Policy paralysis pervades the globe

12 NOVEMBER 2011

Everyone knows about the policy paralysis that has gripped India and the effect this is having on the economy. But it is a global phenomenon. Changes in leadership have been effected in both Greece and in Italy, whose Governments have taken far too much debt, and done too little to improve their nation's productivity, to warrant their continuation. The market's view of the ability of countries to repay their debt is gauged by the percentage premium demanded by investors over what is considered safe investments (which is German bonds in Europe). As the chart below shows, Greece's bonds quote a whopping 32.5% above German bunds and Portugal is over 12%. The big worry is Italy which is far too big an economy (unlike Greece, a small one) to neglect.

Source: www.chartoftheday.com

In the US too, there is a policy paralysis as Republicans and Democrats cannot agree on the spending cuts to be made, and time is running out. The Middle East has seen several regime changes and the pot continues to boil.

The policy paralysis is having enormous economic consequences. ----------------------------- Now get free daily updates on Global Economy! -----------------------------

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India's export growth in September was 12.4%, whereas imports grew 32.7%, leading to a trade deficit of $ 19.6b. for the month, double that of the previous month. Our imports are largely composed of crude oil and are, largely, price inelastic. Till recently rising price of crude oil did not translate, thanks to an asinine policy of subsidised petro products, into higher price of petrol, which would send price signals to consumers. Other petro products continue to be subsidised, for which Government controlled companies are made to pay. The three OMCs (Oil Marketing Companies, viz. IOC, HPCL and BPCL) have stated that they are running out of cash to pay for crude oil, and will not be able to operate their refineries after December.

The only petro product which was unsubsidised, and therefore allowed to shoot up, was aviation fuel. This has caused almost all airline companies (except Indigo) to make huge losses. The losses are funded by banks, which provide working capital loans, so if Kingfisher Airlines, Jet Airways, Spice Jet and others fail it would translate into problems for banks. (Air India is being injected with dollops of cash by the Government). Kingfisher cancelled several of its flights after pilots resigned and is now, unfortunately, flying the bad times.

The policy prescription here would be to permit foreign airlines to take strategic stakes in domestic carriers, assuming they would want to. But, with a policy paralysis, no one is talking of it.

A policy prescription for the dependency on imported crude oil would be to mandate fuel consumption norms for auto companies. USA did it years ago, after the first oil shock. Why should the Government not lay down fuel norms in desired kms/litre, for different segments of cars? Why should it not have differential excise duty rates for smaller cars (lower) and larger cars (higher) and gas guzzling SUVs (punitive)?

A policy prescription for dependency on imported crude would be to encourage the production of domestic oil and gas. Yet a policy paralysis prevents the sensible step of reviewing natural gas prices from the $4.2/unit, even as we agree to pay 3 times as much for imported LNG! Production of gas at RIL's KG6 basin has fallen drastically (which affects power production) but the company says it can be revived with additional investment and technology from its partner, BP.

Policy inaction and lethargy is preventing the stanching of losses at SEBs (State Electricity Boards), which continually suffer losses thanks to 'transmission and distribution losses', a euphemism to disguise theft. This cannot happen without official collusion. Now Allahabad Bank has frozen fresh loans to the power sector and other may follow. The Government has to crack the whip hard on the SEBs.

Banks are reporting higher NPAs, partly resulting from the pressure they faced to lend during the 2008-9 financial meltdown. Moody's downgraded Indian banking sector, causing a fall in stock prices; strangely enough, S&P upgraded the sector! Looking to the banking sector of other countries and the mess they have created globally, our banks are much more circumspect in their lending and are far safer.

Results of 34 of the Nifty 50 companies, for the Sep quarter show a 3 percent fall in net profits, thanks largely to the falling rupee. The rupee is falling because of the trade deficit and the FII outflow.

Tata Steel's profits have fallen 89% for the Sep quarter and Jet Airways and Spice Jet declared losses. SBI's profits were up 12%, since it took a hit in provisioning for NPAs earlier. Banks now recognise NPA (non performing assets) on a system driven basis, allowing no discretion in the recognition. One hopes someone comes up with software to determine system driven NPAs for politicians, which is where the real problem lies!

In global problems, those of Europe can easily spill over to China, whose economy is dependent on continuous growth, largely coming from exports to Europe

If the Chinese economy slows, the chances of a global recession increase manifold.

To add to the plate of woes is Israel President Shimon Perez's threat, last week, to attack Iran in order to prevent it from building a capability to make nuclear weapons.

The IAEA is to soon publish its report, which talks about Iran having made significant developments towards achieving such a capability. An attack by Israel would be catastrophic and would certainly trigger a bear market.

However, an analysis by Stratfor, on 'Iran's Nuclear Programme and its Nuclear Options' concludes that it won't happen. Iran has other deterrents, such as threatening the Strait of Hormuz, through which 40% of the world's sea borne crude passes, and the only country which has the capability to strike at the nuclear and non nuclear deterrent is the US. Given other global problems, Stratfor concludes it won't.

Last week the BSE-Sensex dropped 369 points to end at 17192 and the NSE-Nifty fell 117 to close at 5166.

One cannot be sanguine in the face of such global problems and the policy inaction and paralysis.

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 "Policy paralysis pervades the globe"


Nov 16, 2011

a very well written piece Mr. Mulraj.



Nov 13, 2011

It's time to de-regulate oil pricing completely by eliminating ALL subsidies and ALL taxes on petroleum products. That will actually bring the petrol price down below Rs. 50/liter because currently we pay about Rs. 30/liter in taxes alone. Does the government has the guts and gumption to do this?


surajit som

Nov 13, 2011

francis fukuyama wrote "the end of history" in 1992.it is time somebody writes "the end of economic policy " (or economic bluff). in america it is Wall Street(and the military-industrial complex) which are making economic policies for decades. in euro zone ,they just dont know what to do. probably they have run out of policies.they all seem to say like Louis XV of France:"apre moi,le deluge" !!(after me ,the flood !!!). what better can be expected from Third World countries ?



Nov 12, 2011

The Eminent Financial Planners are not available in the wprld to find suitable solutions. if available are not given a chance to prove



Nov 12, 2011

Hi, I just want to clarify again to the author that apart from cooking gas and kerosene, there is no subsidy being offered by Government. Almost 50 percent of the price the consumers pat for petrol, diesel or ATF are collected by the various governments as taxes. This is a criminal overburdening on one set of resources to pay for the lack of government initiatives in getting legitimate revenues through other means.
If the governments and the tax authorities stopped their corrupt means, their are enough leakages in other forms of taxation to plug the revenue gap which the governments face.
I will give some examples:



Nov 12, 2011


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