UPA II has the Sadim touch - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
UPA II has the Sadim touch A  A  A

20 OCTOBER 2012

In Greek Mythology King Midas asked for, and received, a boon, with which anything he touched turned into gold, much to his later chagrin when, upon embracing his son, he found him to have become gilded.

The UPA II Government has the opposite, or Sadim touch, and anything it has touched has been converted from gold into an ordinary thing.

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Consider the things India used to consider as success stories of its economic liberalisation.

The telecom sector had been hitherto touted as one such success story. India had one of the lowest telecom tariffs in the world, which enabled a phenomenal 929 m. mobile telephone subscribers to avail of the ability to be communicated at any time. The low tariffs thus enabled the inclusion of weaker sections of society into its economic growth. This now has the potential of giving the weaker sections banking access, in areas where brick and mortar banks are unviable. Not only were tariffs amongst the world's lowest, but some telecom companies were profitable enough to spread globally, such as Bharti.

Along came UPA II, with its Sadim touch, and the sector is in danger of being ruined. First was the misuse of Government powers, under erstwhile Minister A Raja, to allocate scarce spectrum cheaply. The Supreme Court had to step in and cancel telecom licences granted for various circles, perhaps including some genuinely obtained.

Now there are two more nails being driven into the telecom sector coffin. First is talk of 'refarming' of spectrum by compelling them to forfeit the spectrum allotted in the 900 MHz band (which will then be re-auctioned to raise more money), and replacing it with spectrum in the 1800 MHz band. For telecom companies using the 900 MHz band, this is estimated to involve an additional capex of Rs 100,000 crores. Should they prefer to re-bid for the 900 MHz band, this is expected to fetch the Government Rs 150,000 crores. In effect, this is like getting the dead golden goose to lay eggs again!

The second nail being driven is to charge for spectrum held in excess of a limit decided by the Government. Now there is talk of charging for this excess retrospectively, from July 2008.

Only a handful of companies are going to bid for the spectrum released by the cancelled licences, thus the auction cannot be expected to generate the windfall gains the Government is expecting.

Without a doubt telecom tariffs will rise and this will impact the marginal consumer, i.e. those at the bottom of the heap. A Raja, meanwhile, has been appointed on a Parliamentary Special Committee!

The telecom sector has been given the Sadim touch by UPA II.

Another sector which was often touted as a success story was that of civil aviation. There were plenty of domestic airlines, including low cost carriers, and plenty of competition throwing up low fares. Now, Air India is on life support system surviving only because of Government largesse. Were it in the private sector it would have folded up, as is the case with Kingfisher Airlines. The fate of Kingfisher is unclear and is causing a severe shortage of flights and a hike in airfares. It is on the verge of losing its licence.

The FDI limit of 49% is not enough to attract foreign carriers to come in as partners, at least not Emirates, according to its CEO. He bemoans the absence of enough landing rights for which airports like Delhi have the capacity to handle and without which they have to hike their usage fees. So the civil aviation sector has also had the Sadim touch.

Another success story is that of the IT sector, including software and BPO. It has provided the largest number of jobs, has generated huge foreign exchange revenue, and has made India a global leader in the field. Despite this, the IT Department, in its quest for revenue, has argued against tax exemption, on the ground that when software engineers go abroad, it is a case of body shopping and not of software exports.

It has now frozen some Rs 900 crores of fixed deposits of Mahindra Satyam, on the grounds that the amount is the result of illegal activity (the erstwhile Satyam management had apparently routed bank finance via several dummy companies). This is welcome, and the IT Department should similarly freeze the illegal gains of all the politicians, whose shenanigans are daily news.

This sector has not, as yet, succumbed to the Sadim touch.

The oil & gas sector was also considered to be a kind of success story, after large finds of gas in the KG basin by Reliance, Oil and Natural Gas Corporation Ltd. (ONGC) and others. However, it is now mired in controversy, thanks to the way the production sharing agreement has been structured. In order to encourage bidders, the Government agreed to allow them to first recover some 2.5 times their capital investment, with operators getting a larger share (and Government getting a lower share) of revenue until such time as the 2.5 times capex was recovered. The dispute is now over whether this structure encouraged gold plating, i.e. a claim for a higher capex than was warranted. Due to this, RIL for one, has severely curtailed its capex and its gas output has sharply fallen. It wants gas prices, fixed at $4.2 /unit, to be raised; they are due for review in 2014.

No foreign companies are willing to bid for the next round of NELP blocks, given the uncertainty. So, in order to encourage them (the business is hugely capital intensive and very risky, so there are few domestic players such as ONGC or RIL who are capable of entering it), the Government is now contemplating exempting their accounts from CAG audit.

This is ironic, for the Government seems to be wanting to do just the reverse in the case of power companies! It wants to appoint an inspector, with blanket powers, to approve plans and expenditure, in order to make all input costs a pass-through.

This is what happens when a Government tweaks rules to suit its momentary convenience. For example, Securities and Exchange Board of India (SEBI) is now recommending that QFIs (qualified foreign investors) be exempt from filing returns, in an attempt to encourage more foreign investment from retail investors. What will happen is that this would become yet another conduit for round-tripping of Indian money, which would be hot money by nature. This will lead to increased volatility.

The oil and gas sector has received the Sadim touch.

Another plus point for India was the advantage of a young population, also called the demographic dividend. However, the Government has failed to properly feed its people, and the resultant malnutrition would result in the demographic dividend turning into a bounced cheque.

The power sector saw a huge amount of capacity buildup, to meet the growing energy needs of India. A lot of the capacity is now lying idle, for want of coal, which is still a Government monopoly. A few years ago the Government offered coal blocks in auction but, as happens always, greed overtook prudence, and the blocks offered became instant lotteries for the successful bidders, the criteria for selection of whom were the depth of their pockets, rather than their experience. It was only after the CAG opened up this can of worms, that the Government is now set to cancel the allocated coal blocks.

The coal sector thus received the Sadim touch.

Vedanta Aluminium set up a 1 million tonne alumina refinery in Odisha, a state with rich deposits of bauxite, and armed with an agreement from the State agency to supply it. The agreement was nullified by the centre, and the refinery is going to shut down. What a waste of assets!

In corporate news, the IT Department is taking to court Vodafone, in another case, not the earlier tax claim for capital gains. Vodafone got a scheme of transfer of its passive assets like telecom towers, to a subsidiary, approved by the Gujarat High Court, prior to its spinoff, in an IPO, to release funds. Several other telecom companies have done this. The IT Department now wants to slap a capital gains tax on Vodafone on such a transfer.

The Supreme Court has asked SEBI to pursue action against two Sahara group companies who have not complied with the directions given by it. SEBI is to recover Rs 24,000 crores from two private Sahara group companies in order to refund it to investors. One wonders how such a huge amount could be recovered.

Over the week the BSE-Sensex added 7 points to close at 18,682, and the NSE-Nifty added 8 to end at 5,684.

The market seems to be consolidating, and will attempt to break through the 19,000 sensex level, with another 1,000 points to add, if it does. It is, essentially, a liquidity driven rally based on FII inflow. Foreign investors have been enthused by the apparently revived enthusiasm for economic reforms. Their confidence could be as easily shaken, and the rally could then dissipate as swiftly, were there to be more exposes. This is likely, given the State elections in Gujarat and HP which are round the corner.

Also round the corner is the opening of the winter session of Parliament, when the opening up of FDI in insurance and banking would have to pass legislative muster. The pot is churning. Prudence is the better part of valour, and investors ought to lighten their commitments.

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 "UPA II has the Sadim touch"
Oct 22, 2012
are you justifying the funds collected by Sahara which most of the indian media has done by keeping silence in this matter. Like 
Oct 22, 2012
Excellent research. Frankly the problem of india today is control. But one important thing is that instead of politicians it is the bureaucracy which always try to make politicians make such policies which suits them. Like 
Parimal Shah
Oct 21, 2012
The eyesore to politicians was that the IT and the telephony sectors did very well and did not enrich the politicians - so the moment government started to interfere - the sectors began loosing and the politicians became richer. No rocket science this. Wish all the politicians are tossed in the Arabian sea to reclaim our freedom from corruption. Like (2)
Hasit Hemani
Oct 20, 2012
First of all Oxford Dictionary people will be indebted to you for coining the new word Sadim touch. Now the system and tradition of the govt bureaucrats and ministers', to spring half cooked, selfish and shrouded policy decisions of far reaching consequences without any public debate or knowledge to the related industry or service sector should be stopped. It will prevent any hidden and unholy deals between unscrupulous officials and business firms at the cost of national interest.The mind set of the political leaders should be changed that they are not the rulers like the Britishers but public servant and answerable as well as accountable for all their actions. Like (1)
Oct 20, 2012
Mulraj is hand in glove with businessmen . corruption is protected by people like him by criticising the govt. and praising mittal and vodafone owner for tax theft. dont indulge in these activities else prepare for case of maligning the govt. and shielding the corrupt businessmen. You are not giving me to have my voice on the web else your tactics will fail .I am equitymaster subscription holder and now thinking of getting out of this bogus website always justifying the misdeeds of corrupt businessmen. Glorifying the corrupt businessmen is also a part of corruption Mr. Mulraj. You are not even a normal Indian. Like (1)
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