The perils and pitfalls of collision politics

By J Mulraj

1st Oct 2011

The first time India had a true coalition Government, a stockmarket friend of mine, a Punjabi, asked me what I thought about the 'collision' Government. I asked him if he was mispronouncing the word or being prescient! It turns out it was the latter! And it has turned out this way because the politicians consider their job as a business, instead of a duty, and the opportunity provided to them by being elected as a means to amass wealth, instead of to serve the nation.

The Ministries allotted to the coalition partners then become fiefdoms which they use to extract tolls, and other partners are asked not to interfere in their 'jagirs'. A Prime Minister known more for his honesty than his backbone, was unable to prevent exploitation of fiefdoms, with the result that there is now such a policy paralysis, it threatens the success of the India story.

Take the scandal in the allotment of spectrum for 2G telephony, for which several politicians/bureaucrats and corporate executives are in jail. It created such a big scandal because the Comptroller & Auditor General (CAG) declared the loss at a whopping Rs 1.76 lac crores!

Well, it now transpires that the initial figure was Rs 2600 crores, and how this grew to the scandalous figure it did, is anybody's guess.

The scam was NOT in selling spectrum at low prices; this was the declared policy of the Government and was a correct one, as it brought down the cost to the consumer and ushered in the telecom revolution to the extent that there are now 750 m. mobile phone subscribers.

The scam was in the out of turn allotment of spectrum to those so favoured, and in the way in which Government did not prevent the subsequent sale of spectrum, at overnight profits, by the allotees.

Yet because of the Rs 1.76 lac crore figure, and the natural public outrage that followed, the Government had to be seen to be taking action and has incarcerated several persons, including corporate employees who cannot be, by any stretch of imagination, thought to be beneficiaries of the scam. This has turned coalition into collision.

This poor governance is seriously affecting the economy, and thus the stockmarket. There are several examples.

One of the fallouts of the corruption scandals of the UPA Government was the counter attack on opposition Governments. This led to the fall of the Karnataka Chief Minister, Yeddyurappa, and the arrest of some of his backers under allegations of illegal mining of iron ore in the district of Bellary. In typical 'throwing the baby out with the bathwater' the court ordered a shut down of iron ore mines. Over 70 sponge iron units in Bellary have shut down, with a loss of 200,000 jobs and causing such a severe shortage of iron ore that JSW Steel is operating its plant at only 30% and threatening to close down. Without the steel it produces, consumer industries such as automobiles and construction industry, are affected. So what started off as a political attack and counterattack, inevitably worked its way down to the economy.

Or take the power sector. Gas based power plants account for 12% of power capacity and several are in final stages of closure, including Reliance Power's 2400 MW Samalkot unit. They need 28 mmscmd of gas, but gas production has fallen. Reliance Industries' KG 6 field production has fallen from 60 to under 45 mmscmd, though it was expected to go to 80. According to DGH the new blocks would be unviable at the Government fixed price of $ 4.2/unit (competing imported LNG costs $ 15/unit) and gas prices are to be revised in 2014. An upward revision in gas prices, together with partner BP's technology, would provide the spur for gas output to be raised, and of the gas based power producing companies to start producing. Else we could face a further shortage of power. Raising gas prices in the politically charged environment would also be fraught with difficulty.

For coal based power plants, the shortage of coal looms large. This is due to more stringent environmental focus making it difficult to get clearance for new blocks. Coal output for August has fallen 15.3%, and has brought down the growth in index of core industry production in August to just 3.5%, an 11 month low. Gas production is down 5.3% Industry has also to deal with inflexible labour laws. They are unable to shut down, if the unit becomes unviable for a myriad of reasons, without permission to lay off workers, after due compensation.

Industry gets around this by hiring workers on a contractual basis.

This has caused them grief at the Manesar plant of Maruti Suzuki, India's largest car maker, which has seen sporadic labour problems of late. The contract workers are demanding tenure. Maruti is now contemplating expansion by setting up a $ 1.3b. plant in Gujarat.

The several problems industry has to deal with - environment, land acquisition for growth, labour issues, policy paralysis, corruption to obtain entitlements, protection from Maoists which the State has been unable to provide, shortage of raw materials, etc - makes one wonder where the jobs will come from, in order for India to encash its demographic dividend. All are manifestations of poor governance.

Industry prefers to expand abroad, where they do not have to deal with poor governance; the outbound FDI is higher than inbound FDI.

To add to domestic problems enumerated above, are the global concerns, especially over Europe. The focus now is on Greece, the country-equivalent of Lehman, and the hope is that if a default can be averted in Greece, it would stave off the falling nine-pin affect of others such as Portugal, Italy, Spain and France, in that order.

Global stockmarkets cheered when Europe announced that it would leverage the Euro 440b. EFSF (European Financial Stability Fund) and stave off a default by Greece. A lot of European banks, especially French, have lent money against Greek Government bonds and France would have a banking crisis. A lot of American banks have lent to the French, so the crisis would jump the Atlantic.

However, the Stratfor article mentioned above maintains that a default is inevitable by Greece. And that the EFSF has to be Euro 2 trillion to stave off a crisis in Europe! This is very very scary.

On a more hopeful note, as per the Economist, Sep 24, 2011, 20 out of 42 economies studied by it grew, in the latest quarter by a rate of over 3% per annum. Of these, only 2 were traditionally 'rich'countries, viz. Sweden and Austria and the rest were emerging markets and newly rich countries like Taiwan and HK. The growth in emerging markets continues; the IMF has assessed they will grow at 6% in 2012 versus less than 2% growth by the rich countries.

Thus the balance is shifting eastwards. Another sign of that is that whilst Chinese bonds of $ 3.1 issued in HK recently, got 4X demand, despite a lower yield, the bonds issued by Italy got a poor response, despite a higher yield.

Last week the BSE-Sensex gained 291 points, to end at 16453, thanks entirely to the 472 point gain on Tuesday, when the EFSF boost was announced. The NSE-Nifty added 75 points over the week, to end at 4943.

However, the EFSF is insufficient to stave off a Greek tragedy and a wider European one. So global factors are bearish.

So are Indian factors, thanks to abysmal governance. Had the opposition BJP got its act together and nominated a leader for the next elections, it would have been on a strong wicket, given the disarray in the ruling Congress party. But BJP is also squabbling. So one can expect more brinkmanship politicking and non governance. Which means that the market would slide further and could go below the 16,000 support level.

By J Mulraj