Yet another scam

27th November 2010

The cancer of corruption spreads fast and ultimately eats into any economic gains that ensue as a result of
growth; the Finance Secretary said Q2 growth was around 8.8%. It spreads because no action is ever taken,
when corruption is discovered, against those responsible, because they are well connected or politically
necessary.

Last week it was a loan for real estate developer scandal which broke out, with top executives in housing
mortgage companies and in banks being arrested, leading to a collapse in their stock prices. This is going to
have longer term implications, as bankers will be very reluctant to approve loans. In our system, nobody gets
penalised for inaction, so they would figure it better to be safe (by not granting any loans) than sorry (by granting
them). Credit growth would slow, impacting growth.

We have, of course, seen a lot of rot in the legislative and administrative arm of Government. Now the Supreme
Court is pointing a finger at the rot in the judicial system, in the Allahabad High Court.

The defence establishment was, hitherto, largely clean but it, too, has been implicated in the Adarsh scandal.
Sadly, the authorities have decided to demolish the 31 storeyed Adarsh building, instead of confiscating flats
from illegal allottees and re-allotting them to intended beneficiaries, viz the Kargil widows. The only purpose of a
demolition would be to discourage, through example, a future attempt. But since no punitive action is ever taken
against those well connected, it would only be a babe in the woods who would believe this to be even mildly
discouraging.

Internationally, too, there was bad news. North Korea shelled an island in South Korea, making the markets
nervous. It, too, being a nuclear power, is not penalised for bad behaviour, and continues thumbing its nose at
international opinion and laws. The market is also nervous about the financial health of Portugal.

In policy relating to petro product subsidy too, we are making incorrect decisions. Environment Minister Jairam
Ramesh has rightly pointed out that a lot of the subsidy given for kerosene, (to be used by the poorer sections of
society as a cooking fuel) is actually used to subsidise gas guzzling SUV vehicles. He has, belatedly, pointed out
the need for a fiscal policy that deters the use of SUVs by taxing them at punitive rates.

That would be the right way to proceed, by putting a high excise duty on gas guzzlers like SUVs or large cars
and using that money to encourage small, fuel efficient cars with a low rate of duty. Instead, we impose the
burden for subsidising SUV owners on companies like ONGC, which has borne a burden of Rs 1 lac crores,
since 2003-4. ONGC is coming out with a 5% divestment by Government which means that it is the Government
who suffers when it sells this stake at a lower price, thanks to the subsidy burden it has imposed on ONGC for
allowing SUV owners cheap diesel. In contrast, Petrobras of Brazil, without any such burden, raised $ 70b. in an
IPO in August, the largest ever in history.

Another subsidy, viz that for urea, a nitrogenous fertiliser, is also badly designed. Whilst urea continues to be
subsidised, pottassic and phosphatic fertilisers do not, as a result of which farmers overuse the cheaper urea
fertiliser, thereby causing permanent damage to their land. So a policy intended to help farmers is actually
hurting them. The urea subsidy bill is expected to be higher than targeted, by Rs 30,000 crores. There goes any
hope of reduction in fiscal deficit.

The way out, of course, is to better target delivery of benefits. Kerosene, for example, can be given at subsidised
price, to the rural poor, whilst the price at petrol pumps would be unsubsidised. The UID project which Nandan
Nilekeni is working on, is one ray of hope in this, provided vested interests do not succeed in derailing it.

Another contentious issue that needs to be tackled is to allow some flexibility in labour laws. The Prime Minister
made a mention of this last week; whether he would have the courage to push through a debate on it is another
matter. In a globalised world, things change very fast and a project which seems viable today may not be so
tomorrow, and would need the flexibility to shut or rejig it. Not having such flexibility is, in fact, hurtful to the
interests of labour.
There was also some good news, perhaps the most encouraging sign in a long time. In the Bihar state elections,
Nitish Kumar and the BJP won a landslide victory. They won it on the grounds of good economic performance,
and voters shunned other parties who contested on the divisive basis of caste, creed or religion. Since 2004
Bihar's economy has grown 86%, compared to 31% for India and voters recognise and reward this. Now if only
politicians at the Centre heard this message and stopped playing vote bank politics and accommodative politics,
India would be far better off.

In corporate news, ONGC is contemplating a stock split prior to the 5% divestment planned for 2011. Coal
India's profits were up 29%, on lower production, thanks to a hike in prices. M&M took a 70% stake in South
Korean Ssyongyang Motors, for $463m, including a debt component of $ 85. HCC has received a notice from
the Environmental Ministry for building at Lavasa, without its clearance, at a height of over 1000 meters above
sea level. One is glad that environmental ministry is alert but one wonders why it took so long to spot a violation?
One suspects that, as in the recently exposed scams in Maharashtra, followed by Karnataka, the shenanigans
are known by all, but exposed only on a 'you-stab-my-back-i'll-stab-yours' basis.

The overdue correction continued last week, with the sensex losing 448 points to end at 19136 and the Nifty
dropping 148, to end at 5751. It looks like the correction may have run its course, except in the event of an
external factor like Portugal collapse or a Korean attack, and investors could contemplate entry.

Comments on this edition of Straight From The Hip: Post a comment! | Read comments

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run
for over 19 years. An MBA from IIM Kolkata, 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. Nothing pleases him more than a reader who confesses having no
interest in stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and
non fiction, bridge, snooker and chess.