Vijay Kumar Gaba

Friday, May 3, 2013

How market reacts to a rate cut?

In past there is virtually no trend as to how market reacts to a rate cut or hike.

However, the only time the rate cut happened after a 5% or more market rally in the preceding month was in January 2009. The market fell 3% in the month following the rate cut.

Date	Repo cut	1Day Return	1M before	1M After
30-Apr-01	-0.25	3%	-4%	6%
7-Jun-01	-0.25	0%	-3%	-4%
28-Mar-02	-0.5	0%	-3%	-3%
12-Nov-02	-0.5	0%	-2%	12%
7-Mar-03	-0.4	-1%	-2%	0%
19-Mar-03	-0.1	1%	-7%	-4%
31-Mar-04	-1	1%	-5%	1%
20-Oct-08	-1	2%	-29%	-14%
3-Nov-08	-0.5	6%	-17%	-15%
8-Dec-08	-1	2%	-15%	5%
5-Jan-09	-1	0%	5%	-3%
5-Mar-09	-0.5	-3%	-12%	26%
21-Apr-09	-0.25	-1%	17%	29%
17-Apr-12	-0.5	1%	-1%	-8%
29-Jan-13	-0.25	-1%	3%	-6%
19-Mar-13	-0.25	-1%	-2%	0%
3-May-13	?	?	5%	?

Date	Repo hike	1Day Return	1M before	1M After
26-Oct-05	0.25	0%	-6%	11%
24-Jan-06	0.25	1%	4%	7%
8-Jun-06	0.25	-5%	-22%	13%
25-Jul-06	0.25	2%	2%	11%
31-Oct-06	0.25	0%	5%	6%
31-Jan-07	0.25	-1%	2%	-8%
31-Mar-07	0.25	0%	1%	6%
12-Jun-08	0.25	0%	-9%	-12%
25-Jun-08	0.5	1%	-14%	4%
30-Jul-08	0.5	4%	6%	2%
19-Mar-10	0.25	0%	8%	0%
20-Apr-10	0.25	0%	0%	-6%
2-Jul-10	0.25	4%	-2%	4%
27-Jul-10	0.25	0%	1%	1%
16-Sep-10	0.25	0%	8%	4%
2-Nov-10	0.25	0%	-1%	-2%
25-Jan-11	0.25	-1%	-4%	-7%
17-Mar-11	0.25	-1%	1%	7%
3-May-11	0.5	-2%	-4%	0%
16-Jun-11	0.25	-1%	0%	3%
26-Jul-11	0.5	-2%	2%	-13%
16-Sep-11	0.25	0%	0%	1%
25-Oct-11	0.25	2%	6%	-8%

2013#GLOBALMARKETS

The sharp equity rally in developed markets, though not completely surprising has surpassed the expectations of many. Indian markets have also shown resilience, despite serious political and economic concerns.

The following top 10 global trends in particular have implications for Indian markets in next few months:

1. The central bankers’ “Put” is proving to be more effective than most thought previously. It passed the Cyprus test with commendable grades. As things stand today, we are likely to see more “easing” than “tightening” in next 12months.

2. Contrary to some forecast, the deluge of liquidity caused by unprecedented monetary easing in past five years has failed to create inflation in the global commodity. To the contrary, the decade old bull market in commodities, including energy, seems have ended. Most industrial metals have already slipped into bear market with sharp price corrections in past 4months.

3. The decade old bull market in precious metals has also ended. Though jury is still out on whether the gold has slipped into a secular bear market, the chances of a sharp up move beyond YTD 2013 highs appear slim.

4. The developed equity markets have run up led from front by the big two - US and Japan. Many emerging markets have also followed into their footsteps. At the same time bond markets also continue to remains strong. The appetite for gilt has not diminished despite all the fiscal and credit concerns. The “Great Rotation” appears to have terminated prematurely – much like the way “Decoupling” did in 2008-09.

5. Audacious “Abenomics” in Japan seems to be the defining trend for currency market for the year. A successful achievement of 2% inflation target may bring the global growth back to its pre Lehman trajectory.

6. Chinese economy is likely stabilizing in lower orbit of 7-8% growth for the moment. The surplus manufacturing capacities created in past decade would continue to feed the additional demand emanating from emerging world for next decade or so.

7. The argument against “Austerity” appears prevailing and all those anti-Keynesian voices appear to be fading.

8. Political stability is gradually returning to Europe, with a working Italian government in place.

9. Middle East continues to be the hot spot. Weaker oil economies may further frustrate the extremists. Complete US withdrawal from Afghanistan would be the first real test.

10. Pakistan elections are critical. Failure of democratic process at this stage may plunge the state and the region into deep trouble. Though the early omen are good.

On Monday, 6^th May we shall outline our views about the key trends in Indian markets with special reference to the aforesaid global trends.

Thursday, May 2, 2013

Four short stories

1. Follow the leader

The number of India skeptics has grown sharply in past one year. Numerous reports have been written to establish that the last pillar of support, viz., consumption, is likely falling rather sharply and the economy will fail to break the vicious cycle. The optimists were in minority and lacked conviction. Very few of them actually walked their bullish talk.

Unilever Plc has enlightened the path for everyone. We believe that the FMCG giant with over 100yrs’ experience of working across the globe certainly knows more than the analysts who cannot tell difference between a shampoo and hair conditioner.

We shall go by Unilever’s assessment of India’s consumption story and stay overweight for next decade at the least.

2. Do not follow the leader

The Supreme Court today indirectly hinted that the country’s leadership may be exercising undue influence on the national investigating agency CBI. It had been our consistent view that most of the problem currently afflicting the country may be stemming from a weaker leadership. SC’s censure today, in context of coal block allocation scam, confirms our belief.

Leadership is essentially about leading – assuming responsibility, showing the way. Leadership is not about making excuses. Following a weak leader will only hold you back and destroy your character.

3. Austerity is a spring phenomenon

Since past couple of week the global economist and banking communities are intensely debating the relevance of austerity in a declining economy.

The consensus that is emerging appears, and rightly so, to be favoring postponement of austerity program to better times.

In our view, austerity works best when going is good. You maintain a balance between your earnings and expenditure and save some for the bad periods. If you have not saved enough for bad period and a medical emergency befalls upon you, you do not become austere at that point in time. You beg, borrow and steal to save your life. Once back on your feet, you can repay the debt and practice austerity for future. If you die,

well….. you die.

Currently, the global economy is in ICU. Not a good time to save.

4. Crisis of confidence for Oracles

In past three weeks most global banks have issued reports suggesting sudden demise of gold bull market.

The enthusiasm of gold consumers seen across the world however suggests that these Oracles no longer enjoy the confidence they used to prior to 2009.

One of the big 4 was however quick to retract its bearish call. Others are still to follow. But who cares!

Tuesday, April 30, 2013

Mandate 2014 – Reforms ain’t mean same for Delhi and Sangli

Scooty (e.g. Activa) and mobile phone have empowered women more than any policy initiative or legislation.

People were least sure as to how reform in power sector, insurance, banking, financial markets, FDI in retail trade, Direct Tax Code, sugar decontrol, highways development, disinvestment etc. would impact their lives.

Most traders in all states except Goa were quite wary of the GST.

During our road trip to six states including the poll bound states of Karnataka and Delhi, we tried to assess the views of the common people about economic reforms – relevance, need, direction, perceived benefits etc.

We discussed with numerous people to find out (a) what has happened in past decade or so that has made difference to their lives (for good or worse); and (b) what would they want the government to do immediately to improve their lives.

Without leading them to any specific direction, we kept the discussions primarily centered around their day to day life and future of their children.

The key highlights of the feedback we received from people were quite reassuring, though not surprisingly.

Key highlights:

(a) We found that the social sector schemes have impacted the people lives more than the economic reforms, especially in rural areas.

Despite frequent news of irregularities, people overwhelmingly suggested that schemes like mid day meal, girl child education, NRHM and MNREGA have positively impacted more lives in almost all the states.

Financial inclusion (SHG, MFI, Banking Correspondents) was the only economic initiative they could cite as having impacted their lives directly.

(b) Most in Maharashtra, Karnataka, and Punjab believed that the infrastructure situation has worsened over past decade. People in Haryana, Delhi and Goa suggested that infrastructure has improved in past decade.

Delhites however felt that it is still inadequate. Public health and education was commonly suggested as the “Worst in the world”.

(c) PMGSY (the flagship rural roads scheme) was widely suggested as the game changer in Maharashtra and Karnataka. (From our past experience we know that same is the case with a majority of the states.)

(d) Mobile connectivity was expectedly cited as the best technological evolution that impacted the rural lives.

(e) In Delhi most of the people we spoke to cited metro rail as the boon that has improved their life significantly.

(f) In rural Maharashtra and Karnataka, obtaining drinking water consumes 6-8 man hours. Electricity is still inadequate. We estimate focusing on these two could enhance productivity and income potential in rural and semi-urban areas substantially.

(g) We felt that strictly implemented prohibition legislation would bring more prosperity to Haryana and Punjab than any economic reform.

(h) Most urban residents felt that education and health reforms are more critical than economic reforms.

In the next phase of our journey we shall be covering Gujarat, Rajasthan, UP, MP, Chhattisgarh, Bihar, Jharkhand and some parts of Maharashtra.

Monday, April 29, 2013

Mandate 2014 – Corruption matters. Alas! Not the way it should

Corruption does matter positively to us, as it helps in circumvent the law and get our way. Not the way crusader like Anna Hazare would like it to matter.

No one minds corruption if his child gets admission in a good school/college through backdoor; if he gets his passport without waiting in queue; if he can construct an additional room in his house without permission; if he could encroach upon the pavement in front of his house/shop; if he can dig a deeper borewell in his house or put a powerful motor in his water supply line when his neighbors’ taps go dry.

Most office goers in Delhi were happy with the flyovers constructed during the CWG. They have long forgotten and forgiven Kalmadi and other people responsible for putting the nation to shame.

Once the home minister of a state visited the Jail on the Independence Day. After finishing his speech, he asked the inmates about their problems and what he could do for them. Most complained about mosquitoes and quality of food. Few wanted new blankets. Some daring one asked for a TV in the library. No convict asked for freedom. No under-trial requested that his/her trial may be speeded up, or he/she be released on bail as the trail proceedings had procrastinated beyond the maximum sentence they would face if convicted. The minister granted their wishes and won their adulation.

Last week two leading media channels broadcasted the findings of their respective opinion polls on Karnataka assembly elections. The finding of these polls prima facie do not match with the assessment we made while we toured across nine districts of the state a week ago, as part of our nationwide road trip to feel the socio-economic pulse of the nation.

Both the polls find that the corruption is the primary concern of people. Paradoxically, both the polls see large support for the former Chief Minister B. S. Yeddyruppa, widely considered as the epitome of corruption outside the state of Karnataka.

In our numerous informal interactions with people in past one month we found that at first instance people do express corruption as their primary concern. However, on scratching the surface a little bit, we found corruption has permeated deep in the DNA of people. The adaptation is so complete that very few (we found no one) would not want to use the means which are ethically or morally undesirable for their convenience.

For example, we found most would vote for a hard criminal, if the candidate is known to them personally, or if they feel that he would help them in getting their constitutional rights like license to work, school admission for kids, passport, BPL card etc. Everyone in a midsized town admitted that they would feel privileged if they “knew” local municipality clerk, SI at local police station or even a bus conductor who will give them free ride whenever they wanted to visit the city.

Last weekend, we happen to attend a meeting of a housing society’s members in posh Bengaluru location with the local candidate of a national party. The only request these educated upper middle class people made to this politician was to “provide a right turn in front of the society gate, as they have to go 500mtrs ahead to take a U turn”. No matter if this “right turn” would be very wrong as it would cause huge traffic disruptions. No one asked him to give an undertaking that he would not encourage corruption, if elected.

In our trip to Delhi we visited a colony Patel Nagar in central Delhi. We were shocked to find that over 95% houses in the locality have hazardous illegal construction. Many studio apartments originally allotted to the refugees from Pakistan in 1947, have been converted into 4-5 bedroom apartments. All pavements have been appropriated by the residents and there was no room to walk even on the road due to illegal parking of vehicles. If someone suggests that corruption is a concern for these people – he is grossly mistaken in our view.

Friday, April 26, 2013

Mandate 2014 – beyond white sand beaches and mustard fields

Besides Delhi and Karnataka, we covered the states of Goa, Maharashtra, Punjab and Haryana in the first phase of our nationwide survey.

Goa

The best part of the journey so far has been the trip to Goa. We mostly focused on rural Goa, away from white sand beaches and luxury resorts. After an extensive 3day trip covering over 1000kms, we discovered that the popular debate on sustainable development model might be completely misplaced. While we often hear about the Gujarat vs. Bihar model of development, in our view Goa indeed presents a good example of sustainable inclusive development. We found people generally happy; infrastructure excellent; education system exemplary; police surprisingly courteous, friendly, honest and firm on the compliance; communities in harmony; and growth inclusive.

Insofar as the political mood is concerned, for a change, most people were found satisfied with the establishment. BJP should be advised to showcase Goa more prominently in the national discourse, despite its tiny size.

Haryana & Punjab

We avoided NH1 in our visit to Punjab and Haryana covering 9districts besides Chandigarh. The key highlights of the trip were as follows:

(a) In Haryana most people were critical of the political establishment, but would not do anything to bring a change. Alcoholism is a major concern both in urban as well as rural areas.

Sex ratio and Khap dictates were not found to be a real concern. The gender discrimination was absolute in rural areas and substantial in urban areas.

Traders, SME and real estate developers/investors were found to be financially stressed. Farmers in general were buoyant.

Corruption was not found to be a real concern. Congress continues to be the most preferred party in the current circumstance.

(b) Punjab appeared most impacted by the global slowdown. The cases of reverse immigration from Europe have increased in past year or so; though the youth still aspire to migrate to West.

Alcoholism is a major concern both in urban as well as rural areas. The gender discrimination remains high in rural areas, urban areas are seeing remarkable improvement.

Corruption is not a real concern in Punjab also. Unemployment is high and rising. Paradoxically labor availability is a major concern with all three sectors – farm, construction and manufacturing. SMEs, traders are financially stressed. Investment in farm sector is decelerating fast.

Middle classes and workers are mostly indifferent to political establishment. This might be a bad news for Congress and BJP both.

..…to be continued on 29^th April

Thursday, April 25, 2013

Mandate 2014 – Karnataka and Delhi

BJP appears losing in Karnataka, but there is no Congress wave. BSY appears headed towards political oblivion ala Kalyan Singh in UP.
Delhi will be a close contest between BJP and Congress. BSP could surprise with 3-5 seats in 70member assembly.
Drinking water is main problem in both states.
Rise in unemployment and crime due to mining ban and draught are real concern in Karnataka.
CWG scam/shame appears mostly forgotten/ forgiven.
Women security, inflation and corruption are not real concerns for the people in Delhi despite media blitzkrieg.

In past four weeks our team travelled extensively in the poll bound states of Karnataka and Delhi. While these two states have a little in common, the indifference of common people towards political establishment was too stark. The corruption, contrary to popular perception, was not a real concern though in Delhi it was major topic of discussion. The key points noted during these interactions and general observations were as follows:

Karnataka

We travelled to eight districts in north and central Karnataka viz. Belgaum, Uttar Kannad, Dharwar, Bagalkot, Bijapr, Gulbarga, Gadag and Bellary and spoke to over 300 individuals and few groups of people from different walks.

(a) The festive look usually associated with election was completely missing. People were totally indifferent to political parties and establishment. Corruption is an issue that does not bother many people.

(b) Mining ban and draught has caused substantial rise in unemployment, especially in rural areas, and crime in urban areas. The economic stress was too conspicuous to ignore even in remotest of places. 28km stretch of NH4A from Ramnagar towards Belgaum city which had only potholes and virtually no road aptly reflected the mood of the people. Electricity and drinking water are two major concerns for women.

(d) Insofar as political preference is concerned, BJP appeared losing but there was no wave for Congress. Former CM B. S. Yeddyurappa appear headed towards political oblivion, ala Kalyan Singh in UP.

Delhi

(a) Though elections are few months away, Delhi is already buzzing. People are discussing only politics and little else.

(b) Arvind Kejariwal is a topic of discussion but hardly considered a political force to reckon with. Large scams like 2G, Coalgate etc. do not excite people. People are mostly satisfied with the infrastructure created during CWG and largely appear to have forgiven the scam/shame part.

(c) BJP leadership is highly charged up but workers on the ground are completely disenchanted. Absence of strong local leadership is impacting the morale. Congress also remains a divided house. BSP is making further inroads into East, North East and South Delhi. In our view, it will be a close contest and BSP with 3-5 seats could be a critical force in 70member assembly. Announcing Modi a PM candidate may help BJP massively in Delhi election at least, as Gujarat CM is found to be extremely popular amongst youth and middle classes of Urban Delhi.

(d) Drinking water is a major concern in many pockets. Women safety, corruption etc. were not found to be real concerns.

(e) Real estate developers, auto dealers, commodity traders and SMEs are under tremendous financial stress. Inflation has impacted consumption patterns though it may not be an election issue..…to be continued on 26^th April

Tuesday, April 23, 2013

Mandate 2014 – Anxiously indifferent

In February this year we had conducted a small impromptu survey to assess the political mood of people across the country, with special regard to “Modi vs. Rahul” debate. (see here)

Encouraged by the response of the readers, we have decided to conduct a comprehensive ground level survey covering 16-18 states to assess the political and economic mood of the people.

The survey began early this month and shall be completed in two months in three phases. Our team will be travelling through various states across the country to assess the mood of the people, their top concerns and expectations from the political establishment. The basic idea is to form an assessment regarding likely political formation post 2014 elections and the likely impact on the economy.

This exercise is completely different from popular opinion polls, inasmuch as our team shall not be carrying any pre-structured survey questionnaires with pre-defined respondent sample in mind. We shall be informally meeting and talking to people on the roads, public transport, temples, shops, farms, village gatherings, schools & colleges, etc.

In the first phase, we travelled to six states, including two election bound states of Delhi and Karnataka besides Maharashtra, Goa, Punjab, and Haryana. In this phase we spoke to over 1400 people from a variety of profession/occupation and socio-economic strata.

Key highlights

(a) A vast majority of people were found to be totally indifferent to the political parties. The general refrain was that all political parties are same and there is little ideological differentiation to make.

(b) The youth in all state was found to be fretful. Lack of sufficient productive employment opportunity near home was the primary source of anxiety amongst rural youth.

(c) The urban youth had much more to bother about – electricity, drinking water, education, inflation, traffic congestion, pollution being some popular concerns.

(d) Prima facie corruption was the first thing most urban people were found to be agitated about. On deep probing however over 70% agreed that they count on corruption in public offices to get preferential treatment.

Politically also they would prefer to vote for someone who they believe will help them in getting odd jobs done, irrespective of the party or ideology of that person. An overwhelming majority (both urban and rural) suggested that they do not voting for a proven criminal if he can afford hem favors like bank loan, gun license, passport, government job, shop/hawker license etc.

(e) The people in Delhi and Haryana were willing to discuss (only!) politics at length, while Maharashtra and Karnataka people were not too inclined. People in Goa mostly refused to talk to politics.

…to be continued on 25^th April

Monday, April 22, 2013

Gold is not aluminum as yet

As we all know before the turn of the last Century, Aluminum was thought to be more precious than Gold. Most powerful kings were served food in aluminum utensils while the lesser knights had to do with gold flatware. The sudden change in the value of aluminum took place when much cheaper means of refining the ore became available. Suddenly, it was disposable - as in aluminum foil or cola cans. In no time it transformed from most expensive thing in the world to garbage.

In past couple of weeks we have received numerous queries from many readers about the strategy for gold; some of these being panic struck. The underlying theme was the fear that the gold might have taken a wrong turn on the path that follows aluminum journey to south.

We asked the following three questions to some of those who were most jittery.

(a) Did you INVEST in gold? If yes, what prompted you to do so?

(b) Have any of the assumptions that prompted you to invest in gold changed in past couple of weeks?

We have got no reply so far. We are not expecting any either.

In our view, the gold is a non-productive asset that cannot and should not be considered as an investment option.

Traditionally, for many centuries, it has been considered as a store of value for its limited supply and physical traits that make it indestructible. It should be considered as such only and used for parking a small part of one’s networth (say 5%) for extreme emergencies. Normally, you should not bother about the market price of gold bars (or ETF units), as you do not about the market price of your home (unencumbered) or ancestral jewelry, unless you are on the brink of bankruptcy.

Insofar as the recent fall in gold prices is concerned, this could be a normal market cycle. The gold prices corrected more sharply during 1975-76 and to similar proportions in during 1995-99.

It is important to note that none of the assumptions that caused 12yr bull market in gold has changed dramatically in past 2months. Most large economies in the world remain fiscally challenged. Interest rates in developed world are close to zero and may only rise in the coming years. The only way for governments to ease fiscal burden would be to keep real rates negative - gradual rise in inflation as interest rates bottom out. In this scenario bonds and stocks may remain overvalued for extended period of time – creating a favorable environment for gold.

The so called currency war, will push central bankers to accumulate more gold; and poverty alleviation in India, China and other emerging economies will create enough consumption demand. A bonus could be if a sub-prime like bubble pops out in gold. Remember a few months back Germany asked for its gold back from US!

Friday, April 12, 2013

A midway diversion to nowhere – youth policy

The young demography is famously the biggest strength of Indian economy at this point in time. However, the rise in incidence of social unrest and violence; spread of Naxalism; rising unemployment and serious deterioration in the skill level of the educated youth suggest that if not managed properly this may as well prove to be the nemesis of the fabled India story.

There could be no argument on the fact that Indian growth in past two decade or so has miserably failed in creation of adequate productive jobs for the burgeoning workforce of the country. MNREGA has helped to some extent, but it is bound by fiscal constraints, leakages and lower productivity. Disguised and underemployment also continue to impact the productivity and earnings potential.

In our view, in spite of fully recognizing the potential of the youth and the problems faced by them, successive governments have mostly failed in implementing an integrated youth policy that would focus on harnessing this tremendous reservoir of energy.

India has so far issued three editions of national youth policy. The first edition was a brief 5 page vision paper which recognized the importance of youth but did not provide any conceptual framework for the growth and development of this one third segment of the population.

The second edition was issued in 2003 and contained a detailed framework for the implementation. It recognized that “the question of employment is, at present, of very serious concern for the Indian youth and that several social issues arise out of widespread unemployment and under-employment of the youth”. The policy emphasized that “critical issues in this area include a mis-match between skills-requirement and employment opportunities, low technology levels, low wages and low productivity, occupational shifts in employment, under-employment owing to seasonal factors, excess labor supply in relation to demand, migration of the labor force from the rural to urban areas and limited participation of women in the work force, especially in the organized sector”. Financial inclusion was included as one of the objective for the first time.

The policy was supposed to be implemented forthwith and reviewed after every five year. The change in government in 2004 however meant that it was hardly implemented.

The extant government has issued a draft policy in 2012 with the goal of “empowering the youth of the nation by bringing holistic development”. The objective, inter alia, include “Through a sustained programme of education and training and appropriate support services, help young people become economically self-reliant and productive units of the country, either by taking up employment or by setting up their own business enterprises.”

The policy has yet not been adopted. Given the political scenario we would need to wait till the next government assumes office and settles down “other priority issues”, before the next word is said on this extremely critical and potentially explosive issue.

Thursday, April 11, 2013

A midway diversion to nowhere – Energy policy

Energy deficiency had been one of the primary reasons for India’s fiscal and trade deficits. Failure in implementing an integrated energy policy has been a major failure of policy making.

It is widely recognized that “roof top solar panel” has the potential greater than the one seen in mobile telephoney in past one decade. Reducing energy intensity of water and developing a world class public transport infrastructure on priority basis, especially in tier II and III cities, and strict legal enforcement of energy efficiency should be considered.

The draft report of the Expert Committee on Integrated Energy Policy set up by the Planning Commission submitted in December 2005 explicitly stated that “India faces formidable challenges in meeting its energy needs and providing adequate energy of desired quality in various forms to users in a sustainable manner and at reasonable costs. India needs to sustain a 8% to 10% economic growth to eradicate poverty and meet its economic & human development goals. Such economic growth would call for increased demand for energy and ensuring access to clean, convenient and reliable energy for all to address human development. To deliver a sustained growth of 8% through 2031, India would, in the very least, need to grow its primary energy supply by 3 to 4 times and electricity supply by 5 to 7 times of today’s consumption. By 2031-32 power generation capacity would have to increase to 778095 MW and annual coal requirement would be 2040MT, if we don’t take any measures to reduce requirement. Along with quantity the quality of energy supply has to also improve. The energy challenge is of fundamental importance to India’s economic growth imperatives (empasis supplied).

The Expert Committee made suggestions based on the following approach:

(a) Markets that promote competition.

(b) Pricing and resource allocation to take place under market forces under an effective and credible regulatory oversight, as far as possible.

(d) Improved efficiencies across the energy chain.

(e) Policies that reflect externalities of energy consumption.

(f) Policies that rely on incentives and which are implementable

Despite having such a vivid idea about the problems and well documented approach to the solution, the government not only took a divergent route but also did all possible things to scuttle the growth of energy sector.

The NDA government had for once effectively dismantled the administrative pricing mechanism for transportation fuel; de-regulated the oil and gas exploration and production under New Exploration Licensing Policy (NELP); allowed private players in retailing of transportation fuel; privatized power production and related coal mining.

The successive governments however undid most of these steps in the interest of short term political gains. It dithered for many years on revision of market price of transportation fuel and LPG. Failed to implement the coal mining policy; national solar mission remained mostly on papers; nuclear energy program has seen very little progress despite all the political hoopla in 2009; subsidies have been misdirected and mostly remained uncontrolled till recently.

In past few months, the government again appears to have changed the course of the policy under severe pressure from global lenders, rating agencies and investors. But the diversion seems to leading nowhere as it is again an ad hoc step without proper framework and guidance.

Wednesday, April 10, 2013

A midway diversion to nowhere – Foreign capital

In the last five decades, policy towards private foreign capital has moved closely with exigencies of India’s external payments position, and with changing official perceptions of the role of foreign capital in alleviating or exacerbating that position. The early liberalisation of the late 1950s was in part motivated by a balance of payments crisis. The restrictive regime of the 1970s, and FERA in particular, was influenced by the belief that excessive remittances of foreign enterprises were worsening a precarious balance of payments position. The gradual liberalisation of the 1980s and the major reforms of the 1990s were, to different degrees, responses to external payments difficulties.

Recent spate of FDI liberalization (Retail, Civil Aviation etc,) is also mostly driven by the ominously placed CAD conditions.

There could be little argument on the fact that the changing structure of India’s socio-economic milieu require tremendous amount of capital investment.

The demand for civil and industrial amenities like power, transportation infrastructure (e.g., roads, airports, railways, ports, waterways etc.), sanitation, water, education and health etc. is rising with conspicuous rise in affordability. The demand for food, especially protein rich food, is also rising in non-linear trend since past decade or so.

However, the supply has not matched the demand in most of these areas leading to serious productivity constraints and persistently high inflation. This trend highlights the urgent need to invest huge amount of capital in building basic infrastructure and improving agro productivity. Unfortunately, all the required capital is not available within the country and we have to rely on the foreign capital for this.

In our view, this is as simple as it sounds and we need not have complicated the matter. If we need foreign capital, which we do desperately, we need to be consistent in our approach towards investors.

The basic rule of capital investment is that the investor needs (a) reasonable protection of his capital from systemic failures, (b) reasonable return on the capital, (c) mobility of the capital and (d) consistency in laws, including tax laws, governing the capital.

Despite the East India Company phobia at the time of independence, Nehru gave assurance to foreign investors in 1949 that there will be no discrimination between foreign and Indian capital and foreigners will be given full rights to earn and remit profits. The first industrial policy in 1956 also highlighted the importance of foreign capital.

The emphasis was however changed in early 1970’s with the implementation of Foreign Exchange Regulation Act, 1973 (FERA) which marked the first major departure from the stated policy of welcoming foreign capital. Ironically, the current Prime Minister Dr. Manmohan Singh was one of the key forces behind designing and implementing FERA first as adviser to the then finance minister L. N. Mishra and later as finance secretary.

In 1990’s FERA was repealed and replaced with much softer Foreign Exchange Management Act (FEMA). However, there have been frequent flip flops on the of issue foreign investment in India despite deep recognition of the need and desirability of such capital.

Frequent controversies surrounding foreign investment through Mauritius route and recent cases like Vodafone and Etihad highlight the lack of conceptual clarity and consistent framework for foreign capital.

It would be wrong to suggest that the complete removal of capital controls is desirable at this stage. However, inconsistency and incongruence in the framework governing the foreign capital is completely avoidable.

We need to remember investors will come when they like and not when we want them desperately.