Better late than never; better never than late - Straight from the Hip by J Mulraj

Better late than never; better never than late


Quite a few things happened last week.

The UPA Government finally realised it had a spine, and took some steps which were better late than never. It increased prices of subsidised diesel by Rs 5/litre, and also capped the subsidy outgo on LPG by restricting supply of subsidised gas cylinders to 6 per family per year. It also allowed 51% foreign direct investment (FDI) into multi brand retail and airlines. All these steps were better late than never.

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Globally, Ben Bernanke announced an open ended quantitative easing (QE) and has agreed for the US Federal Reserve to buy $40 b. of bonds each month until unemployment was brought down. This step is better never than late; the solution to America's problems is not more money, which is rather like trying to cure an alcoholic by opening up the bar! The solution is for Americans to lower costs to regain competitiveness and thus provide jobs, and to save more to bring down unsustainable debt. The Fed action comes on the heels of an easing by the European Central Bank, which, too, announced an open ended purchase of bonds of weaker countries, but subject to conditionalities. These actions are just kicking the can down the road, or postponing the problem. They are not the solution.

Like any party that continues merrymaking when more drinks are brought in, global stock markets too, made merry when more money was brought in. The BSE Sensex ended the week with a gain of 714 points at 18,462 and the NSE-Nifty added 219 to close at 5,577. Indian stock markets were also cheered by the resolve of the UPA Government to tackle the burgeoning fiscal deficit by raising diesel prices. Rating agencies had threatened a downgrade, to junk status, if steps were not initiated to rein in the fiscal deficit. Besides, the Reserve Bank of India (RBI) Governor had stated that he would bring down interest rates only when he saw the Government take steps to bring its fiscal house in order. Perhaps the criticism of Prime Minister Manmohan Singh in a Washington Post article also helped push the Government into taking overdue steps.

The move to curb petro product subsidies is a step in the right direction, however belated. It is a sad commentary on our political leadership that such steps are taken only when there is a crisis or an impending crisis. The problem with most democratic Governments is their preference for launching well intentioned, but leaky, social welfare schemes without an expiry date. This makes it well nigh impossible for future Governments to reverse it, for fear of losing popularity. In other words, the problem with India, as well as with America, is not that tax revenues are low; it is that expenditures are uncontrolled.

In USA, as per a post 'Reality Versus Obama - Is it Really a Revenue Problem" in, "In 8 years, George W Bush spent ~ $ 2 trillion more than he took in. In Obama's first 3 years, he has spent ~ $ 4 trillion more than he has taken in." It would be the same in India, if someone does the math.

The solution to high US unemployment as advocated by Bernanke, namely, throwing more money at the problem, is akin to the railway passenger throwing peanuts out of the window of his compartment. When asked why he was doing so, he replied it was to keep away the elephants. When it was pointed out that there were no elephants, he smiled smugly, saying 'see, it works!'.

The Fed's argument that its QE2 programme helped create 2 million jobs is a statistical legerdemain. What it hides is the fact that more than 2 million people have given up looking for jobs and they are classified as 'not in labour force' and removed from the unemployed statistic. Since Jan 2009, more than 8.4 m. people gave up looking for jobs, compared to 3.4 m. who got new ones. Since our leaders also conveniently misuse statistics to paint a rosy picture, one wonders if Governments secretly confer on how to use statistics to fool people?

Instead of creating more jobs, perhaps the truth is diametrically opposite. Millions of retirees live off the interest income on their savings and by keeping interest rates low, their earning, and spending power is reduced. A blog in zerohedge says "The projected annual impact of this loss of interest income on just $9.9 trillion of rate-sensitive assets translates into $256 billion of lost consumption, a 1.75 percent loss of GDP, and about 2.4 million fewer jobs."

What excess liquidity will do is to push up asset prices. Stock markets have gone up; India's Sensex gained 2.4% in a day. Commodity prices will go up, despite recession in most countries. It would mean a continual rise in prices of gold and crude oil. Gold can hit $3350/ounce and oil $190/barrel .

So the open tap of the US Fed will push up crude oil prices, and that would mean further sharp increases in petro product prices. Of course, a responsible Government would be able to temper the price hike by reducing the exorbitant excise duties it levies on petro products. The key word here is 'responsible'.

In India the 12% hike in diesel prices will immediately increase transportation cost. But this is bound to happen; low transportation cost based on subsidised diesel (and even more subisidised kerosene which was used to adulterate diesel) cannot be forever sustained, so we shall be simply returning to reality. Bearing this in mind, will the RBI reduce interest rates One feels it would wait to see how the situation unfolds. The opposition parties and at least one of its allies, the mercurial Mamata Bannerjee, has threatened action of the diesel price is not rolled back. At least the opposition cannot stall Parliamentary proceedings; perhaps this is the reason why the hike was postponed until the monsoon session ended.

As regards the increased limit of FDI in multibrand retail, the opposition to it stems from the notion that mom and pop neighbourhood grocery shops (kiranawalas) will have to shut down. But hey, multibrand retail already exists, for several years, and not a single kiranawala has shut down because of it! In Mumbai one has shopping malls such as Phoenix and Shoppers Stop etc. which stock brands of various products. Why should we suppose that kiranawalas would succumb if more foreign investment is brought in?

The Government has also announced disinvestment in 4 companies, viz. Oil India (10%), MMTC (4.3%), Hindustan Copper (4.6) and National Aluminium Company Limited (Nalco) (12). Later, in Neyveli Lignite and RITES. This would fetch a good inflow to Government coffers if the markets remain buoyant. That is, if they don't do anything foolish or if no corruption worms slither out of the cupboards.

As a solution to corruption issues, Government undoes its previous actions by cancelling allotments. Whether of spectrum, as dictated by the Supreme Court (which is getting someone else to wash your dirty laundry) or of coal blocks, four of which were cancelled last week. Well done! But don't you feel, Dr Manmohan Singh, that you should also penalise the perpetrators of wrongdoing on the Government side?

If private persons are penalised by Securities and Exchange Board of India (SEBI), for example, by being forced to not only spend time in jail but also to disgorge their undue gains obtained by wrongdoing, why is it that Government officials are not asked to similarly disgorge their illicit gains? Why is it that they get to enjoy the fruits of their wrong actions?

In corporate news of interest, Bharti Infratel, which owns the telecom towers, is reportedly set to file a prospectus to raise Rs 5,000 crores through an IPO. Infosys has acquired a consulting company in Switzerland for $ 350 m. which increases its client base by some 200 new customers, and gives it strength in SAP consulting.

Sahara, asked by the Supreme Court to submit to SEBI details of the claimed 30 million investors who had invested Rs 17,000 crores in the optionally fully convertible debentures of its two private companies, each with Rs 10 lac paid up capital, did so on Monday, well past working hours, with a truckload of papers. SEBI refused to accept delivery. This would be argued in court as a reason to delay the refund of the OFCD amount, as ordered by the Supreme Court, together with interest.

Earlier rounds of quantitative easing did revive investor confidence and did lead to stockmarket rallies for many months. But unless one sees economic growth pick up without any monetary or fiscal stimulus, the rally would need another QE to sustain. Kicking the can down the road.

The next resistance for the sensex is at 19500. It could well hit that, especially if the Government announces some more economic reform measures. And providing, of course, it does not cave in to the protests that are bound to follow, for which it has a good track record.

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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7 Responses to "Better late than never; better never than late"

sunilkumar tejwani

Sep 15, 2012

why hell nobody is talking about bringing black money of politicians to India and reduce fiscal deficit to zero?
and why the hell nobody is punished for wrong doings for scores of scams ranging from C W G, 2G , coal mines, metal mining , education, statues building etc. In our country public memory is too short. Till date, Anna Hazare and team is grappling to cleanse the electoral and political arena, scamsters are busy in saving their skins and enjoy the fruits of their scams.
And to top it all, the person holding the top position is maintaining sphinx like silence like a deaf and dumb.
God save the country.


Venkatesh Kumar

Sep 15, 2012

I am a regular reader of your column.Eventhough, I am not good in stock market, your detailed analysis of current development is quite interesting and gives me an idea about what to expect in future. Please keep posting such regular analysis




Sep 15, 2012

I was happy to read the papers that what is urgently needed for this Country was being done.This was to have been done a long time back.But given our Silent intelectual Prime Minister who feels silence is golden, I have my reservations if these will hold. A most corrupt leadr in BSP, against whom the CBI could find no evidence of Corruption in spite of the open misappropriations is shocking to say the least.Another
from W. Bengal who is mentally defecient, and opposes any hike, without understanding the economies of the country, who thinks that oil is found in her house and you do not need to raise prices is absolutely ignorant and not fit to be where she is. Another in the south, who only knows to oppose any effort to bring this country out of this rut by opposing proposals that are urgently needed, the situation does not look bright ahead. Will our Silent Prime Minister have the guts to go ahead and face the opposition head on and bring some monetary sanity in this country? Why do these so called leaders not understand that this countery cannot bear the pressures of subsidies, and the nett result would be a collapse of the economy?If they had brains they would, but communal forces are keeping them alive and destroying this country. Mr. Karat knows only one phrase "We cannot allow prices to increase"". Then how the hell does he think oil will be supplied? Its disgusting to become a laughing stock in front of the whole world and pat ourselves on the back saying we have
avoided increase in oil prices.These jokers are not fit to be in the ruling or oposition parties. This is the price we will have to pay for the politics of this country. Unfortunate the there is no one like the Late Mrs. Indira Gandhi.May her soul rest in peace and we go to eternal damnation.Mr. Ferns.


surajit som

Sep 15, 2012

it is astounding that Fed is trying to crate jobs through monetary policy( printing money). it is like Fed running the military affairs in Afghanistan rather than Pentagon!!!just imagine RBI(or any Central bank) trying to create jobs !!!

this is diabolical. people who have saved whatever little money for old age, are losing a bit of it on daily-basis due to negative interest rate.this bogus money is pushing up crude price world over and people are suffering everywhere due to higher petrol, diesel prices. oil price is going up due suicidal policies taken by FED, ECB etc.poor oil-importing countries world-over are forced to ever-increase subsidy on oil products .this -in addition to mismanagement ,corruption by their own politicians,govt officials -is ruining their economies. this is exactly what is happening in india now.


Om Prakash Sharma

Sep 15, 2012

Dear Sir, The bureocracy was not responsible for the 'coalgate'. It is the doing of Congress under the very guidance of Prime Minister. So he should be held responsible and recovery of the money should be from Congress party fund or Prime Minister's property

Like (2)

Abhay Dixit

Sep 15, 2012

What are the prices in economies similar to India ( dependent on imports of oil)? How do they compare with Indian prices of Kero/diesel/petrol/LPG/Aviation?
similar exercise for airwaves, etc?

Like (2)

Indravadan Shah

Sep 15, 2012

Iwant to tell that step taken by tackel economic crisis is belated but good.But i firmly belive that instead of increasing prices and increase inflation so that life for common man wiii be very bad govt.first try to take step to stop corruption,bring money from swiss bank which will decrease our fiscal deficit and common man will be happy.Secomndly for gas cylinder govt. should think once again and keep cylinder quota as per family msmber say for 4 member-6cylinder,for 6 member-8 cylinder which ic practical

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