India: Losing its sheen

The policy paralysis consequent to the unveiling of several scams, and the resultant fear of taking any policy decision which may be questioned later, is making India lose its sheen as an attractive investment destination. Several examples of this have been seen lately. 

Norway's Telenor has threatened to pull out completely from India, writing off its investment made so far, and has protested against the proposed auction of a mere 5 MHz of spectrum when 20-30 MHz is available, thereby creating a scarcity which drives up the value, which favours incumbents, and also to the illogicality of rollout obligations imposed by TRAI, To qualify to bid for the 5MHz spectrum, each bidder must invest in infrastructure, such as telecom towers, which would unnecessarily lead to avoidable duplication of infrastructure. 

A group of telecom leaders met with senior Government officials and voiced their concerns. The Government seems to have heard them, for the Telecom Commission has refused to accept TRAI's recommendation hiking spectrum charges by upto 13 times. It is also writing to TRAI on 4 issues, including the rollout obligation issue raised by Telenor, and why TRAI is auctioning only a part of available spectrum. 

Telecom was one of India's success stories of liberalisation and is now mired in a mess. 

Arcelor Mittal, the world's largest steel maker, says India is no longer an investment priority. Being a global player it has global opportunities, and will invest in places where its investment is welcome. It laments the policy paralysis that has resulted in a six year wait for a licence. 

Vanguard, one of the largest mutual funds in the world, with assets under management of $ 1.7 trillion, is going slow on its plans to enter India. Fidelity, another large global asset manager, recently sold its Indian mutual fund assets to L&T Finance. Vanguard is concerned about the low earning potential, the disincentivised distributors who have been disallowed upfront commission by the regulator, and the slow growth of assets under management of the industry. 

There have been several protests against the apparent retrospectivity of tax collection, such as in the case of Vodafone, which, in 2007, bought the telecom assets of Hutchison through an offshore transaction of shares representing a controlling interest of the Indian company. The Government says it had informed Vodafone of its intention to collect capital gains tax from Hutch on the $ 11 b. transaction, and asked Vodafone to deduct the tax from the sale proceeds. Vodafone did not, and was slapped with a Rs 7900 crore capital gain, a penalty of like amount and interest thereon, now totalling Rs 20,000 crores. 

Well, it now seems that Vodafone is veering around to accepting the Government's viewpoint, either based on legal advice or on practicality, and has approached the Finance Ministry for a compromise. Under this, the tax amount of Rs 7900 crores would be collected and the rest waived. 

The Government's reliance on LIC to bail it out of various financial commitments is likely to have an effect on the latter. Moody's has placed LIC under watch for a possible downgrade. LIC had been called upon to rescue the Oil and Natural Gas Corporation Limited (ONGC) follow on offer and has also bought stakes in some public sector banks as the Government, perpetually in a fiscally incontinent position, was unable to fund the banks. Concommitantly, private sector banks, which have a higher than sovereign rating, such as ICICI Bank, HDFC Bank, and Axis Bank, have also been put under watch for a possible downgrade. 

Indian banks will require Rs 1.5 lac crores additional capital, to meet with Basel III capital requirements. The Government owns more than half the capital of 20 public sector banks. So, if the Indian banks have to be properly capitalised, the Government will need to pump in a huge chunk of money it doesn't have. It would either have to dilute its stake in some PSU banks below 51% (which would not be a bad thing) or indulge in financial skulduggery such as asking LIC to invest in bank stock. 

The Indian rupee has been sliding versus the $ and fell below 53 last week. This is mainly because of our high import bill on crude oil. India needs to discourage consumption of petro products and encourage discovery of crude oil/gas domestically. It is doing the reverse! 

Diesel continues to be subsidised, and petrol, though ostensibly freed from controls, is still subjected to Government approval for any price increase. Consumption is thus higher than it should be. Also, the Government has caved in to the auto manufacturers lobby and delayed introduction of mandatory fuel efficiency standards. 

In order to look for domestic sources of oil and gas, the Government opened up blocks in deep sea, inviting bidders to be operators of the block. Under the scheme, the first 100% of capital investment made by the bidders, was recoverable from sale of any oil/gas discovered there, in the proportion of some 95% for the operator and 5 for the Government, until 100% of capex was recovered. Thereafter, for another some 150% of capex, the operator's share fell and the Government's rose, and after that the Government got the major bite of any revenue. 

There is now a dispute with Reliance Industries. The Government has, last week, disallowed $1.2b capex recovery claims by the company, on the ground that gas production from its block has fallen and not risen after the capex has been made. RIL says that is because the geological formation of the field is more complex than it imagined. 

The disallowance of the $ 1.2b. claim is a precursor to start of arbitration proceedings. RIL has gone for international arbitration, as provided under the production sharing contract. 

Last week the market fell 320 points on the last day, primarily over fears of a review of the double tax avoidance treaty with Mauritius, through which a lot of investments take place in India. Over the week the sensex lost 356 points, to close at 16831 and the NSE-Nifty fell 122 to close at 5086. 

The breach of the 17,000 support level on the sensex does not bode well. Unless the BSE-Sensex goes above 17000 in the coming week, the breach suggests a further downturn. The next support level is at 15,500. 

What can prevent the market sliding down to that? 

The Budget session comes to an end on May 22, and, if this Government has, by then, felt that its chances for being reelected would hinge on its ability to continue with needed economic reform, then, perhaps, one could see it take some steps towards major economic reform in June. Parliament would be closed, and opposition would not be able to voice their protest on the floor of the house. Though this would deprive television audiences of some entertaining moments, the continuation of economic reforms through administrative action, wherever possible, would boost investor sentiment. 

The Government may also get a firmer grip on Swiss bank accounts, and thus be in a better position to collect money. The Swiss Government is likely to agree, as per reports, to give bank account holder details, on skimpier information than hitherto required. This could embolden the Government to have yet another voluntary declaration scheme. 

The third factor is the falling rupee which, ironically, encourages foreign investors to invest, if they feel that the rupee has fallen enough. If, for example, a foreign investor buys Indian equity when the exchange rate is Rs 55/$, and sells a year later when it is, say Rs 50/$, he makes a gain both on appreciation of the stock and on the rupee. At some point in time the rupee will stop sliding. 

So one should watch out for any movement on economic reforms by the Government, probably after the Budget session is over. Hopefully India would then get back a bit of its lost sheen, lost due to poor governance. 

Last week's column had ten responses. The most recent, by a reader named Srinivas, caused mixed emotions of anger, amusement and anguish. Anger because the guy, without any foundation whatsoever, accuses me of taking money from companies for writing. That is scurrilous of him! Amusement because Srinivas thinks that my writing influences Government policy enough to make them wish to refund spectrum charges (else why would companies pay me, right?). Ha! And anguish because, after writing objectively and conscientiously for over 24 years, I receive totally unfounded accusations unthinkingly hurled at me, with nary a comment from others who have been reading my columns for so long, and have known me through it. 

( J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 24 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)