»Straight from the hip by Jawahir Mulraj

Who will pull Raja's 2G string?
13 NOVEMBER 2010


India's three pillars, viz. legislature, administration and judiciary, all seem to be in cohoots with each and seem to have no rules to govern themselves. Telecom Minister A Raja has been indicted by the CAG (Comptroller and Auditor General) for causing a revenue loss of Rs 1.8 lac crores when he allotted cheap 2G spectrum yet blithely continues in office, because the UPA Government is scared of being pulled down should its political ally, to which Raja belongs, pull the rug. Even the Prime Minister, with his reputation for honesty, remains a mute spectator. Someone should petition the court asking why ordinary citizens should pay taxes? If the revenues are eaten up by the likes of Raja or Kalmadi or Chavan?

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The administration is involved in the mutual back scratch. Witness the negligence in gathering sufficient evidence in the molester cop Rathore's case allowing him to walk free on bail. A crying shame. The recent scandal in the Adarsh (which, ironically, means ideals) Society misallotment of flats, has even tainted the army; a very scary thought with a hostile neighbour bent on terrorism.

Finally the judiciary. A Kolkata high court judge has been found guilty of misuse of funds and may be impeached.

Even when action is taken, the worst that can happen is the guy loses his position. No attempt is ever made to recover the money and put it back in the Government kitty. The fiscal deficit would vanish if the amounts were recovered. But politics is a mutual back scratching game so the tab for these shenanigans fall on the taxpayer, who really ought to protest. In the Adarsh Housing Society, the officials who cleared the proposals at various levels, who tweaked allotment norms, who broke environmental rules etc. are never going to be brought to task. Instead, the building is going to be demolished, so even a legitimate owner would be punished, though not the guilty administrator.

This sort of criminally poor governance ultimately tells on economic performance and hence stockmarket performance. The Sep IIP growth is only 4.4%, the lowest in 17 months. One has seen how the policy of subsidising petro products is severely denting the profitability of ONGC, OIL and GAIL and destroying the balance sheets of IOC, BPCL and HPCL. Not only destroying balance sheets but also the environment, as recently (and very belatedly) pointed out by Minister Jairam Ramesh. He correctly points out that the subsidy on diesel goes more for gas guzzling SUVs than for diesel pump sets.

This can be easily remedied by the Finance Ministry. As these columns have suggested, there could be an excise structure that encourages fuel efficient cars (by having lower excise taxes) and punishes guzzlers (by having prohibitively high ones) in a tax neutral manner, so that the auto buyer who settles for a fuel efficient vehicle, sacrificing space or speed, is recompensed for his sacrifice by the buyer of an obscene SUV.

Failure to address this now only worsens the problem because the world is running out of fossil fuels and one day these on road SUVs will be an inventory disposal problem. SUVs also make us more dependent on oil imports, which amount to 70% of the requirement.

The market is sensitive to companies whose results do not match investor expectations pushing down prices of stocks, such as Bharti Airtel, which did not meet expectations (Bharti's net profits were down 27%, as its African acquisition is taking time to settle though it ultimately should). The Tatas have successfully integrated their acquisitions of Corus, by Tata Steel and of JLR by Tata Motors and results of both have exceeded investor expectations.

Some of my readers feel that I have a bias towards the private sector. This is incorrect. There are excellent public sector companies and it is thanks to conservative management of public sector banks that the global financial crisis did not impact India significantly. There is, however, continued interference in the management of public sector companies, to their detriment and, sometimes, downfall. Air India went in for a fleet acquisition it could not afford, for reasons best known to those who ordered it, and is now in dire straits. BSNL, once a duopoly in telecom, has been so badly interfered with that it is now thinking of selling spectrum!

The developed countries are pumping money to prop up their economies. Most of the 50 State Governments of the US are broke due to pension liabilities. These are on a 'defined benefits' basis whilst private sector have moved over to 'defined contribution'. The 50 State Governments are unable to fund the shortfall. The pension assets need to earn 8% but do not, resulting in a shortfall which has to be made good by the Government. They would thus be buyers of bonds which give them that return.

India is considering a $10b. bond issue to finance infrastructure. Given that our infra needs are $1 trillion, and given that there is a huge market for any bond offering close to 8%, this is a highly unambitious target.

The sensex lost 848 points last week, most of it in the last two days, to end at 20156 and the Nifty dropped 240 to end at 6071. The correction is healthy for the market and long overdue. Should it continue, perhaps if the Prime Minister suddenly discovers he has a backbone, after all, and sacks Raja, it would be a good time to buy. Most certainly it would be a good time to buy if the Government actually locked the rascals who have stolen money and recovered it! But that would be a dream!

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.
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