not take prompt action to bring the perpetrators of the NSEL fraud to justice and to reimburse investors. It is not just the few thousands but the millions of investors who would take notice of this, and their anger would spill over in the coming elections.

With such low standards of governance, it is not surprising that the global press has poor things to say about our country.

Last week the BSE-Sensex surprisingly flared up a whopping 727 points on Tuesday, and ended the week with a gain of 462 to close at 19,732. The NSE-Nifty added 170 to close the week at 5,850.

This week two global factors are worrying investors. One is the Fed meeting in which it could announce the start of the tapering off, of the quantitative easing programme. Some optimists are yet hoping that job growth data is not as strong as it ought to be, and the tapering may be, ah well, tapered.

The second worry is that the US may have a 'no boots on the ground' engagement with Syria. Technology now permits countries which have them the advantage of military force without boots on the ground i.e. loss of life. But, as this blog points out, Pearl Harbour also started with a 'no boots on the ground' attack by the Japanese, but led to WWII. So also, 9/11 was also a 'no boots on the ground' but led to the invasion of Iraq and of Afghanistan. The US Administration has proof that chemical weapons were used but not about who used them and it could, in this crazy world of strange geopolitical bedfellows, one doesn't know if it was the Syrian Government or the rebels who did. A country cannot be attacked without such proof.

In the event of a taper and/or of a Syrian attack by remote military technology, stock markets would react negatively.

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 "Licensed to kill"
S. Suchindranath Aiyer
Sep 17, 2013
License Raj! After being a lonely voice (if not a lonely thinker) saying this, I am no longer solitary. Here is another echo.

I have seen institutions going down hill in India since the 1970s. It has to do with two simple factors. One is the burden of unrealistic, idealistic laws and regulations that simply run against fundamentals and the purpose-for-existence of institutions (whether in the nature of check and balance, economic integrity, or whatever)thus diluting both the institutions and the laws(rules), leaving more and more scope for discretion aka corruption. (For example, the Mission statement of the Reserve Bank of India includes "Economic Growth" (!) Nationalization of Banks and the resultant "Capital Engineering" is too well known. The impact of "Reservations" regime and Quota-Creep "Social Engineering" is another). The other is a growing body of "precedents' that wear away at the Institutional efficiency and effectiveness brought about by promoting incompetent, corrupt men beholden to those in power. My several refereed papers published in "Prajnan" (National Institute of Bank Management) in the 1970s and 80s on Human Resources Development, Strategic Planning and Organisational Development deal with this in depth, albeit conceptually and with not too many examples (to avoid the retribution that did come anyway).

In the last three years, many of the laws that were made directly create totalitarian entitlements. Whether it be RTE (nationalization of 25% of private primary and secondary education), Land Acquisition, Food Security, Cooking Gas rationing or whatever. The most egregious example was the "retrospective" tax law for which Pranab Da Mukherjee G was elevated to President of India (!). The sole exception was the "Right to Information" which the scallywags who sit in Parliament have united to curb and de fang: across party lines!!

25% of seats and 6 cylinders per year are absolutely Quota-License. In any case, Quota-License was always the most obvious manifestation of India's "Animal Farm" Totalitarianism celebrated most prominently, in the 9th Schedule to the Indian Constitution apart from everywhere. He has not de-regulated Banking. He has relaxed Bank licensing.This is NOT at all the same thing. Just like Vodafone and every other facet of "liberalization", I predict that, once a foreign Bank falls into the RBI's newly fashioned fly-trap, the screws will begin to tighten and the digestive juices of India's corruption will begin to operate until India's ruling scum evacuate the remains after accumulating the mulcted butter and cheese in personal fortunes in safe havens.
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G.Nagaraja
Sep 14, 2013
UPA is out to destroy the nation no foreign invader did to the country in all the centuries yet hopes to get voted back to power to complete the task.Let us save the country and wait for the God to save it.We need good and honest, bold , innovative rulers and NOT so-called economists,bureaucrats and criminal mafia called politicians. Like (1)
rj
Sep 14, 2013
Tampering with public funds is possible by those in power only with the collusion of the finance ministry.

There have to be safeguards in place where by the finance ministry cannot be the sole signatory that releases the money spigot as and when the politicians in power want it released.This should be the case no matter which party is in power.

Similarly, without acquiring several consents the govt should not be able to impose controls and taxes on different industries and commodities.

The authorities giving such consents have to be non political for this plan to function properly.

Maybe this requires constitutional changes.But for the progress of the country the changes should be made so that the govt is not the sole authority of the public's funds nor should it be permitted to squeeze the public with more taxes and controls and have funds at its disposal to squander and swallow to feed its corrupt members.

Like (1)
SHAH DILIPKUMAR
Sep 14, 2013
AN EXCELLENT ARTICLE BY J MULRAJ BUT WHO IS GOING TO CARE OR TAKE PAIN IN THIS COUNTRY WHERE NOT DEMOCRACY BUT BEAUROCRASY IS RULING ONLY IN THE INTEREST OF POLITICIANS FOR MANY DECADES SHOW ME ONE COUNTRY WHERE CRUDE IS IMPORTED BY GOVERNMENT AND GOLD DISTRIBUTED BY CANALIZED AGENCIES ONLY BANKERS ARE CANALIZED AGENCIES AND CURRENCY IS ALLOWED TO BE TEMPERED BY CENTRAL BANK GOVERNORFOR BILLIONS OF DOLLARS THROUGH DUBAI COMMODITY EXCHANGE AND IRAN CRUDE PAYMENT IS MADE ONLY THROUGH SHAIKH MOHAMMED SON'S BANK ONLY Like (1)
SHAH DILIPKUMAR
Sep 14, 2013
This is the root cause of corruption created by old congress
FOR MANY DECADES UNDER LEGACY OF BEAUROCRATES DONATED BY BRITISH GOVERNMENT FOR ALL PUBLIC SERVANTS OR SHER LIONS OF INDIA KILLING POOR INDIAN PEOPLE ONLY WHICH COUNTRY HAS GOT GOVT WHO IMPORTS CRUDEPETROL/GOLD/ REAL CAUSE OF INFLATION AND CURRENT ACCOUNT DEFICIT WHICH SHALL NEVER BE SOLVED BY DOCTORATE IN ECONOMICS MAY BE MM OR RR OR AHLUWALIA OR RANGRAJAM
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