A crisis of governance - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
A crisis of governance A  A  A

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9 NOVEMBER 2013

There is a serious crisis of public governance, and the potential for a constitutional crisis cannot be ignored either. The lines of obligations, responsibilities and authority, well demarcated in the Constitution, are being blurred, with each wing of Government, the legislature, administration and judiciary, stepping into each others' turf. Combined with a lackadaisical approach towards governance, this bodes ill.

Consider a recent judgement of a High Court in Gauhati which declares the CBI (Central Bureau of Investigation) to be illegitimate. According to the judgement, which the Government is rushing to the Supreme Court to challenge, the CBI has not been legislatively created properly and hence not a legal organisation! This would mean that, until this is resolved, all pending cases and investigations would be kept in limbo, including the several scams that have surfaced in the past two terms of the UPA Government, as also the ones before that. Who knows, perhaps those already investigated and convicted, such as Laloo Yadav, may file for a review if CBI is declared illegit.

In the telecom spectrum allocation case, the Supreme Court passed a judgement that all future allocations of public property had to be done only on the basis of open auction. This seems like a case of judicial overreach, with the judiciary stepping into the turf of the legislature, in deciding policy, and the executive, in implementing it. The fact that spectrum auctions have failed thereafter, largely due to the unviably high reserve price for spectrum, indicates the folly of such a mandate, and the need to have a well thought out review of it.

The quality of Parliamentarians has also, sadly, declined over the years, with a lot of criminality creeping in, something which the Supreme Court has also intervened to attempt to stanch.

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Administrative procedures are also being, sadly, overlooked. It is this lapse that has allowed the Gauhati High Court to state that the CBI is illegitimate. Somebody, somewhere, simply forgot to properly notify its creation.

Just like somebody forgot to, for example, properly authorise and empower a regulator for scam hit NSEL (National Spot Exchange Ltd), by allowing an ordinance issued in 2008 to lapse. Jignesh Shah is to use this as an argument. This is rubbish. It is like someone saying that since there was no policemen guarding the street, he has a licence to burgle! He is to appear before the FMC on Nov 12 to respond to a notice why he should not lose the 'fit and proper' tag to run an exchange.

The evidence says he must lose it. The warehouses were not registered, as they should have been, with the Government authority. They were not supervised or audited, and stocks are missing. The borrowing companies were not scrutinised for solvency and were given funds far in excess of their ability to repay. As the promoter of Financial Technologies (the sole owner of NSEL) and as a Board Member, Shah has had to have full knowledge, control and authority of goings on at the Exchange, as affirmed by the CEO.

The role of auditors E&Y (Ernst & Young), whose affiliate, SV Ghatalia and Company, audited the accounts, is also being investigated.

One must study and contrast the approach of developed and developing countries in such scandals. JP Morgan arrived at two settlements totalling $19b. for 'mis-selling' products by making false claims about them. But here, when there is an outright fraud committed, the Finance Minister claims that the Government is not responsible, as the Exchange was an unregulated entity (how did you allow it to commence and continue then?) and blames investors.

Bad governance and disrespect for property rights is also manifest, for example, in the Government arm twisting publicly listed companies such as ONGC, GAIL and Oil India to pay for losses caused by Government policy of subsidising petro products, which must go into the Union Budget and not into corporate balance sheets. ONGC pad a whopping subsidy bill of Rs 13,796 crores because of this arm twisting, which is a trampling of rights of minority shareholders. Not only that, it is actually bad for the financial health of ONGC and the economic health of India. The amount of Rs 13,796 crores is money that should be used for investment to secure India's energy future, but is, instead being used for consumption now. So, instead of raising prices in order to discourage consumption, and use the funds to find more fossil fuel resources for our future, the Government robs ONGC to subsidise petro products, thus increasing consumption and thence the current account deficit. ONGC says that it has had to dip into its cash reserves and, in a few years, would not be left with any, and will start making losses.

If this is not uniquely poor governance, one does not know what is.

The bureaucratic apathy in the case of CBI's birth certificate, or in the case of FMC's continuing as regulator certificate, was also manifest in the case of Sun Pharma, India's most valuable pharma company. The Drug Controller has asked it to shut down its Mumbai bio analytical lab as it has discovered (how many years later, please tell us) that it had not been authorised by the Government.

Similarly, several decades after they were built, the BMC has discovered that several floors built in the Campa Cola housing complex, were unauthorised. What were the BMC inspectors and officers doing all these years?

The truth is that the corrupt officials who take bribes are not penalised. The stupid suckers who get conned are the victims. This is because of the perverse attitude towards property rights.

In the case of banks, it will be depositors who will ultimately pay the price. Several banks, especially public sector banks which, being majority owned by Government are pressured by it to lend to cronies. The PSU banks have declared poor results, PNB, for example, (the # 2 PSU bank after SBI) has declared a 71% drop, yoy, in profits for the Sep quarter, after a significant increase in provisions for doubtful loans. Now, if the economy does not pick up, and the loans become unrecoverable, one day it may make depositors pay for these losses. That is what happened in Cyprus; depositors lost 40% of their money overnight, on instructions from the Government.

In other news, India successfully launched a mission to go to Mars. Interestingly, a day later Mars Inc., the world's largest chocolate maker, decided to come to India!

Last week the BSE-Sensex lost 430 points to end at 20,666, and the NSE-Nifty dropped 166, to end at 6,140.

The fall was due to reduced buying by foreign investors. We have a strange situation in global capital markets. Consider the US economy, the world's largest, as a patient lying, critical, in ICU. The doctor comes out with the latest news. Consider two outcomes.

In the first, the doctor shakes his head and says there is no improvement in the condition, so the patient has to remain on oxygen supplying life support system (i.e. quantitative easing). The relatives cheer and pop the champagne!

In the second scenario, the doctor informs waiting relatives that the health of the patient is improving (e.g. in October 204,000 new jobs were created, better than expected) and that the patient may be weaned off the life support system (i.e. the taper will commence). The relatives break down in mournful ululation!

That is the state of the investment world today! It cheers when the patient remains sick, because they get more money from QE to continue buying assets and is sorrowful at any signs of improvement that could suggest a shutting down of the Fed bar.

As these columns have pointed out, the importance of money, as one of the four factors of production, besides men, material and machines, has grown preponderantly, to the neglect of others. There are three main reasons for this. One is the acceptance of the philosophy of shareholder capitalism, replacing the more benign stakeholder capitalism. Second is the greater institutionalisation of money, explained in the previous column, as a result of globalisation. And third is the digitisation of money, which is the only factor of production capable of being digitised. This enables the velocity of money to be much higher than the velocity of other factors, thereby increasing its importance.

The Economist points to this in its article 'Labour Pains' which points to the reduced share of labour in national income.

As mentioned in the previous column, the funds under management total over $ 300 trillion, which is over 3 X aggregate global GDP. The financial powerhouses have enormous clout. Last week a controversy erupted when Goldman Sachs upgraded India after 'Modi-fying' their views. This play on words on the BJP Prime Ministerial candidate chagrined Commerce & Industry Minister, Anand Sharma, who accused GS of interfering in domestic politics. GS said it is not, merely expressing investor sentiment.

It is investor sentiment, anticipating a change in Government after the 2014 elections, and an improvement in governance, that led to the markets hitting new highs last week.

Investor sentiment is an extremely important factor. This Government ought to heed, instead of fight, it. It can do so by respecting property rights and protecting victims (instead of castigating them like P Chidambaram and Arvind Mayaram have done) and by governing well. It can do so by encouraging the move to cleanse the polity of criminality and not by passing ordinances to allow it to flourish. It can do so by swiftly bringing to task culprits not giving them enough time to escape, as in several cases. It can do so by making the electorate feel that the Government is for the people and of the people.

The market is dependent for its height on foreign money which, in turn, is dependent of creation of money, out of thin air, by the US Fed, in a manner reminiscent of blowing soap bubbles. What investors must do is to remember that soap bubbles always burst.

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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6 Responses to "A crisis of governance"
Manoj
Nov 14, 2013
For a good governance across all administration we need good administrators. This will happen only when educated voters participate in the election process by voting in every election. These educated voters will hopefully have the ability to read between the lines and vote for the better candidates. The long term effect will be that once we have a set of good qualified voters, then the profile of candidates will also improve. now it (candidates) mostly consists of moneybags or scoundrels as anybody worth his/her salt will stay away from politics. This needs to change and this change can only be brought by encouraging all educated people to vote. So help in mobilizing the new VOTE BANK. Step-1:Get the voter ID card STEP-2:Know your constituency. STEP-3:know the election dates STEP-4: Know the candidates. Any suggestion is welcome. Like 
Ramesh Kancharla
Nov 11, 2013
Good article. I wish ALL the people in India who have voting rights read this article (and few others from you) and make an informed decision on whom to elect (not falling for a bottle of arrack/toddy and packet of biryani).

Regarding one of the comments about CBI in comparison of IRS - First of all why are we comparing 2 different organizations from 2 different countries whose responsibilities are totally different. If any we should compare CBI with FBI not with IRS. Even if the responsibilities of these 2 orgs are same, Is the reader saying if it is OK in US, it is OK in India too? Isn't it bit lame ?
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Mithun
Nov 10, 2013
When the markets hit an all time high,Chidambaram wasted no time in calling a press conference to trumpet the fiction of it being due to UPA's sound economic policies and what not- all on expected lines - as if the market upswing had anything to do with India's GDP performance!.It was purely due to the US fed's money printing presses working overtime and the money sloshing around the globe.
Regarding the failure of spectrum auctions,even a college kid knows that you can't sell a 2008 model car for the same price in 2013.How stupid can these "experts"get?
About CBI,well! isn't the IRS in the US also illegitimate and "Unauthorised"?.They merrily go around collecting income tax there.Seems like we are no different.
Like 
Tikam Patni
Nov 10, 2013
The sole reason for our poor governance is our electoral ans political system. When there is no clarity on Responsibility and Authority the result is chaos which is what we have.Coupled with it we have preponderance of uncontrolled electoral and political malpractices . Like 
SAKHEER HUSSAIN
Nov 10, 2013
Sir,
It was interesting to read the "Doctor and Patient" in similarity to the financial condition of the markets ! Nonsense is ruling the markets and sensible persons get confused what is right and what is wrong !
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Shankar Joshi
Nov 9, 2013
The article is absolutely frank and aptly pinpoints the issues leading to economic non-governance and the resultant crisis. It hits the nail on its head. It also rightly observes that for the investors' confidence to return to the market, the Government has to start governing and punish the culprits and cleanse the corrupt bureaucracy. But the moral of the story is it is not just the bureacracy that is corrupt. The Government itself is the culprit and is wholly and openly corrupt from the very top to bottom. How does it have the moral courage to attack corruption or punish the corrupt? Cleansing itself would mean axing itself!! Who will bell the cat? That is where the "Mody-fication" becomes meaningful as the need of hour!! Let the electrote take it on itself to do what the Government can never be expected to do. Till then, let us be sure, we will not have seen the last of non-governance. Like 
  
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