Whose Parliament is it, anyway? - 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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24 DECEMBER 2011

The Economic Times of Dec 22 carries a story of a BSP MP who, in his protest at being pushed by the PM's special protection group, stated that they shouldn't have pushed him, because Parliament 'belonged' to MPs! Excuse me! Parliament belongs to the people, as does the country! This mindset amongst politicians is one of the root causes of the malaise of corruption and of India's economic problems.

One small example. Air India is in abysmal financial health, needing constant bailouts with taxpayer's money. Yet it is owed some Rs 480 crores by MPs, most of them from the UPA! Why doesn't our honest Prime Minister compel them to pay it, upon penalty of removal from the Party, instead of making the taxpayer pay? This is the reason why the Government cannot think of privatising the airline - its minister's would lose the advantage of its 'fly now, pay later (or don't pay)' scheme. In order to quash protest from its management, the CEO of the airline is offered the bait of lifelong free air travel for self and family!

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When it comes to other airlines, the Government has at its disposal, agencies such as the IT Department, with the right to attach bank accounts, as they did (rightly so) in the case of Kingfisher. Why does not the Government use the same agencies to attach bank accounts of those of its kith who do not pay for services rendered, whether from Air India, or from Mahanagar Telephone Nigam Limited (MTNL)/BSNL (unpaid telephone bills), or PSU banks (unpaid loans) or others?

It is precisely for this reason that the Government is loath to concede its power over investigating agencies such as the CBI, to a Lokpal (ombudsman). The Lokpal legislation, as proposed by the UPA, will be tabled next week. It is a watered down version of the one demanded by the Anna Hazare camp and is a no-win situation for the latter's movement. Either it will be passed with support from other parties (who, if they come into power, are equally keen to keep the CBI under its control), which would lead to the protest fast by Hazare, or it will fail to get a majority, which would lead to the same result.

There is a story of God manifesting Himself to a devout, pleased with his prayers. To the question 'when will poverty be removed from India' God replies, 'not in your lifetime'. To the question 'when will corruption be removed from India' God replies 'not in my lifetime!' Shahrukh Khan would have said 'Bhrashtachar ko hatana sirf mushkil hi nahin, namumkin hai'.

Another example of appropriation of national assets is the proposed 'Food Security Bill' because it is an unending and disastrously constructed liability. After social welfare schemes are introduced, it becomes almost impossible for future Governments to reverse it; see how the petro price subsidy continues to eat into the nation's financial innards and how it is almost politically impossible to remove subsidy on LPG and kerosene.

The Food Security Bill, as conceptualised, promises rice at Rs 3/kg, wheat at 2 and coarse grain at 1. The subsidy bill can hit Rs 1lac crores very easily, and rising to Rs 6 lac crores. But worse, unless the procurement of these foodgrains covers the entire country, the situation will be alarmingly worse see story ('The Grain Drain') Farmers who are not covered by the procurement scheme would switch from cultivating rice/wheat/coarse grain (which they largely consume themselves), to cultivating cash crops, and get the subsidised grain under the new Food Security Act. Which will lead the Government of India to buy the foodgrains, now locally produced, from other countries, which, given the size of our population, and the coverage of the scheme (over 65% of the population), will mean an unaffordable rise in global food prices, and of the subsidy bill on the scheme.

This column has been suggesting that we should think of a proposition making the party which conceives of such spending schemes, to be asked to bear say 10% of the cost from Party funds. That would serve to subdue the enthusiasm for the ruling party to use national assets in order to gain popular votes.

Thanks to several factors, India's fiscal deficit is out of control, again. One factor is the high interest rate regime, which has killed investment on new projects (which, in turn, will bring down GDP growth next year, to below 6% according to Larsen And Toubro CMD, AM Naik). The other is the absence of economic reform, in the wake of a political paralysis. Perhaps the Government should give new brooms to every department, as its contribution to sweeping reform! The third factor is the failure of Government to take advantage of an earlier booming stock market to divest shares of public sector companies, to the tune of Rs 40,000 crores, as budgeted (hardly a few hundred crores have come in from PFC divestment). Stockmarkets are now low. The fourth is the subsidy bills from past welfare schemes which, as stated earlier, have no termination date, and largely lead to wastage of funds - more funds are eaten away by middlemen than reach the intended beneficiary. A UID (unique identity) scheme, which would help address this problem by targeting subsidies to only the needy and not to the greedy, is being blocked by the Parliament Standing Committee. If they keep blocking meaningful legislation (the Pension Bill and Companies Bill were also blocked) perhaps they should think of sitting down!

Let us see what is happening on each of these factors.

Interest rates are not being brought down by Reserve Bank Of India (RBI), whose focus is to fight inflation. The Food Security Act will, as conceptualised, not bring down food prices which are also a function of several global factors such as the inability of yields to keep pace with population, environmental changes and food habits of populations as incomes rise. The policy inaction will continue at least till elections to five States, including the largets, UP, are over, which would not be before mid 2012.

As regards meeting the disinvestment target of Rs 40,000 crores is concerned, the inventive babus have thought of a scheme. The plan is to create an SPV (special purpose vehicle) in which the Government would place surplus land and stocks of SUUTI, enabling it to then borrow some Rs 50,000 crores against the assets, which would be used to buy Rs 40,000 crores of PSU stock from the Government! All's well that ends well? Well, its a bet on whether the Rs 40,000 crores of stock bought rise faster than the rate of interest on the borrowings. Its a bit of financial jugglery. To be fair, in the past, when companies like Indian Oil Corporation (IOC) and Oil and Natural Gas Corporation Ltd. (ONGC) were asked to buy stock under similar circumstances, they did later manage to get a good appreciation on them.

There are other weird things the Government is doing. It is unable to control theft of power, which are being euphemistically called transmission and distribution losses but are actually supply of free power, with a wink, to a favoured few. Distribution companies (State Electricity Boards) run up losses, of some Rs 82,000 crores a year. Now a special committee has recommended that legitimate consumers pay for these losses! This is untenable and must be opposed!

Or take the weird decision by DoT (Department of Telecom) to term as 'illegal' (sic) the agreements which telecom companies had reached, to share 3G spectrum, so that the consumer can use it even if his operator did not have the 3G spectrum allocation in that region. The decision is so devoid of logic, and so user unfriendly, that to call it asinine would be a compliment. The Government gets the revenue anyways, as it gets a % of total revenue, and, since spectrum is a scarce resource, it makes eminent good sense to share it! How, then, is it illegal?

Or take the India-rubberman-contortions-of-logic by the IT Department, simply in order to garner additional revenue to pay for all the well intentioned but badly conceptualised schemes. It has earlier slapped a $ 2 b. fine on Vodafone for not deducting tax at source in an offshore transaction to acquire majority control of the Indian company from Hutchison Whampoa, on the argument that the assets were in India. The decision is due in a fortnight.

It later slapped a tax on Hindalco in a transfer pricing issue. Hindalco had acquired, through an SPV (special purpose vehicle), a Canadian company Novelis in a $ 6 b. transaction. Since the process of obtaining clearances by various authorities is not conducive to a speedy conclusion of a deal, all such acquisitions go through an SPV route. The SPV is a wholly owned foreign subsidiary, set up with a minimal capital, which then borrows, on the strength of the parent's balance sheet, the money for the acquisition. Hindustan Aluminium Company (Hindalco) did not, correctly, charge any fee to its wholly owned subsidiary for providing the guarantee, but has been charged a tax on a notional fee! And the Bombay High Court has upheld it!

Now compare this with what has happened in the case of United Breweries (UB). In this case, UB borrowed some Rs 118 crores, for which a guarantee was provided by Vijay Mallya, who was paid a 1 % (Rs 1.18 crore) fee for it. The same IT Department has disallowed the fee! This is because (and this has another strange twist to it) the declared assets of Vijay Mallya were Rs 0.70 crores! One wonders if the banks giving loans against personal guarantees do the amount of due diligence which they do when a small depositor goes to deposit money in them!

So UB is disallowed the fee it paid for a guarantee, and Hindalco is taxed on a notional fee. Can both be tenable?

In interesting corporate news Reliance Industries Limited (RIL) has taken a minority stake in a US company, Terra Power Ltd., with Bill Gates as a majority partner. The company plans to set up a nuclear power plant based on new technology called 'travelling wave', which uses the nuclear waste of other plants to produce electricity! RIL will also be happy with a call by PNGRB (Petroleum & Natural Gas Regulatory Board) asking for gas prices to be deregulated. The price has been fixed at $ 4.2/unit by the Government, whilst imported LNG costs more than 3 times as much.

Last week the ECB (European Central Bank) opened the spigots and permitted unlimited borrowing by European Banks, at 1% interest, against collateral, under a scheme called long term recapitalisation option. European banks borrowed some Euro 490 b. The collateral? Well, the Spanish Government was able to sell, within minutes, a bond issue to its banks. The banks then used the bonds as collateral to borrow from ECB, thereby giving them a carry of 5% (yield on the bonds minus the 1% interest). This works so long as Spain does not default on the bonds.

This is merely pushing the can down the road. The problems of Europe cannot be purchased away.

But for the moment, it led to a rally. The BSE-Sensex gained 247 points over the week, to end at 15738, whilst the NSE-Nifty ended at 4714, up 63. Interestingly, on the days for which data is available, FIIs were net sellers on all days, and domestic mutual funds were net buyers!

What next?

Just like another round of alcohol permits the party to go on a bit longer, so does the monetary injection by the ECB. One cannot foresee how long investors would be mollified by the good spirits. But a hangover will be the inevitable result. Any small crisis in Europe would have a nine-pin effect and spread the contagion of investor gloom. Selling on rallies should be pursued. India has a lot of potential, once political leaders find out that Parliament, and the nation, belong to the people, and work towards the good of the country.

They will!

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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18 Responses to "Whose Parliament is it, anyway?"
V P
Dec 30, 2011
INDUSTRY CAN BE GIVEN 4LAC 51 THOUSAND CRORE SUBSIDY IS OK. FUEL SUBSIDY 1.3 LAC CRORE OK BUT FOOD SUBSIDY 1 LAC CRORE IS DEBATED. WHY INDUSTRIALIST ARE BEING GIVEN TAX CUTS. PEOPLE MAY DIE OF HUNGER IS OK ACCORDING TO YOU. DONT BEFOOL OTHERS MR JAWAHIR. AND PLEASE DONT CURSE THE GOVT. AS OPPOSITION ALSO SAYS WHEN PETROL PRICES ARE HIKED THAT GOVT IS AGAINST AAM ADMI. Like 
Sid
Dec 26, 2011
Jawahar,
Appreciate your efforts...but we expect more:

- These are, somewhat random, rants about problems. There is no theme or central message, other than you complaining about things here and there.
- It is one-sided. Would appreciate a balanced view pointing out a few of the things that went well. Be fair.
- Most of your comments have already been covered in newspapers and so are stale by now. Can't we expect some original research from Jawahar?
- You don't seem to understand taxation based on the way you wrote about it. Please consult with a CA and make sure you understand before you publish something. This is your duty.

Just as the parliament belongs to the people, your column belongs to the readers. We can vote you out by not reading your column and reading others.

regards, and hope we see better stuff from you,

Sid
Like 
K G BHAT
Dec 26, 2011
Recently Ajitsingh and Sonia Gandhi had meetings and then Ajitsingh agreed to support UPA and he was inducted into the Union Cabinet.Is it not corrupt practice.? Like 
Lakshman Pardhanani
Dec 25, 2011
Dear Mr. Mulraj,
How right you are about the attitude of our so called leaders in Parliament.
I cannot begin to tell you how distressed I feel at what I see in India today. I came to India after having lived abroad for 45 years of my life hoping to spend the final few years of my life giving back to the country what it had given me in upbringing and education.I had hoped to see a country that alongside its progress materially, had managed to maintain and improve upon its values which people like me have always boasted about on India's behalf, wherever we have been. It has been a cataclysmic shock, having seen it to be otherwise.
You rightly talk about the leaders,but what about the ordinary middle class? I have not seen a more selfcentred,unpatriotic,uncaring,and a grasping set of people in any part of the world that I have lived in.
India has lost its soul, it is now in danger of losing its status as a poltical entity, given the centrifugal forces at work here.
I have supported the Anna agitation from the day it started here in Goa. Last week at the time of Anna's one day fast in Delhi only 25 people turned up in support at the Azad Maidan in the Goan capital.
I ask yet again,have we all lost our souls??
Like 
Tikam Patni
Dec 25, 2011
As long as we continue with the system of Coalition Governments ( Miljul Kar Khao Sarkar ) and year around elections, India will continue to go downhill.

1) Ban post election coalitions.
2) Conduct all elections, central and State at the same time.
3) Elect PM thru general election by all the people.
4) Prohibit elected reps from holding any executive position. They should formulate laws.
5) Let the PM form his executive team from professional unelected citizens.
Like 
athmanathan
Dec 25, 2011
Kindly forward this mail to the powers that be at Delhi durbar, the chief justice of the supreme court and the Anna Hazare camp. Mindless policies like Food Security Bill cannot fill the void caused by policy vacuum. If all the gloomy scenario unravels as predicted by you and in the article in Economic Times, the time will not be far off if someone who is reading all these articles takes into his mind to wipe out the politicians one after another. Like 
R Swaminathan
Dec 24, 2011
Good write up. Revealing info on dues to Air India by the MPs! It is not clear what does the 'the retail theft' and the parameter on Y axis of the chart mean?
I recall MPs squatting on the Delhi accommodation provided to them even after they cease to be MPs.
Let us all remember that 300 and odd special phone connections were given to a single home; that of Sriman Maran , the yesterday's minister! The lines were doing the transmission sevice to Sun TV network. No enquiry , no punishment. I remember a youth in Eastern part of India commiting suicide for not getting a phone connection in the past around 1975. We have a memorial tomb of dead telephones of Calcutta in BBD baug in Kolkataa. What a shame on BSNL!
Like 
MITHUN
Dec 24, 2011
NREGA+Food Security Bill+Land Aquisition Bill+Mining Bill = Your money and mine down a rat hole.

Coming Next-CSR Bill(Corporate Social Responsibility) whereby this incompetent Government seeks to cleverly shift it's responsibility of providing basic Infrastructure onto the Corporates who are already paying huge taxes to the Govt. for that very purpose.If this is not a Con Job what is?
This country is surely headed towards disaster.
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shyam gupta
Dec 24, 2011
Dear brother,
TRUE,TRUE, TRUE
WHAT CAN BE DONE,SOMETHING HAS TO BE DONE BY SOME ONE,EVERY STEP HAS SOME POSSITIVE & NEGATIVE POINTS.
DONOT WORRY LET THE THINGS TO COME UP,NEXT RULING GOVT. WILL EITHER MODIFY IT OR WILL CONTINUE IT.
POEPLE WILL DECIDE ABOUT POPULARITY OF SCHEME.
WE ARE TAX PAYER NO BODY IS ASKING FROM TAX PAYER,WE HAVE TO PAY ,AS EARLIER SO MANY AMOUNT WAS GOING AS WASTE EXPENDITURE & WE HAVE NOT SPOKEN.SILENCE IS THE WAY OUT. EVERY BODY IS FRIGHTEN FOR WHAT IS NOT KNOWN TO ME.
Like 
Leen
Dec 24, 2011
I dont know why everybody, including you, keep advocating the Lokpal as a panacea to India corruptions issues.

Corruption can only be solved when people individually feel that they must not be a party to it. Every Indian must feel that way ..... that they will obey traffic rules, that they will not grease some govt clerks palms to get their file ahead of others, that they will not speak to so and so and make payments to get this or that allothment, job or other privilege that the govt hands out. Let me illustrate with an example. Gandhi struggled for independence from the 1900's onwards, but indpendence was never a people's issue or on the people's conscience. It was only after 1942 Quit India movement that independence from the british became a personal issue for every indian and that was when independance movement became a mass movement. Gandhis brillance was in keeping the focus and not losing faith and getting the people organised for it in a largely physically non-violent way.

Secondly, on a practical level, Lokpal is not required. All what is required is better implementation of the existing vigilance laws and most importantly clearing the backlog in courts. Only when courts can deliver a petty judgement in a maximum of say two months, then only will the common man feel that he has a remedy against corruption.

Anna Hazare is all bunkum and the people who support him and his Lokpal are merely people who let others do the thinking for them.
Like 
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