The coming conflicts that Governments will face

by J Mulraj

All over the world political leaders are facing issues which will get even more tough to resolve. As unfolding events in Tunisia, Egypt and Yemen reveal, people, especially the youth, are increasingly intolerant to bad governance and lack of planning for the future.

These issues and how they are tackled, would be of great interest to investors, since the direction of Government views and spending would determine the direction of various sectors.

Public v/s Private Transport is one such conflict. As the world runs out of fossil fuels, and it is, political leaders, together with scientists, would have to find alternatives. Crude oil costs will sharply rise and these form the chunk of India's import bill. There has been little effort to build up an efficient public transportation system, especially in India's commercial capital, Mumbai. There should be planning for a variety of public transport systems including more buses, both airconditioned and non, an overhead rail system (Bangkok has established one to take care of once horrible gridlocks) and maybe some other options such as bringing back electric trams.

Simultaneously, alternate fuels would need to be developed, be they hydrogen, or compressed air (the Tata group is planning to introduce a vehicle, together with French inventor Guy Negre, which will run on compressed air), or electric vehicles or CNG.

Now if we focus on CNG, as we have discovered natural gas in the KG basin and others, we would need to have transparent procedures which encourage risk takers by rewarding them adequately whilst simultaneously giving Government, the owner of the resource, a fair value for its exploitation. The Comptroller & Auditor General is now investigating whether the increase in capex approved for RIL's KG 6 basin, from $ 2.4b. to $ 8.8b., was justified, since gas production seems to have plateaued at 55 mmscmd. The hunt for gas is a risky and very expensive proposition that few players can afford to undertake. It needs financial resources and skillsets, especially since a lot of the discoveries are deep sea. The floating rigs needed to scout for, and evaluate, the oil and gas blocks, need to be hired at costs of $ 500,000 or more per day, not a sum that more than a handful of companies, with strong cash flows, can afford.

If the Government were to focus on public transport and dissuade private transport, as the island state of Singapore does, the set of policies that emanate would be different. Singapore has no car manufacture; all vehicles are imported. Import duty is exorbitant, and proof of a parking spot necessary before being allowed to import one. India is a huge country where private transport is necessary until more efficient public transport is built up. But some day in the future, the capacities being set up for car manufacture will need to shut, as demand tapers, as it has in America.

Too big to fail v/s too small to matter: This applies more to financial institutions and banks. UK has set up a committee called the Vickers Commission, which will submit its report in April. It is expected to suggest ring fencing the banks in a manner that would protect individual savers. Since banking is a global industry that may be difficult. Economist Barrie Wilkinson expects another banking crisis by 2015.

This conflict essentially emanates from the fact that the global finance industry is more powerful than all Governments. The stock of global financial assets are around 4 times global GDP! Of the 4 factors of production, viz. men, material, machines and money, it is only money that has been digitized, thus enabling it to travel at the click of a mouse. Velocity of money is thus infinitely greater than velocity of other factors of production, thus making its impact greater than other factors. Banks grow in size both organically and inorganically, and often become 'too big to fail'. They do this because they do not want to be too small to matter. Size, however, imposes the burden of getting increasing returns for investors which, in turn, causes them to take unnecessary risks. That's why the crisis happened in 2007. Governments thus have a conflict on whether to let banks and financial institutions grow to a point where they would be too big to let fail or not.

In India we have 19 public sector banks, other than SBI. None of them rank even amongst the top 100 globally, which is a sad comment for a BRIC country. The Government should let go majority control in all but, say 2 or 3 large PSU banks, and allow them to grow, perhaps through mergers. But will this be politically possible?

Growth v/s Environment: This conflict is centre stage now. Last week the Environment Ministry cleared, with riders, the 6 year old application of Korean steel company Posco, to set up a large steel complex in Orissa and is likely to clear some UMPPs too. These pose both environmental issues as well as dislocation and loss of livelihood issues. People whose land is acquired for the purpose of setting up these projects need to be provided both adequate compensation and jobs to secure their future; else they will continue to oppose it and will continue to find political support by self centred politicians seeking vote banks.

To sustain their economic growth stories, countries like China and India would have to expand power capacities in a big way. Coal based power plants are popular in both countries, as they are blessed with coal reserves. Coal is, however, environmentally harmful. Yet, as mentioned in the Economist, Nomura of Japan thinks China will add 500 GW of coal fired power plants by 2015 and double capacity by 2020. India, too, will depend on coal, but move slower.

Security v/s personal freedom:? This is increasingly becoming a challenge of governance, as brought out in the Niira Radia tape leaks. Mr Ratan Tata has gone to court, rightly so, for the invasion of his privacy. Yet we will see more invasions of it, in the name of security. The risk is that such intrusions of privacy would be used by politicians to silence others.

These are some of the conflicts political leaders will face. Alas, we do not seem to have political vision or cohesiveness of different parties to sit and discuss these conflicts and try and resolve them. Instead politicians are too busy setting fires in the others' camps and fighting them in their own.