Coalition politics and the economy - Straight from the Hip by J Mulraj
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Coalition politics and the economy A  A  A

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5 OCTOBER 2013

The UPA Government, sadly, places its survival as being more important than the nation's survival. In order to do this, it has to placate the coalition partners on which its survival depends. This entails the carving up of special interests (i.e. money grabbing opportunities), which are then allocated to the partners as their fiefdoms to extract money through.

One coalition partner was allocated the telecom space and used this fiefdom to enrich himself, and the party he represented, by allocating telephone spectrum out of turn to favoured companies. No prizes for guessing why they were favoured.

Such false prioritisation of party over country has economic consequences. The once thriving telecom sector, which has seen mobile telephony hitting some 900 m. subscribers and with one of the lowest tariffs in the world, has been killed like the proverbial golden goose. The industry is reeling under a debt burden of Rs 250,000 crores (over $ 40b.) and so the Government is asking Asian Development Bank to provide soft loans to the sector as the companies cannot afford to raise debt by another Rs 65,000 crores required to meet green technology norms mandated by the Government.

Meanwhile, there is no word of further action on those who, in Government, perpetrated the scam, and no attempt to trace the money by following the trail, which is easy, so as to recover it. The reason is because the priority of the UPA is to survive, and not to progress India's economy.

Another fiefdom was the aviation sector, granted to a coalition partner. The partner then went on to milk it, basically by bankrupting Air India, forcing the airline to undertake a huge and unnecessary fleet expansion programme financed through debt. Air India is, as a consequence, bankrupt and has to be annually bailed out with equity infusions financed by taxpayers. Added to this is the ludicrously high cost of aviation fuel, which accounts for some 70% of operating costs, so that the Government policy of subsidising other petro products can continue, and this sector is another proverbial golden goose to have met an early demise. Kingfisher Airline is bankrupt. Jet Airways got rescued with a 24% stake acquisition by Etihaad, in a deal cleared last week.

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A third example is the sugar industry. In order to gain the goodwill of cane farmers, the UP Government has fixed the price of cane unaffordably high. The UP sugar industry is likely to shut down in the season starting this October. Expect sugar prices to shoot up this festive season, alongwith tempers of consumers.

The NSEL imbroglio points to commodity exchanges also being given away as a fiefdom to coalition partners. When Finance Minister P Chidambaram sought to put the blame on victims of the fraud instead of accepting the culpability of the Government which sanctioned the exchange, he told investors that they ought not to have invested though NSEL because it was an unregulated one. This statement is economical with the truth.

Firstly it begs the question what is meant by authorising an exchange, which is an institution that deals with the investing public, if the Government abdicates its responsibility to oversee it.

Secondly, it transpires that NSEL was, in fact, under the purview of the FMC, long before the crisis hit. So it is a lie to say that investors 'knew' that the exchange was unregulated, as it is, indeed, a folly for the Government to seek to exonerate itself by saying that it was not responsible to regulate an exchange it had authorised.

This, again, points to the false prioritisation of the Government, of self before country.

Again, Government agencies can easily, if they wish, establish the money trail. Simply follow where the money went and catch the holders of it. But when the intent is dishonest, investors cannot expect such a Government to rescue them. It is likely that the money is being set aside to fund elections and so the Government would be keener to thwart the investigation than to aid it.

What can investors do? They can vote with their fingers, instead of their feet, when punching the voting button in the coming general election. And this applies to all investors, across all asset classes. Not only to the victims of NSEL. Simply because the UPA Government's priorities are to protect itself and its coalition partners.

Evidence of its myopia would present itself on Dec 8, when results for five state elections (Madhya Pradesh, Chattisgarh, Rajasthan, Delhi and Mizoram) will be declared. Perhaps voters have had enough of corruption and of brushing under the carpet the shenanigans of their ilk.

Perhaps realising this angry mood of the electorate, Rahul Gandhi, Vice President of the Congress party, suddenly and surprisingly declared as 'nonsense' the ordinance passed by the UPA, which permitted criminally convicted MPs to continue in office, overruling a Supreme Court judgement. This led to the ordinance being withdrawn. And thence to Laloo Prasad Yadav, former Chief Minister of Bihar, to be jailed for five years for stealing money meant to feed cows (India's sacred animal) and to lose his seat in Parliament. Though Rahul later regretted, under advisement of his mother, the use of the term 'nonsense' as being too harsh, after a close examination of the Oxford English Dictionary, one can conclude that it is not. There are, in fact, far harsher terms that could, and should, have been used to define an ordinance that was so illbegotten and so out of touch with public sentiment. I doubt, though, that my editor would permit me to mention them.

This article also points to the fact that the Government was fully in the know of the misdeeds at NSEL but did nothing to control them. This suggests vested interests, criminal mismanagement, and culpability. If its intentions were honest, the Government would act faster and against the culprits not the victims.

Not only is the Government slow in acting against the culprits in the case of NSEL, but the contrast of its actions in the case of Sahara is quite illustrative of its bad intent.

The two cases are fairly similar.

Just as NSEL fell between regulatory cracks in which SEBI, which is more able and qualified, distanced itself from the burden of regulating a commodity exchange and FMC, the designated regulator, slept on the job, so also the Sahara companies fell between regulatory cracks of RBI and Company Law Board and SEBI. When SEBI sought to block two Sahara group companies from raising money from more than 50 investors without a Prospectus to be cleared by it, the group obtained a stay order and nonchalantly continued.

Both appear to have political backing and events are moving in line with political currents. But now the Supreme Court has ordered Sahara to pay some Rs 21,000 crores to SEBI or to provide a bank guarantee for it. However, in the case of NSEL, it has taken no visible action to chase, and recover, the money by following the money trail. It has not filed any case against the group as it has in the case of Sahara.

This, again, is evidence of mala fide intent.

In global events, the US Government shut down after bickering amongst political parties compelled it to. The shut down will have lots of economic, and other, consequences, some of which concern investors. For example, the USSEC will not have the manpower to go through the filings made by companies, which can pave the way for financial frauds. Reduced border control manpower could mean infiltration by immigrants or, worse, terrorists. Tourism would be hit as over 400 parks are to shut down.

Funnily, stockmarkets did not collapse after the shutdown! Investors are mistaken in believing that the shutdown enhances the chances of a delay in the tapering off of the Fed's bond buying programme. One fails to understand how, if the debt ceiling has been hit, and is not raised, the Fed can continue with it.

The BSE-Sensex gained 188 points last week to end at 19,915 and the NSE-Nifty added 74 to close at 5,907.

So, where now?

Domestically, five states are going to the polls from end November and results would be declared on Dec 8. There is, thus, political uncertainty, which investors abhor.

Globally, the world's largest economy is on the verge of a debt default on Oct 18, if the debt ceiling is not raised. The Democrats insist on retaining Obamacare in the current form as it is the President's biggest legislative achievement. The Republicans want it to be entirely reviewed as they feel it would be more expensive and add to the nation's woes. The situation is like two F1 drivers staring into each other's eyes to see who blinks first, instead of concentrating on the cliff that looms ahead. If the US is downgraded, there would be global consequences. Asset bubbles in equity, US Government bonds and in real estate, would start to pop.

It is not inconceivable that the US does what Cyprus did. That is to compel a haircut on all bank deposits of, say, 30-40%. Investors should know that, as per global laws, the money deposited by them in a bank belongs to the bank and not to them. The investors become unsecured creditors of the bank. The banks lend the money, and, if they make huge losses in such lending, can legally compel a haircut on depositors.

Let us see if the Government belatedly senses public opprobrium and starts to protect victims, or whether it continues to live in its make believe world that everything can be brushed under the carpet and that investors, voters and consumers can be perennially fooled.

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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Equitymaster requests your view! Post a comment on "Coalition politics and the economy". Click here!
8 Responses to "Coalition politics and the economy"
Gandhi Pankaj
Oct 8, 2013
In the contry no body is allowed to work sincerely thats the motto of Administrator. Their malafied motive should be satisfy by ensuring monitory gain. Let that fellow go to hale. No body bothered.There are so many exmpls available to produce before you,but useless to tell. Like 
Tikam Patni
Oct 7, 2013
The other apt name for Coalition Government is Miljul Kar Khao Sarkar.

The only way to stop this nonsense is to bring about following electoral reform :
1) All party candidates must be asked to merge/combine and create a pre poll coalition of two political parties before the elections.
2) Post election coalition is an outright fraud and amounts to cheating the voters.
3) The winning party coalition will rule full term . Issues may pass or fail, but the Govt will continue.
Like 
rj
Oct 6, 2013
Mithun is correct.
In the US the banks are the mafia and the fed aids them.
The mafia as gone legit. And Chase is willing to pay 11 billion dollar fine to stay out of jail.
Obama has no hair for him it is ok to give haircuts to others.
Like 
madhavankutty
Oct 6, 2013
I also made a comment two months back about coalition government in center or state it will ruinedthe economy of the nation why people are interesting to split the politics
of greediness and it will increase exploitation then public will suffer.Mr RahulGandhi made good step to rout out the criminals from the Indian Politics while widrowing the ordinance up to some extent. Now people of each constituency should take care to select proper sincere and honest citizen for the post of Panchaysth members,municipal counclers, MLAS and MPs.They must be competent enough to govern the countery.
Like 
madhavankutty
Oct 6, 2013
I also made a comment two months back about coalition government in center or state it will ruinedthe economy of the nation why people are interesting to split the politics
of greediness and it will increase exploitation then public will suffer.Mr RahulGandhi made good step to rout out the criminals from the Indian Politics while widrowing the ordinance up to some extent. Now people of each constituency should take care to select proper sincere and honest citizen for the post of Panchaysth members,municipal counclers, MLAS and MPs.They must be competent enough to govern the countery.
Like 
Mithun
Oct 6, 2013
A couple of points here.......

1.NSEL fiasco.
It is only now that the EOW has chosen to freeze the bank accounts of Jignesh Shah & co-as per the proverbial "Locking the stable door after the horses have bolted".

This fiasco has parrellels in other events that occur in our country such as:
Whenever a building collapses and people die,the local municipality suddenly rises up and declares that the building did not have a sanctioned plan or was built in violation of the by-laws.and there ends their responsibility.The occupants are blamed for failing to ensure that the builder had all the necessary permits/approvals etc.
2.Cyprus
Cyprus incurred the wrath of Putin when they announced the haircut because most of the depositors of Cypriot banks belong to the Russian Mafia.The golden rule is-YOU DON'T STEAL FROM THE MOB.
In the US,it is the banks themselves who are the Mob who are being "bankrolled" by the Fed!
Like 
Sivaprakasam P.
Oct 5, 2013
Then why
cant u blame
voters for
split
verdict
resulted in
coalition
govt?
Like (1)
LOVEPAREEK
Oct 5, 2013
A VERY WELL WRITTEN PIECE...AS ALWAYS. TNX SIR FOR THE SAME....THE LAST PARAs RAISE A CHILL...IF (RATHER, "WHEN") THE HAIRCUTS START HAPPNING IN US, THE CONSEQUENCES WILL BE NO LESS THAN A GLOBAL MELTDOWN. WHOA! ROCKING DAYS AHEAD. Like (1)
  
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