»Straight from the hip by Jawahir Mulraj

Privy purses are back

The Maharajas of erstwhile princely states of India traded their independence, and joined the Indian Union, when India gained independence from the British, with a promise, in return, to get a privy purse, or an annual payment, in compensation. These privy purses were abolished in 1971 through a constitutional amendment.

We now discover that the privy purses were never abolished, only the recipients are different. The fruits of power are bestowed on the political class, and all of them, in varying degrees, are beneficiaries of it. Last week we saw that the kith and kin of political leaders such as Vijay Darda and Subodh Kant Sahay, of the Congress, S Jagatrakshakan of DMK and Prem Chand Gupta of RJD were awarded rights to mine coal.

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There are several other instances of such expropriation of assets, ostensibly for public good but in actuality for the benefit of a handful of politically connected people.

Take the airline sector. In 1953 the Air Corporations Act was formed, to nationalise the aviation sector and take over 8 airlines, forming Indian Airlines. This was later merged with Air India, primarily to dress up the balance sheet of the latter which had been forced by powers that be to acquire many more aircraft than it could afford. Today Air India, the merged entity, is sick and unviable, and puts an annual and unending strain on the fisc. Any honest Government would jettison the airline by selling it, but that deprives the new privy purse owners the freedom to delay flights, divert them for family, over order aircraft, upgrade themselves or otherwise misuse their authority.

Or take the coal sector, now the epicentre of the coal-gate scandal that has resulted in a washout of the monsoon session of Parliament in which only 4 bills were passed, as the opposition BJP filibustered the entire session. The coal industry was nationalised in two stages, first the coking coal industry in 1971 and then the non coking coal in 1973. India has a 220 year history of mining coal, and has one of the world's largest reserves of coal. In fact, in India, the energy derived from coal is twice that of the energy derived from oil; internationally it is 70%.

Yet, after nationalisation, we have not invested enough in modern technology to mine coal, and despite having humongous reserves of it, keep power plants starved, resulting in a huge shortage of power. We then 'invite' private sector participation, ostensibly to increase production of it, but in reality as a means of earning rentier income to favoured allottees of it. The rentier income is a privy purse to politically connected people.

Consider food. The village of Satnapur, in UP, hasn't had any foodgrain or kerosene distributed in a fair price shop, though a facility storying 57,000 tonnes of it is barely 20 minutes drive away (see here). The grain meant for the fair price shops is stolen by politically connected persons. Even food, meant for starving poor Indians, becomes a privy purse.

One of the bullish points about India's economy and its stock markets. often mentioned is its 'demographic dividend' . India has a young population, which is set to enter the work stream, and provide the impetus for economic growth for years to come. However, one wonders how capable the young population will be, because of malnutrition. One fifth of our children are malnourished, and "The UN estimates that 2.1 million Indian children die before reaching the age of 5 every year - four every minute - mostly from preventable illnesses such as diarrhoea, typhoid, malaria, measles and pneumonia. Every day, 1,000 Indian children die because of diarrhoea alone." (Source: Wikipedia)

So the India story can be a good one, if only our rapacious leaders allowed the story to bloom.

What is happening globally?

Europe is in recession and the experiment with the common currency, the Euro, has failed, because it does not allow weaker countries the option to devalue. As a result, the stronger and more productive economies (read Germany) are able to export their products to the weaker countries which the latter would have found unaffordable if their currencies had been allowed to drop. The weaker countries went on a spending spree, with borrowed money, and now find themselves in an inextricable debt trap.

They can only think of one way in which to get out of the trap, i.e. by printing money. The President of the European Central Bank (ECB), Mario Draghi, announced a plan of unlimited bond purchases of periphery countries, but subject to conditionalities, yet to be spelt out. Global stock markets rose and the sensex rose 336 points alongside.

Yet one is unsure of what will happen when the fine print is read. The conditionalities would include an oversight by the ECB of any borrowing country's spending programme. In other words, the loss of fiscal sovereignity by member countries. Will they accept such a loss in return of a financial bail out? When the conditionalities are spelt out in greater detail, one may find the enthusiasm of global markets waning.

In the coming week, on Wed/Thu, the US Federal Open Markets Committee will meet. Data on creation of new jobs has been disappointing, only 96,000 new non farm jobs were created in August, less than the forecast of 130,000. This has created expectation of another round of quantitative easing.

Should that happen, global markets will rally, as the party will go on. But it is not certain to happen. The US is hitting its debt ceiling, and the Republicans (who want the Government to cut expenditure, or entitlements) cannot agree with the Democrats (who want to raise taxes). The US, like India, is stuck in a policy paralysis. Once the Government borrowing hits the ceiling, it cannot borrow more. It will be unable to pay salaries and meet its obligations. There would be chaos.

Nouriel Roubini warns of the perfect financial storm. He says that the US is in danger of tipping over a fiscal cliff, once it hits the debt ceiling. Europe is in recession and will stay in one for a decade. China's growth has slowed to 7%, which is low enough to warrant a danger of social unrest and rioting.

To add to this discouraging potpourri is the risk of an attack by Israel on Iran's nuclear facilities. According to Haaretz, Prime Minister Netanyahu believes Iran to be just 4 to 8 weeks from producing a nuclear bomb.

The BSE-Sensex ended the week at 17,683, with a gain of 254 points, entirely due to the spurt, on Friday, of 337 points, thanks to the comments of Draghi. The NSE-Nifty ended at 5,342, up 83.

The level of 18,000 poses a crucial resistance level. If Bernanke follows Draghi's footsteps, and eases the monetary tap with a QE3, the 18,000 level would be breached. If he does not, there would be resistance at 18,000. After that, the attention would be on Netanyahu. The hope is that because it will be a very difficult mission to accomplish, it will not be attempted. Who will blink first is the question - Netanyahu, Ahmadinejad, or the investor?

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.

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.
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