We are not responsible!
EQUITYMASTER HOMEPAGE 24th Aug 2013
The UPA Government has earned itself the dubious distinction of involvement in several large corruption scandals. Each time various Government functionaries absolve themselves of all responsibility. Perhaps it should admit being an irresponsible Government, which it is.
The latest is the scam at the National Spot Exchange Limited (NSEL). When a group of investors, with an aggregate Rs 5,500 crores stuck in the exchange, complained to Arvind Mayaram in the Ministry of Finance, the expected answer was that his Ministry was not responsible. It was the Ministry of Consumer Affairs that was, under whose jurisdiction the regulator, Forward Markets Commission (FMC) was supposed to be responsible for regulating the exchange. But FMC Chairman claims he is not responsible, as he was appointed regulator but without power! The question, raised by these columns earlier, and unanswered is, who permitted the NSEL to start operations, without first authorising a regulator to regulate its operations?
Imagine the chaos that would ensue if each regulator took a similar stance. What if the RBI shirked responsibility of a banking fraud and claimed it was not responsible? What if SEBI maintained that it was powerless against a company who, e.g. had raised money through an IPO and misused it? Is it any wonder, then, that individuals repose their faith in gold and not in paper assets? If the Government is genuine, it has to protect investors, else it will incur their wrath prior to a general election.
Echoing the sentiment, the NSEL says it is not responsible. The top management has been sacked, which is a gesture by the promoters of the Exchange to shirk responsibility for the actions of a management they appointed.
Let's look at other examples of shirking of responsibility.
The Finance Minister says that it is not responsible for the state of the economy, which is in dire straits. It is not responsible for the high fiscal deficit or for the unsustainably high current account deficit. For the latter, it is the citizen, with his penchant for gold, explained above, who is responsible! For the poor GDP growth it is the companies who are responsible, for going slow on investment, and not the Government, which has blocked several permissions required for the investment. The National Highways Authority of India has had to cancel 6 road projects because of not being able to get land acquisition clearance. But, of course, the Government is never responsible.
Consider the depreciating rupee. In 1947, when India became independent, the Rupee was equal to the US $. It is now Rs 65/$. So in 66 years, the currency has depreciated 65 times. The value of the currency is related to productivity of the country. This means that India has, since independence, sharply declined in productivity. The Congress party has been in power for over 75% of the time during these 65 years. But, of course, it is not responsible!
The falling rupee will, obviously, lead to inflation. Crude oil, as well as gas, translated to INR, would be more expensive. This would mean that all petro products, petrol, diesel, LPG, kerosene, would cost more, and so will power from gas based plants. So the subsidies on the petro products and power will shoot up, and, in a bid to contain them, the Government will raise prices, with the velvet glove admonition to 'kindly bear with us'. Corporate profits will be hit by the hike in costs, combined with the higher interest rates which are the consequence of a badly managed economy. Of course, the Government is not responsible.
This is a criminal misallocation of resources. The national productivity rises when children are given a proper education and training and when laws and regulation are conducive to economic acitivity and growth. Not when subsidies are given for people to drive cars in. Annual sale of cars is under 4 m., or 0.08% of our population. The Government subsidises them instead of spending money on better education.
Only a few countries are teaching their children how to think. These include Finland, Poland, Japan, South Korea and Canada, who consistently score high on the PISA test. India scores poorly. Children become smart, and, later, productive, when they are challenged to think for themselves. In India the Government has cleared the way for all to be promoted. This does not challenge them to think. They are not as productive as they can be. Without productivity, the nation slips. The currency weakens. Other countries race ahead. But the Government is not responsible.
So tyrannical are the rules and laws in India, and so subjective, that we destroy our own industries and encourage the brightest to go abroad.
The sugar industry, one of the most controlled industries, is being killed. Prices for sugar cane are fixed by both the Centre and the States, both competing with each other to increase prices, never mind the viability of the sugar factories. They set high prices to get farmer votes; the cost is borne by the mills. The mills are going bankrupt. Bad politics drives away good economics. But the Governments are not responsible.
Another example is that of iron ore exports. These were banned after cases of illegal iron ore mining (corruption, again, in various states like Karnataka and AP) were discovered. It is easy to ban, or destroy. It is not easy to rebuild. The drop in iron ore exports is a contributory factor to the Current Account Deficit. It has led to a loss of jobs. And to a fall in production of steel. Is anybody reviewing the export ban? Or is nobody responsible?
Well, companies like Tata Steel have, in partnership with a Canadian company, set up an iron ore project in Canada, and has already got permission. (South Korean Posco, after an 8 year wait in Odisha, has not). If a large FDI proposal such as Posco comes in it eases pressure on the rupee. But there is no thinking in Government. As this article in the Economist points out, economic activity is being shifted out of India.
America is anticipating an economic boom, predicated largely on a boom in output of shale gas, using a technology called hydraulic fracking. Now it is not the availability of technology that is preventing the search for shale gas in India. Technologies can be bought, or obtained, or developed. Rather, it is ownership rights. In the US, the land owner has the right to everything on, or under, his land. In India it is the Government. As a result, the prospectors for oil and gas, can deal with land owners and sign contracts for exploiting the gas below their lands. And finds a lot of it, lowering gas prices and incentivising producers of energy dependent steel, fertilisers, metals, etc, to relocate to the US and create jobs and growth.
In India, the Government claims right to any resource under the ground of property belonging to any individual. It auctions the right to hunt for oil/gas, creates a huge mess in the pricing of it. Production drops and prices rise. The fall in production leads to higher imports, a higher current account deficit and a falling currency.
So, what is important to the Government? Is it the ownership of resources under individual land or is it the possibility of larger oil/gas finds and an easing of economic problems? A responsible Government would know the right answer.
There is something strange happening in the gold market, as per this blog. Export of gold from London (where it is not mined, but, rather, held as a backing for gold ETFs) has zoomed, to Switzerland. In 2012 exports were a mere 92 tonnes. In the first half of 2013 it is 797 tonnes. It appears that this gold is being melted to smaller sizes for export to Asia. Presumably most of it is smuggled into India, as import duties have been myopically hiked.
There is another interesting article titled 'Hawala Logic' by Anand Ranganathan, which points to the sharp fall in the rupee versus the US $ in the months preceeding a general election, presumable to fetch more rupees when the $s stashed abroad are brought back. The only exception was when the BJP was in power in 2004 and the rupee appreciated.
It is possible that the Government may announce another amnesty scheme, in which those with funds stashed in Swiss banks and other offshore centres (which the Supreme Court is insisting on taking action agains) can be brought back with a smallish penalty. The fall in the rupee more than pays for the penalty. Then the Government will take credit for the strengthening of the rupee. The stockmarket, where the money will be invested after the recent fall, could bounce back, and everyone will sing happy days are here again. This is just a hypothesis.
Last week the BSE-Sensex lost 79 points to close at 18,519, and the NSE-Nifty dropped 36 to end at 5,471.
International factors are ominous. As per this blog 'What Happened in 1987' the current rally since 2012 in US markets is driven entirely by valuations, and not by earnings. The US Fed is likely to taper off its bond buying programme from September, and is to have a new boss who may be more hawkish. On the flip side, should PC come out with a disclosure scheme that would lead to funds stashed abroad coming back, it could lead to a rally. If not for that, the economy, the currency and the stockmarket would continue to slide. Of course, the Government is not responsible.
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J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 25 years. An MBA from IIM Calcutta, 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.
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