The ascent of intolerance - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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17 NOVEMBER 2012

As the economic race gets tougher, and physical resources scarcer, intolerance goes into ascendancy. The latest, and most bizarre, outburst of intolerance is in the petition by 36 States, after Mitt Romney lost the elections, asking to secede from the United States of America! It is the common market provided by the Union that gives economic growth and strength to the States and the petitions by no less than 36 States wanting secession is indicative of the deep schisms in American society.

American society is based on certain principles, all encompassed in the phrased 'the American way of life'. These include individual liberty, freedom of speech and of choice. The golden period for America was in the '60s when the entry of baby boomers (those born to soldiers returning home after the second world war with time and energy on their hand) into the workforce gave the economy a boost. The US had the technology to produce computers (IBM was a global leader), cars (GM, Ford, Chrysler were giants) and airplanes (Boeing), which other countries lagged behind, and so could charge premiums for these products which allowed the American way of life to be sustained.

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Globalisation and communication technology whittled down these advantages. First Japan, then Korea and now China and India make automobiles; France combined with Britain to make the Airbus, China bought IBM's PC business and so on. China and India, both with a population of over 1 billion, embraced globalisation and free market policies, with China doing it much earlier and thus managing to get over 400 million people out of poverty.

America needs innovative breakthroughs in order to be able to charge premium prices and so maintain its way of life and there are several fields from which such breakthroughs can appear. These include nanotechnology, which can lead, among other things, to new medicines; or robotics or genomics or biotechnology. In energy, for example, the technology of horizontal fracturing, or fracking, of shale rock in order to extract oil and gas from it, is likely to make USA the world's largest oil producer and also making it energy independent. Currently shale gas prices are so low that they are the equivalent of around $ 15/barrel crude oil price, which gives US manufacturers an unbelievable cost advantage. So one can see a bounce in the US economy pretty fast and certainly much faster than Europe, which is inflexible and not as innovative.

Until such innovations happen, the US economy can grow only if consumers continue spending, since consumption accounts for 70% of US GDP. American consumers, hooked onto credit cards, willingly spend all the way into debt, but their confidence has been shaken by the collapse of the property and stock markets, and the consequent erosion of their nest eggs. So the Government has been making it easy by printing money, calling it quantitative easing. It can't continue doing this and is heading towards a fiscal cliff on January 1st. Unless the two political parties agree on spending cuts and tax increases, there would be a compulsory cut in some spending and a compulsory withdrawal of deductions.

Part of the reason for the schism is the disagreement between the two political parties on where to draw the line between tax increases (which the Obama Government prefers) and cuts in entitlements (which the Republicans prefer). So divergent are their views that they would opt for secession rather than compromise. This is insane!

The solution would be, of course, a mix of both spending cuts and tax increases, but, given the combative mood, it is taking longer. Part of the solution would also require American consumers to consume less (have only 4 flavours of ice cream in the freezer instead of 8) and to save more. This is already happening. Part of the long term solution would also be to start raising interest rates, in order to wean the American away from excessive consumption fuelled by easy money, but this is not happening.

Globally, too, there is an ascendancy of intolerance, witness the jasmine revolutions in the Middle East. There is an interesting take on why General Petreus suddenly resigned in the post which opines that the resignation was to avert his deposition, under oath, before the US House and Senate committees, on the murder of Ambassador Stevens in Libya which could have revealed a link with Al Qaeda to arm the Syrian rebels.

The Middle East situation is volatile and now there is a risk of a ground assault by Israel in the Gaza strip, from which rockets are being fired into Israel. That would make the situation more volatile and investors more nervous.

In India, too, otherwise one of the most tolerant societies, we have several instances of intolerance. Not least of which is the intolerance towards corruption, which is excellent, provided the powers that be follow up on it. Sadly there is no evidence of that. Intolerance of bad governance is manifesting itself through various agencies voicing their opinion, be it the judiciary, which stepped in to cancel telecom licences obtained out of order in the first-come-first-served manipulated policy, or the Comptroller and Auditor General, exposing misdeeds in several fields, or by NGOs and the media. These serve a purpose of providing checks and balances and are not to be denied respect by labelling them as sensationalism.

What we, as citizens and as investors, really ought to be intolerant of, is bad governance. The UPA Government has excelled at it! Every sector that was considered a success story of economic liberalisation is now in shambles.

The telecom sector was truly a success story. We had lots of competition, we had a fairly decent quality of service, though, of course, there was scope for improvement. We had amongst the lowest telecom tariffs in the world. We had over 900 million mobile telephone subscribers. The Government was getting a fair share of revenue; consumers were getting fair service and investors a fair return. The UPA messed it up. As Telecom Minister Kapil Sibal rightly said, they killed the goose that laid golden eggs.

The success was partly based on availability of spectrum at an affordable cost (in fact initially spectrum was bundled alongwith the telecom licence). It was only when the Government viewed spectrum as a scarce resource and sought a larger bite from sale of it (either for the Government or for the Minister) that the success story started unravelling. The recent auction of spectrum, as directed by the Court, failed spectacularly, garnering a pittance of the expected revenue of Rs 40,000 crores. In fact, after netting off refunds of money for cancelled spectrum, payment made for spectrum bought by BSNL/MTNL and the option of winners to pay in instalments, the Government will get less than Rs 400 crores this year! That's just 1% of the budgeted figure!

The reason, of course, is that the base, or minimum, price set by TRAI and accepted by Government, was not grounded in reality. The Government has to learn, but will not, that it cannot dictate to the market. It is trying to do so when divesting stakes in public sector companies, ignoring the advice of investment bankers about what the market would bear. Let's see if the lesson is learnt when the auctions take place, again in March (before the year end; the Government is very desperate for revenue).

Poor governance naturally affects the economy. Thus the index of industrial production was down 0.4% in September, not a good sign. NASSCOM has reduced the forecast for growth in IT/ITES sector to 11%, down from 14%. Nonetheless, the sector would still have a revenue of $ 66b. mostly exports. This helps contain the widening trade deficit. The October 2012 trade deficit was at a record high of $ 20.8 b. It was $ 110 b. for the seven months April-October.

The high trade deficit cannot be sustained without capital inflows and leads to a depreciating currency. Since crude oil is the largest component of imports, it becomes imperative for the Government to source more domestic oil and gas.

This is where the Government is sitting on the horns of a dilemma. The largest independent producer of gas, Reliance, whose production of gas from the KG basin has sharply fallen, was given permission to drill more wells. However, the CAG wants the Government to withhold permission until RIL complies with an audit of the capex incurred by it.

The way forward would be to allow permission to drill but subject the company to the determinisation and finalisation of its capex costs, which CAG fears are gold plated.

So the UPA II has messed up the success stories in the telecom sector, the oil and gas sector, and the civil aviation sector, where Kingfisher Airlines is about to lose its licence and Air India is only surviving on financial life support at tax payer cost.

The market fell last week, as foreign investors, who are driving this rally, fretted over the impending fiscal cliff in the USA and worried over India's own fiscal deficit, now that the spectrum sale has not laid the golden egg. Not even scrambled egg!

The market is driven by foreign investors. That is why the Government has cleared QFI (qualified financial investors) norms, which permit foreign citizens to directly access the stock market, not merely via a mutual fund or a participatory note (for large investors). Their continued participation would, in turn, depend on how things shape up in the US over the fiscal cliff and how our Government starts to do what it has been elected to do, viz. govern sensibly. Both of which seem to be missing.

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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4 Responses to "The ascent of intolerance"
DR ANIL K KOTHARI
Nov 19, 2012
Excellent analysis. In fact the whole country is suffering because of poor governance. We are also making our working force lazy by giving them freebies. Sir you have forget to mention the banking sector which has huge NPAs but courtesy to CDR they are manipulating the figures. Like 
surajit som
Nov 17, 2012
america (and europe ,others) are now in the second and more dangerous phase of economic decline. because now -unlike in 2008-there is little money and options left.so intolerance will increase.we saw storm (not Hurricane !!) Sandy reduced New York and much of the country to third world level.

today we saw to billionaire brothers in delhi,the chadhas -widely believed to operate business in mafia-style -killed each other !! you talk of American intolerance !!! i hear that some are praying that Ambani brothers do that as well !!!
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AD
Nov 17, 2012
"petitions by no less than 36 States"
As I understand it is a petition by a group of people, not by the states.
However, agree that it is alarming.

Are we witnessing an empire imploding?
Like 
Amir
Nov 17, 2012
Thanks Mr. Mulraj, very interesting indeed. However, you missed mention of the peddlers of religious intolerance....

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