THE RETURN OF RISK- BY equitymaster

19th September 2009

It is distressingly sad to see the decline in public governance standards over time. Politicians put self before country; their twin objectives being acquisition and retention of power, and of lucre. To acquire both of which, they seek discretionary powers, never mind what it does to the economic progress of the country. The electorate, on its part, is of a generation that takes the democratic attributes of freedom and liberty for granted. The post Independence third generation do not have the first hand experience of the loss of freedom, nor the second hand narrative of it. They are thus prey to the divisive policies of divide and rule, initiated by the British and perfected by our politicians, on the basis of caste, creed and religion.

The idea of having a common GST, one that good governance demands (several countries of the EU got together to form a common market. India, as one country, cannot get its State Governments to agree to it!) is likely to be derailed because state Governments wish to have 3 rates. One for precious metals, at 1%, another for commodities of mass consumption, at 4% and the standard rate for the rest, of 8-9%. It is in the second slab that discretion, with the potential of lucre, comes in. What are commodities of mass consumption?

More than the lure of lucre it is the retention of power that is important; witness the reluctance of politicians to take a call on Sn 377, placing the onus on the Supreme Court to take a decision that may perhaps be unpopular. Politicians are great at creating messes, leaving it to the judiciary to clean up (witness the clean air of Delhi after the Supreme Court mandated uses of CNG for buses/trucks, which the administration was too wimpish to accomplish).

Or take rent control. Why is it not possible to abolish this for future tenancies, leaving existing ones under protection of existing law? Such a move hurts no one's interests; in fact it helps people move to cities by opening up a rental market.

Or take the irrational policy of petro product pricing, where subsidised petrol encourages the growth of the auto industry, unmindful of the fact that vehicles running on petrol (and the plants to build them) may prove a huge future problem when fossil fuels run out and alternate fuels are brought in. Mr Deora should read a book 'Natural Capitalism' by Hawken, Lowens and Lowens. As much as 80% of the energy contained in oil is wasted because of design of the vehicle (95% by weight is the car and 5% the passenger who is to be transported) and design. This could be addressed by making the car lighter, using hybrid materials, reducing the drag and by electric hybrid or other alternative fuels.Surely not by subsidising petrol, and that, too, at the cost of IOC, HPCL and BPCL's minority shareholders.

Prior to 1992, when industrial licensing was done away with, politicians stultified growth of industry in order to retain the discretion, with concomitant power and lucre, to grant licenses. Simultaneously, the financial sector growth was constrained; long term funding came only out of three all India lending institutions viz. IDBI, ICICI and IFCI and 3 investing institutions LIC, GIC and UTI. Fast forward to today and see the impact this has had on society. Over 60% of our population depends on agriculture, but get 18% of national income; food prices are kept low due to artificial barriers, primarily to benefit a more vocal urban population. Compare with an agrarian, and poor country like Ethiopia, where agriculture supports 50% of the population but they get 80% of the income!

Good governance matters because we now need to ensure that the Indian economy continues to grow; the global problems are not yet over.

Sadly, the Government is unable to move ahead with necessary financial sector reforms, despite having an opposition that is shooting itself in the foot. In the coming winter session of Parliament, the Banking and Pension sector reform bills are not being taken up; only micro finance and stake dilution in SBI is likely to be. In a wonderful article in ET, 18th Sep, Manish Chokhani maintains that the current rally is not sustainable, pointing to the risks of asset price inflation, arising out of the huge monetary stimuli of US, UK, German and other Governments. Witness the $ 3.16m paid in HK for a 1 bedroom flat.

Globally, the largest economy, USA, has been a consumption led economy. The fiscal and monetary stimuli were meant to spur consumption, after the collapse of Lehman Bros a year ago brought down the financial system like a pack of cards. This has, however, piled up debt, which must be repaid and to repay which, the US household must save more by consuming less. Unless other countries pick up the slack of such reduced consumption, the world can slide back into low growth. This is the risk.

In domestic corporate news, RIL is eyeing gains of about Rs 4250 by selling its own stock held after RPL was merged into it. During the past week it sold about 75% of the stock with the rest to be sold shortly.

The merger between Bharti Airtel and South African MTN, is likely to run into the roadblock of dual listing. The South Africans want it. India is not yet ready for it; several changes in Company Law and the Foreign Exchange Regulations will need to be made.

The stockmarket rose last week, with the Sensex gaining 477 points to end at 16741 and the Nifty gaining 147 to end at 4976. There is still some steam left but caution is advocated as a dip is near.

One hopes that there is not another terrorist attack, as Israel has warned India to expect. If there is, the response from India is not likely to be muted and that would slay the bull. For politicians, discretion may be the better part of lucre, but for investors it is the better part of valour

Weekend edition-The Return of Risk ( Equity Master Home page)