Discretion is the better part of <strike>valour</strike> failure - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Discretion is the better part of valour failure A  A  A

26 OCTOBER 2012

Economic liberalisation in 1991 ushered in fresh air, as entrepreneurs were freed of the shackles of discretionary bureaucratic controls under the licence-permit raj. Indian entrepreneurs responded well, and built companies that could take on the world, belying the fears of many doomsdayers. World class institutions were built in IT and IT services and in mobile telephony amongst others.

Yet the Government retained too many discretionary powers in the hands of politicians and the bureaucracy. The scams that we have been witnessing are a consequence of a misuse of that discretion. This misuse is the main reason for failure of governance, as witnessed in the mis-allocation of telecom spectrum or of coal blocks. And now, it transpires, of land.

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The remark, last week, by Congress spokesperson, Mr Digvijay Singh, that the Government has evidence of graft against the kin of opposition leaders, Advani and Vajpayee, but has refrained from using it due to political proprieties, is very disturbing. For this is a brazen and public admission that we live in an animal farm, where some people (top politicians and their kin) are more equal than others.

This only implies that for political leaders of all parties "governance" does not mean going after those who evade the law (by Singh's own admission they have evidence of graft against kin of opposition political leaders but have not used it) but instead means filing away proof of misdeeds until they need to be called upon as a weapon of counterattack.

That's an example of discretion being the better part of failure, of governance.

Several scams are happening because land records have not been made transparent and a lot of discretionary power vests with the bureaucracy to alter them. Whether it is the kind of discretion that allowed illegal buildings to come up (a la Adarsh Society in Maharashtra) or the sort that allows people who can sway use of discretionary powers to their pecuniary advantage, or the ability of some to get agricultural land converted to non agriculture use thereby boosting its value, or discretionary power to change the category of land reserved for certain usage, or whatever.

What needs to be urgently done is to have electronic land records which are transparent and which do not give anyone an advantage simply because of an ability to be able to use the discretionary power. Some states are moving towards this, such as Karnataka and Gujarat.

The discretionary powers are supplemented with supervisory capabilities but often the supervision is lax. Several scams have pointed to the laxity of supervision. Thus two private companies in the Sahara group were able to collect some Rs 19,000 crores from some 22 m. investors, through an issue of optionally fully convertible debentures (OFCDs) despite it being illegal to invite more than 50 persons to subscribe to them, without issuing a prospectus. The issue slipped through a regulatory crack between Ministry of Corporate Affairs and Securities and Exchange Board of India (SEBI), and was aided by a stay order by a court in UP. The Supreme Court has belatedly asked SEBI to verify the names and addresses of the 22 m. investors, many of which seem, prima facie, to be fake. This suggests a regulatory failure.

Crooked people, whether in the public or in the private sector, have found ingenious ways to legitimise bribes. Some float private companies, and sell stock in them at hugely inflated prices (which is the bribe) completely unjustified by any valuation norms. A few years later the transaction is reversed, and the crooked people buy back the shares at, say, 1 % of the price at which they sold them. Why is it not possible for the IT Department to investigate this? Is this also an animal farm?

If resources are thus salted away by privilegentsia, it is little wonder that the fiscal deficit runs amok, bringing with it the threat of a downgrade by rating agencies. Finance Minister P Chidambaram is seeking to rein in the fiscal deficit to 5.3% of GDP, relying on raising Rs 40,000 crores by sale of spectrum, Rs 30,000 crores from disinvestment of stakes of public sector companies, higher dividends from public sector companies (they have been asked to either undertake capital expenditure or distribute the dividend, even if their management wants to retain bank balances to invest a year or two later) and austerity measures.

In corporate news of interest, Oil and Natural Gas Corporation (ONGC) is reportedly in talks with RIL to hire the latter's unused assets in the KG basin. Gas production the Reliance Industries Limited (RIL) fields has fallen due to geological factors rendering surplus assets.

Last week the BSE-Sensex closed flat week on week, to end at 18,625 and the NSE-Nifty closed at 5,664.

What now?

There are news reports that Rahul Gandhi may be inducted into the cabinet this weekend and other younger politicians like Jyotiraditya Scindia and Sachin Pilot, elevated, to present a younger, more forward looking, cabinet. The Prime Minister is also expected to announce further economic reforms in the coming week, which will boost sentiment of foreign investors, with excess liquidity to invest.

The ongoing rally is liquidity driven as the developed world is fighting economic sluggishness with dollops of money. The money finds its way into various asset classes, including stock markets. The US Federal Reserve has just announced that its easy money policy will remain until 2015, and it will continue to purchase Treasury bonds at the rate of $ 40b. a month to keep interest rates down. So, until there is a crisis, this surfeit of global liquidity will keep the rally going.

Until there is a crisis.

There are several potential crises around the corner.

One is the imminent collapse of the Spanish banking system, which will turn $ 1 trillion worh of Spanish Government bonds pledged with the ECB into junk bonds. For inexplicable reason these bonds are classified as AAA and its only a matter of time before someone will point out that the Emperor has no clothes. ECB would then demand $ 1 trillion of collateral, as the AAA bonds will turn into junk, overnight. This would be a major European crisis.

Another is the chance of riots as prices of food, especially of corn, have shot up. Some 40-50% of corn is diverted from food to energy and when global food prices rise beyond a point, there is a risk of social unrest.

The third is the risk of a conflagaration in the Middle East. Israel loudly proclaims that Iran is months away from having nuclear capability. In the third US Presidential televised debate, President Obama avers that he would not permit that to happen. Both of them tried to derail the programme by introducing a virus called Stuxnet, which made several centrifuges ineffective. Iran has countered by introducing the Shamoon virus on Saudi Aramco, the world's largest oil company. Any disruption of supplies from Saudi Aramco would result in a sharp rise in crude oil prices and an end to hopes of economic recovery. A military adventure, with its attendant retaliatory consequences, would be even worse.

The Sensex may rise, perhaps to the 20,000 level, based on liquidity flows. Caution should then be exercised.

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 "Discretion is the better part of valour failure"
Oct 27, 2012
Excellent reading!Would have been even better if the risk of Fiscal cliff the US is facing was also included, and the threat to US$ as the global trade currency. Could be done in the next issue perhaps.
shaheen mohmad ashraf
Oct 27, 2012
is producing nuclear weaopons on prerogativ of USA and ISRAEL only, one wonders.Why is ISRAEL afraid of IRAN developing nuclear weapons .WHO has empowered USA and ISRAEL not to allow any sovereign country from producing nuclear weaoponns.Second if IRAN S weaopons r potential threat , why about these two naked AGGREESORS , i mean USA and ISRAEL. Like 
Oct 27, 2012
The silence of otherwise very vocal Mr LK Advani only means that he agrees with the statement of Mr Digvijay Singh and that his own kins too are indulging in loot,like many others. Like 
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