Biggest threat to India story is poor public governance

30 OCTOBER 2010

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Whether in totalitarian Russia or in democratic India, political leaders are wont to disabuse power and to live in a world of their own. This is the biggest threat to the India story, one that was highlighted by several shenanigans. Luckily for democratic India, we still have some institutions and some people who are bold enough to point to these scandals.

One of the recent scandals is the over-construction ot (31 floors instead of the permitted 7) and illegal allotments to (those connected with the armed forces and politicians) of a building in Mumbai originally intended for widows of the Kargil martyrs. The sympathy evoked for such widows is misused to get exemptions for illegal construction and allotment, one of which was to the mother in law of the State's Chief Minister who, according to his definition, was not a relative, although SEBI would tend to disagree. Or take the case filed by trustees of a temple against Mrs Narayan Rane for taking over its land. Or the fact that a Supreme Court judge needs to ask the Government of Manmohan Singh, with his reputation for impeccable honesty, why Telecom Minister Raja is still in office.

Let's face it; the political class is not likely to govern itself. The only hope for a change for the better lies with the electorate, which is why the forthcoming elections in Bihar, where Nitish Kumar is fighting on a platform of effective governance and not, as hitherto, on the divisive planks of caste, creed and religion, assumes such importance. Should he win it would send a strong signal to political leaders that the electorate is more concerned about good governance than the divisive factors behind which incompetence and poor leadership has hidden.

The ability of corrupt politicians to leech the economic lifeblood arises thanks to the good performance of the corporate sector, both public and private. More of the latter, because the same politicians often do not permit the public sector companies the freedom to take independent decisions. A classic case in point is that of ONGC, whose net profits for the quarter to Sep were up 6% because the subsidy burden it is forced to assume, was up 14.5% and because it has had to pay Rs 466 crores as Cairn India's share of subsidy even though ONGC owns 30% of the block, under a deal signed by the Ministry of Petroleum.

Corporate results of 281 companies for the Sep quarter showed a 21% rise in sales, a 16% rise in operating profits and a 23% rise in net profits. Thus ONGC's 6% rise in net profits is far below average, but needn't have been had it not been foisted with a burden which is not its. Interestingly, of these 281 companies, there are 15 companies which form part of the Nifty 50 stock index, in other words, the large caps. Their sales were up 18%, OP was up 10% and NP was up 17%, all growth rates lower than the 281 companies. This suggests that the companies outside of the Nifty (or, indeed, the sensex) are performing better!

Another example of Government action affecting companies is in the stunting of growth of public sector banks, thanks to its insistence on retaining a majority control over all of them. As a result, none of India's banks are amongst the top 150 banks in the world, by market valuation whilst the top 3 banks are all Chinese. This is already impacting India Inc's ability to aggressively grow inorganically; consider that it was only SBI that gave Bharti $1 b. line of credit for its $ 8.5 b. acquisition of Zain. The Government fears that the financial sector's stability will be undermined if it were to allow its holding to go below 51% in 19 PSU banks. That is a false fear; it could quite easily secure the financial sector's stability by retaining a majority in 2 or at most 3 banks and letting the others free.

PSU banks, by and large, have performed well, barring Union Bank, whose net profits slipped 40%. In terms of net interest margins and return on average assets, PNB leads with a NIM of 3.99% (truly salivating for its competitors) and a handsome RoAA of 1.36%. All PSU banks have NIMs of over 3%, which is creditable, given that they are compelled to deposit a portion of their deposits in Government securities where it would be lower. Their return on assets are also higher than global banks, which are happy to get a 1% return on assets; as and when these banks grow to global size this can be expected to fall.

Results of companies in core industries are poor; Grasim, a large cement manufacturer, showed a 58% dip in net profit and SAIL, the largest steel producer, a 34% dip. Sales of both cement and steel were up around 4% in the 6 months to September.

In corporate news, RIL will hit its peak gas output, of 80 mmscmd from the D6 field, this year. Usage of gas as a feedstock in fertiliser production, instead of naptha, can help eliminate fertiliser subsidy, thus bringing the fiscal deficit further under control. To the extent that gas replaces crude oil, it will help bring down India's import bill; 70% of our crude oil is imported. India's trade deficit for September is the lowest for the past six months, as imports have fallen, and perhaps increased gas production is a contributory factor. Essar is in talks with Egypt to build a $ 3.4b refinery there.

BSNL is planning to float a $3.5b. tender to add 40 m. lines; earlier tenders were aborted on legal challenges, stunting its growth at a time when other private sector players grew full steam ahead. It has one of the largest workforces, many opposed to privatisation; hopefully the success of the Coal India IPO would cause a rethink by employees to the privatisation process.

There needs to be a serious rethink about the reservation for FIIs in such IPOs. FIIs like Goldman (in Orient Green), Citi (in Indsolar) and others have sold the stock on the day it was listed, for a quick gain. The higher reservation kept for FIIs is in order to have a base of long term investors. In that case, either the reservation needs to be reduced, in favour of a higher one for the retail investor, and/or there needs to be a mechanism to prevent such flipping. FII's plonk only 10% on application, unlike retail investors who put down 100%, and can thus bid for a higher quantity, just to flip on day 1. Perhaps they, and the high net worth individuals/domestic companies, should be subjected to a 30 day lock in.

Last week the sensex declined 129 points to close at 20032 and the Nifty fell 48 to end at 6017. On Nov 3, the US Federal Reserve is meeting and may decide to go in for a round of quantitative easing. Mark Gilbert, a columnist for Bloomberg, opines that use of an untested tool like quantitative easing is akin to a surgeon telling the patient he is not quite sure of the size of scalpel to use to perform the surgery.

The amount of money pumped in by developed economies to save their own, is going to result in consequences in terms of inflation and bursting asset bubbles, at some point in future. For now, though, watch how aggressive is the quantitative easing. For the Indian stockmarket has been booming on the back of FII inflows; at $6.11b in October it was the highest monthly inflow since they first came in. This may well continue even if quantitative easing is not aggressive because the end owners of capital such as the pension funds, are allocating more to emerging markets. The returns generated by their assets is insufficient to meet their liabilities, requiring more funding which the American states cannot afford. So the India story looks good provided our political leaders do not continue to behave as if the world owed them a living. Therein lies the tale.

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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13 Responses to "Biggest threat to India story is poor public governance"


Nov 3, 2010

Biggest threat to India story is poor public governance

I wish to offer my comments as under on Straight from the Hip Dated 30th Oct 2010 :

(1) About PSU Banks :
I'm not sure if Banks in Private sector alone can do good to the economy. Look at the banking behemoths of the world now, after the meltdown. There are fault lines at a very basic level there that the meltdown exposed. In my humble understanding, Allen Greenspan reduced interest rates hoping that is the way to achieving what Bill Clinton also said : to make people move away from social security to work, so productivity improves. Greenspan had relied on his understanding that Banks were best capable of protecting their own equity and that of their share holders and that his hands-off approach was faultless as it had worked for him for over forty years. He admits to his flawed model in his admissions to the Congressional Committee on Oct 23rd 2008. (See this link “...I made a mistake in presuming that the self-interest of organisations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms ... I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works. I had been going for 40 years with considerable evidence that it was working exceptionally well. The overall view I take of regulation is, I took an oath of office when I became Federal Reserve chairman. I'm here to uphold the laws of the land passed by Congress, not my own predilections."

(Greenspan's predilections were the “hands-off” approach and, presumably lower rates to spur growth).

Speculation in all markets boomed. Money begetting money is speculation. It is not productivity when it fails to function as a financial intermediary between capitalists and entrepreneurs When easy money is available, perhaps housing and real estate gives the maximum returns with minimum asset depreciation. Speculation here, in combination with opaque derivatives that got over-leveraged, led to the famous “irrational exuberance” that Greenspan warned the markets against. He could do little to stop it at that stage, perhaps, in keeping with his model. I don't know. The point I am making is all Banks joined the band wagon of quick profits through highly speculative deals in instruments of such doubtful financial integrity that Warren Buffet rightly called them “weapons of mass destruction”. (I now call them “weapons of mass instruction” since huge masses of people have now probably learned that shortcuts to wealth through casinos of gambling calling themselves Banks could be as costly as their counterparts in Las Vegas or Reno, where the glitz and glamour hide many a cruel croupier who rakes in your years' savings in a few spins of the roulette).

No Public Sector Bank in India had any loss worth mentioning like their counterparts abroad. India's fortuitous 'lethargy' in 'developing' its Banks in line with international banking 'mores' perhaps saved our fragile economic growth. Now there is a lot of thinking in developed economies that robust control and oversight or regulation of Banks, including top executive pay and bonuses, is a sine qua non for avoiding the kind of economic calamity we are seeing there. In fact, no-nonsense appointees of Governments are already there on the boards of bailed out Banks.

I'm not for a moment suggesting that our PSU Banks are par for the course. They are abysmal in efficiency and return on capital, barring a few. What needs to be done is to make them more professional in customer service, loans and recovery and spread accountability for all that across the board. It is not impossible.

Actually, what is happening now in huge behemoths like Citibank could be a case study for us. They're repaying their bailouts with interest, pretty fast, I'd.
say. UBS advertises in WSJ day after day “we will not rest until.....we change what needs to be changed...what is good becomes better....etc. etc....until then, we will not rest.”

Alas, will our petty MLA's and MP's who meddle in Banks and loot their money by crony capitalism and influence-peddling ever allow such professionalism? Even if they do, our Bank officials would feel like babes in the woods because they are not used to exercising professional autonomy, without a 'godfather' in the corridors of power.

What is the remedy? Take away the Banking Ambudsman. Bring all Banks under the Right to Information Act. Abolish the Department of Banking, under the Ministry of Finance so that no under or upper secretary tells a Bank Chairman “give so-and-so this loan or off with your head”. Appoint professional directors of known integrity and experience to represent the Government's interest on the boards of the bank. Stop Babus' interference in banking completely.

Where there is a will, there is profit and growth of a healthy kind.



Nov 1, 2010

To compare India with China is a joke. Chinese government is a far more organised entity than most indian private sector firms, forget the state. Agreed that a communist regime does offer that reduced beaurocracy at some cost to freedom values. But in a country where freedom is akin to "free for all", not sure how can we justify our existing governance model.

I am of the strong opinion that we need to have a constitutional reform with respect to our government model. Parliametary system of government creates layers and layers of beaurocracy making decision processes non-transparent and prone to corruption.

A presidential form of government both at the federal and the state level will reduces party affiliation influence during elections and should spring up new contenders with genuine interest in framing better public policy.

I sometimes wonder, if the Internet revolution hadn't happened, what would have been the poverty level in India. People who think that economy can continue to receive positive shocks like that are fooling themselves. Without the internet revolution, India would have been far poorer but China would have still been performing well.

India story is not sustainable unless we make radical changes.



Nov 1, 2010

Manmohan Singh is overrated both an Economist and PM. What is the use of "impeccable honesty" if you turn a blind eye to the corruption around you by your own colleagues and does not have the inclination or the perhaps the power to act against it. If a PM is so helpless then we have no hope


c ferrer

Oct 31, 2010

I fully agree with the columnist that politicians are hungry, unscruplous and are fraudsters. For the common man to increase his capital by 100 pct he requires judicious struggle for 5 years at least; for the politicians it requires just one term to multiply his capital 50 times- see the son of the late CM of Andhra, see the ministers of the Karnataka Govt(mining on Govt land, see the owners of 65 pct of the educational institutions that have sprung up over the last 3 decades(capitation fees zindabad),see the Adarsh scandal, see the CWG racket, see the landgrab in all cities by politicians.
India is heading for not an economic revolution ( as only 6 pct are benefitting) but a bloody revolution by the aam admi against the rich and the corrupt.
Beware everyone.


Tikam Patni

Oct 31, 2010

In any family / society /country institutions are conceived ,built and nurished by leaders who are the products of written or unwritten constitution.

Thru elections the Indian constitution prescribes transfer of citizens power thru votes to certain individuals. In the process. the citizens after this transfer become powerless and the recepient becomes powerful.

Truely in India the democracy which the constitution is supposed to protect, dies on the day of election.

It is time, the constitution is rewritten taking the present realities in mind. At the time of the writing the present constitution, Nehru thought that he will always be the PM with Sardar Patel always the HM.


sn malhotra

Oct 31, 2010

The role of natural gas in allieviating India's energy problems and reducing its foreign dependence has been well highlighted.In this regard it would enlighten readers further to summarise in these columns the PICKENS Plan mooted by billionaire Pickens to secure Americas energy needs and make it independent of oil imports from middle east countries.There may be some valuable points in the Pickens Plan for India's energy planners to emulate.



Oct 30, 2010

Dear Mr.Mulraj,
You are right to point out the corruption that afflicts our Goverment and Politicians alike. Neither party is free from it. However you appear to have a pretty strong bias in favour of the private sector somehow exempting them from the disease that in my observation and reluctant judgement, runs through the viens of all India like an uncontrollable cancer.
In fact I would go far enough to say that the evils of the private sector, exemplified in the case of the Commonealth Games and the Inian Premier League fiasco show India at its greedy worst, with the rich, the noveau riche, and the upwardly mobiles, ready to suck the blood out of India's reputation and its emerging standing in the world, in order to satisfy their lust for money.
And look the conditions in which the poor workers at the Games were living. Utterly disgraceful.
Instead of trying to making political points on behalf of the private sector we should all sink our heads in shame at the two nation state that we have created.
One showering itself with often ill gotten affluence and wealth enjoyed by politicians, bureaucrats, and corporate bosses alike, and the other 60% of the country living in poverty, squalor, unacceptable deprivation and suicide.
It is no use the Army Commander or the Minister's mother in law giving up their flats. They(the Minister) should both be hauled in front of the criminal courts and made examples of. Only then will India begin to learn a few lessons.


Dilip A Shah

Oct 30, 2010

You have very nicely analysed the situation and let us expect that with a renowned economist like Dr. Manmohan Sing, this will not go unnoticed.
Your observatin regarding reservation in IPOs for FII and their making money is worth noting. Can it not be solved by keeping a certain time frame of 2-3 years for minimum holding period as is prescribed for promotors.



Oct 30, 2010


It is a resourceful article throwing light on obstacles in the growth story of our country. We request you to throw light on more and more hidden truths.



Om Prakash Sharma

Oct 30, 2010

Dear Sir,
You rightly hit the bulls eye. But, Are they listening. Even the public is not willing to take a sane advice. Let's see what happens in Bihar!

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