»Straight from the hip by Jawahir Mulraj

Shooting ourselves in the foot
12 JUNE 2010


The India story is good not because of good public governance, but despite abysmally poor governance. But the last week has shown the dangers of bad governance and the risks to the market of our ability to shoot ourselves in the foot. The increasing inability of Government to the threats posed by Maoist was illustrated by its calls to the Army to help fight them. The Army rightly refused, as it is needed to counter external threats. The movement has gathered steam due to official neglect of their plight and is now a big problem. In J&K a colonel was removed and a major suspended, for faking encounters. In Goa a former tourism minister is alleged to have aided in the suicide of his lady friend.

------------------------------------------ Equitymaster Webinar ------------------------------------------
Thank you for making the latest edition of the Equitymaster Webinar - "Global fears, India cheers?" a huge success! We would like to hear from you on how we can make this initiative more useful for you. Do share your feedback and suggestions with us.
Just in case you missed the Webinar, here are two excerpts from the same -
1. The Sensex could be heading to 31,000
2. Views on Real estate and gold
We look forward to bringing you many more Webinars in future and your active participation in them.

-----------------------------------------------------------------------------------------------------------------------

Perhaps the biggest example of reprehensible governance was that of Bhopal in which some 15,000 people perished in Dec 1984 due to a gas leak from the Union Carbide plant. It took our legal system 25 years to close the case against local officials, giving them a relatively light 2 year jail term, and granting bail. The delay itself is a travesty of justice and the judicial system must be brought into shape for speedier dispensation of justice. Pleas for adjournment must not be entertained. No one has raised questions about why the methyl iconsynate gas was allowed to be manufactured there, especially after people had warned the State Government, for a few years prior to the accident, of the dangers. It was a failure of administration of factory inspections, which are often a good source of income to the inspectors. Warren Anderson, the then CEO of Union Carbide USA, who visited India, was let off under mysterious circumstances, probably under US pressure to which we buckle innumerably, unlike China.

We appear to be buckling again in trying to restrict penalties for suppliers of nuclear equipment, in case of an accident. Given the corruption and 'chalta hai' attitude of inspectors, we are inviting a bigger disaster.

The US has different standards for itself. Witness the toughness it is displaying against BP to pay for cleaning up the oil spill.

This poor governance reflects on companies and on stockmarkets. Consider the weakness with which the Government tackles the issue of raising petrol and diesel prices, thus bleeding the oil marketing companies, once called 'navratnas' or nine jewels. IOC, strapped for funds because of having to foot part of the bill for the subsidies, has delayed its plans to set up a refinery and petrol stations in Turkey. Unfettered by such diktats, the private sector is going global with gusto.

Bharti Airtel completed its acquisition of Zain thus becoming the fifth largest telco in the world. Africa has developed the use of mobile banking. In remote areas, the phone can act like an ATM or to make a banking transaction or to purchase stuff. Our Government now harps on 'inclusive growth', which implies making banking facilities available to all. Most villages are too tiny to set up a brick and mortar bank branch viably in. Which is why demand for gold is highest from India; without easy access to banks, the rural folk carry their wealth on them in silver and gold bangles. Mobile banking is the obvious solution, using best available technology. It is scuppered by 'security' concerns. This is hogwash! It is easy to place a monetary limit to a mobile phone transaction and fake security concerns are no reason to deny phone banking technology, not if we are honestly wanting inclusive banking. The key word is 'honestly'.

Mobile banking has to come, because logic dictates so. When it does, Bharti would be better positioned to exploit it.

Bereft of the discarded non compete agreement, RIL has ventured into telecom by buying a 95% stake in Infotel Broadband, promoted by Nahatas. Interestingly, the Nahatas had demonstrated both the vision to be the only telco to buy broadband wireless spectrum pan India, but also the ability to pay for it, and cashed in on that vision soon after it acquired the spectrum. It is to be seen whether the high price collected from spectrum sale by the Government would make the pricing of broadband wireless access affordable. When 2G started, the Government had similarly auctioned off blocks at a high price, which resulted in call charges being at an unaffordable Rs 16/minute. The telecom revolution truly started when the Government switched to a revenue sharing system, bringing down the cost of mobile telephony to the world's lowest. Will we again tread that path in broadband wireless?

RIL is also looking at acquisition of more shale gas assets in the USA, and also to enter the nuclear power business.

Another impact of poor governance or non governance is in getting the political consensus for divestment. Mamata Banerjee, whose biceps were enhanced by her recent civic poll showing in Kolkata, is opposing the planned divestment of Coal India and Hindustan Copper, which have been deferred. Naturally, if Manmohan can't take on O Mama, he would be unable to take on Obama.

Despite all this, the economy is doing well. Industry grew a whopping 17.6% in April! The net profits of 2700 companies showed a growth of an astounding 94% over Q4 of last year, admittedly a bad year and hence a low base. Net sales were up 23%, which is impressive. The LIC has increased amounts to invest in stock markets; last year it invested Rs 60,000 crores, which was 60% of the amount FIIs invested. Adding to that the likely investment from pension funds, and mutual funds, we are moving towards a dilution of the swing factor power of FIIs. FIIs holding of corporate equity may not be huge but its ability to create short term swings is.

Last week the BSE-Sensex fell sharply, on global cues, at the start of the week, then rallied, and ended the week at 17064, for a weekly loss of 53 points. The NSE-Nifty lost 16 to end at 5119. The sensex would meet resistance at around 18,000, perhaps because of another shot in the foot. Or, since the World Cup is starting in South Africa, because of our ability to score self goals.

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. 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 stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
© Equitymaster Agora Research Private Limited