A question of balance - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
A question of balance A  A  A

29 NOVEMBER 2008

Less than a dozen terrorists held a city of 15 m. hostage over three days, killing 200 people, injuring over 300 and filling the hearts of all Indians with an amalgam of sadness, helplessness and anger. A lot of soul searching will undoubtedly follow; whether it will result in action to set up an infrastructure to prevent future attacks or deal with them more effectively, is a hope unconfirmed by experience. Society, as well as companies, will increasingly have to deal with conflicts and find ways to reach a balance of differring interests.

Global terror is on the rise, bringing with it a clash of personal liberties versus national security. As more incidents occur, it is the former that would yield to the latter. This, of course, would affect business. For example, in the telecom space, the strict know-your-customer norms, which insist on a proof of residence like a voter registration card or a ration card, for allotment of a mobile number, deny connections to large sections of the population living in remote villages. Yet this population is the one that can most benefit from the technological advantage of mobile banking. For mobile banking can provide them access to banking services, which the Government desires, as part of 'inclusive banking', in locations where brick and mortar branches are unviable. So the personal liberty of a phone connection succumbs on grounds of national security, denying the villager most in need of it, a banking service. Thereby affecting the telecom sector, the banking sector and, importantly, farmer productivity (the farmer would have to make several trips to the nearest brick and mortar bank to get a loan approved to purchase seeds, for example).

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The same conflict would also adversely affect productivity, as more time would be needed for security checks, and profitability, as hotels, offices, plants would need to beef up their security apparatus. More x-ray machines, more well armed and well trained guards, more security cameras etc would be the norm. These costs are bound to affect profitability margins.

The political class will face, deservedly, the biggest public outrage for its success in enfeebling the security forces for personal agendas. Two thirds of our MPs have criminal backgrounds, according to reports, and, after getting elected, use the security forces to guard themselves from the front instead of getting having them behind their backs. Why should any politician, be it the Prime Minister or the President or the Army Chief, be exempt from security checks; he ought, instead, to set the example. The conflict between political ego and national security will have to sway towards the latter. Not only will the intelligence forces be needed to be freed of political interference purely for personal reasons, they would also need to be equipped and trained to fight terrorists who are thus. The people do not want more committees who file reports and make recommendations that are not acted on; they want to know the status of action taken on past recommendations.

Or take the conflict between public governance and public finance. To pursue the former, the Government asked tobacco companies to put a frightening pictorial warning on cigarette packs to warn smokers of the consequences of puffing to their lungs. This warning has now been postponed, because of the strain to public finance it could cause; tobacco companies provide a significant proportion of excise revenue.

Then there are conflicts of different stakeholders. In November, the Maharashtra Government raised procurement prices of cotton 46%, so as to benefit cotton farmers. Unfortunately, with global prices of cotton falling sharply, this made cotton ginning, as also the textile industry, which employs 50 m. people, unviable as they couldn't compete with lower international cotton prices.

These conflicts of stakeholders extend to the private sector too. Chesapeake Energy Corp, the largest US producer of natural gas, is seeking to borrow $1.8b in order to fund its drilling and exploration activities. Now, natural gas prices had been rising dramatically the past few years, and Chesapeake ought to have been flush with funds. Except that it squandered them on high dividends and share buybacks, so as to keep happy one class of stakeholders viz. the shareholders. Similarly, Brazilian Government owned Petrobras is also borrowing $880 m in order to pay taxes! It paid $ 6.2b in dividends, perhaps under direction from its principal owner, the Government, which needs money. Our own Government, similarly in dire financial straits, also insists that its PSUs pay out large dividends.

The market, closed the day after the dastardly terrorist attacks, held its own on Friday with the BSE-Sensex gaining 66 points. It ended the week at 9092, up 177. The NSE-Nifty ended at 2755, up 32. There was an ongoing rally prior to the terrorist attacks.

Coming on top of an unprecedented global financial and economic crisis, the terrorist attack would further set back the end of the bear market. Governments are taking unprecedented steps to protect their economies. The US Fed has unveiled a second, $800 b. package. The People's Bank of China has cut lending, as well as deposit, rates by 108 basis points, besides unveiling a large package to boost infrastructure spend. India is putting together a Rs 50,000 crores ($ 10b) fund to assure funding for projects. This would be managed by IDFC or IIFCL. Banks may be freely given permission to expand branches or to set up ATMs.

Inflationary pressures have abated internationally, thanks to the sharp fall in crude and in commodity prices. India's GDP grew at 7.6% in Q2, better than expected, although Q3 is expected to be lower.

India can bounce back faster from the global financial meltdown, as also from such dastardly terrorist attacks, if the political leaders unite and stop dividing the country on the basis of caste, creed, region or religion. Sadly the politicians never learn. This time the public angst against them is so high that it will be voiced in the coming elections. India can only once again start shining if our politicians stop lining their pockets, stop whining on divisive grounds and start mining the immense potential of our country. It is time we got an honest and bold statesman to head our Government. Until then, investors would bide the time to buy, which would not likely be for a good part of 2009.

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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