Monday, May 31, 2004

Finance: Pension problems

News from Business Standard

Employees' pension scheme has a gap of Rs. 1,700 crores, says the article. This is because of keeping a higher fixed rate of interest of 9% on the money deposited with EPS.

The article suggests that to get out of this muddle, the government should resort to the following:
  • Market-linked rates of return instead of assured pension
  • Government’s 1.16% contribution to be withdrawn
Another consideration should be for the government to completely quit the pension sector - in phases, and leave it to private players. Across the world, private pension funds manage pension. Even government employees have their pension managed by trustee pension funds. The functioning of these pension funds are fairly transparent. We know where they invest their money. However, in India, in the guise of offering a fixed return, the EPS does not tell its constituents how they have been managing their money. With the kind of large funds they have in their hands, they could very well generate a larger than 9% return consistently, with a prudent management team. And this wouldn't require the contribution at all from the government.

Previous item: Finance: Chidambaram reacts to market crash

Sunday, May 30, 2004

Power: Construction of Prototype Fast Breeder Reactor begins in Kalpakkam

News from The Hindu

Work has begun in Kalpakkam to construct a Prototype Fast Breeder Reactor (PFBR) with a capacity to generate 500 MWe. The estimated cost (including cost of escalation) is Rs. 3,400 crores, and the plant will reach its criticality in 2010.

Previous item: Power: Electricity Act 2003 to be reviewed?

Food: M.S.Swaminathan appointed head of National Commission on Farmers

News from The Hindu

The commission is expected to focus on
  • identify the factors responsible for imbalances and disparities
  • suggest measures to achieve sustainable and equitable agricultural development
  • examine the issues of existing price and marketing policies and the legal framework to improve the income and welfare of farmers
  • assess the impact of international trade environment on the livelihood sustainability and the viability of small agricultural holdings
  • ways by which agriculture reforms can be accelerated, particularly in quality production and marketing

Previous item: Food: Merger of Agriculture and Food ministries extolled, but a long way to go

Finance: Chidambaram reacts to market crash

Article in Financial Express
"Market will react to events. Market goes up and down. One should take it as it is. The Indian capital market is well regulated and even on the Black Monday there was no payment crisis. We will regulate it better. One should not react to every market movement," the finance minister said.
Stating that the Government will take some steps over the next month which will address the fears of certain section of the market, he also reiterated that India is one of the best investment destinations and will remain so.

Previous item: Finance: Maharashtra presents deficit budget

Saturday, May 29, 2004

Finance: Maharashtra presents deficit budget

News from The Economic Times and Mid Day. Budget details at Government of Maharashtra.

Maharashtra had passed an interim vote on account earlier (Details) - in the words of Maharashtra Finance Minister Jayant Patil: "the country was about to go to the polls to elect a new Lok Sabha. The Government of India had also gone in for a vote on account and is yet to present a full budget before the Houses of Parliament."

The revenue deficit is expected to be Rs 9,037 crores. The total revenue receipts are estimated to Rs 40,393.08 crores (compared to Rs 37,158.92 crores in FY-04). The total revenue expenditure in the current fiscal is pegged at Rs 50,144.88 crores (compared to Rs 46,195.49 crores in FY-04).

In his budget speech, Jayant Patil pretty much cried out to Dr. Manmohan Singh, the Prime Minister for help:
A new Government has recently taken power at the Centre under the leadership of Dr. Man Mohan Singh (sic). The Hon. Members of this House are aware that Dr. Man Mohan Singh (sic) is a successful economist of international repute. I am confident that the present Democratic Front Government will receive excellent guidance and cooperation from the Centre in its financial management. The Government will endeavour to suitably resolve the financial difficulties of the State through consultation with the Centre and under the guidance and cooperation of Prime Minister Dr. Man Mohan Singh. (sic)
It seems the Prime Minister has to bail out quite a few states, as well as the whole country.

Previous item: Finance: Forex reserves decline for the first time this fiscal

Finance: Forex reserves decline for the first time this fiscal

News from Times of India, Press release from The RBI

The weekly reports from RBI (for week ending 21st May 2004) indicates that for the first time this financial year, forex reserves has declined. It has been going up consistently for several weeks at a stretch.

Some of the reasons are
  1. Foreign institutional investors (FIIs) were net sellers in the stock markets, resulting in foreign exchange outflow from India
  2. Declining value of Rupee vs Dollar, and against Pounds, Euro and Yen

Previous item: Finance: Markets tank on seeing the CMP

Friday, May 28, 2004

Finance: Markets tank on seeing the CMP

The stock markets have not received the CMP favourably. As I write this, the markets have crashed down by close to 200 points.

The finance minister P.Chidambaram talked to the press in a hastily arranged press conference. [News on]

It appears that the markets were spooked by
  1. A call for review of Electricity Act, 2003
  2. No privatisation of profit-making PSUs
It looks like the reaction is a bit unfair, but then the stock markets have hardly been rational. If this Govt. believes in their CMP, they should press ahead and focus on growth and not bother with what the markets think. The markets will come in line anyway, once the economy continues to grow at the current pace.

Previous item: Finance: Common minimum programme (CMP)

Finance: Common minimum programme (CMP)

The ruling United Progressive Alliance (UPA) coalition announced its CMP yesterday, signed by the current coalition partners and supported by the Left parties from outside. The full text is available at The Hindu.

The key financial aspects are:
  • Elimination of revenue deficit by 2009
  • Subsidies to focus only on the needy constituents, details of which will be tabled in the Parliament within 90 days.
  • The government is committed to early introduction of VAT
  • Measures to increase tax to GDP ratio will be implemented such as (a) expanding the base of taxpayers (b) increased tax compliance and (c) efficient tax administration
  • [Chidambaram special...] Special schemes to unearth black money will be introduced
  • SEBI will be further strengthened
  • Profit making PSUs will not be privatised. But PSUs will be allowed to go to the markets to raise resourced. [In other words, the Govt. will not reduce its stake by selling that to public, but fresh shares can be floated in the market to raise money for the PSU - in the process the Govt. equity will invariably anyway come down.]
  • Any privatisation revenue [from loss-making PSUs] will be linked to designated social sector schemes
  • Sick PSUs may be sold off or closed down

Previous item: Finance: Chidambaram's first press conference

Thursday, May 27, 2004

Power: Electricity Act 2003 to be reviewed?

The Power Minister PM Sayeed said two days back that he didn't see any need to review the Electricity Act 2003, when responding to a question posed to him by the journalists. Here is the quote from the news in The Hindu:
On the demand of some of the UPA allies that the recently passed Electricity Act be reviewed, Mr. Sayeed said there was no need to do so at the moment.

The Electricity Act, 2003 contemplates the efficient development of the power sector in a competitive environment, including restructuring of the vertically integrated State Electricity Boards to bring about greater accountability, transparency in provision of subsidy and introduction of competition through open access in transmission, he said.
However it appears that the left parties want the review of this act in the Common Minimum Programme (CMP), which is to be released today. Based on various television reports, the CMP may ask for a review of the act.

You can get The Electricity Act, 2003 as a PDF file here. The Electricity Employees Federation of India is of the opinion that this act is bad for the poor people. Their views are here.

No wonder, the Left groups are a bit concerned with this act. I intend to read the massive 84 page document of the Act and also various analysis available around to find out what is there in it, and will revert with my views at a later time.

Previous blog on Power: Power: PM Sayeed says 'free power is okay' provided it is paid for!

IT: Dayanidhi Maran's 10 point agenda

Article from

All nice things to say. High PC penetration, broadband for everyone, e-governance all over, NIXI - the much talked about Internet Exchange, Indian domain name (this is an interesting issue to talk about anyway), Migration to IPv6, Security of networks, Language computing etcetera.

No doubt all are good things. Let us see how much he makes them happen.

Wednesday, May 26, 2004

Broadcasting: Interoperability of STBs not viable, say manufacturers

News from Business Line

Consumer Electronics and TV Manufacturers' Association (CETMA) has told TRAI that it is not viable to produce set top boxes, used in CAS, to be interoperable across different operators. Attempt to make them interoperable will double the cost of the boxes, says CETMA. CETMA's contention is also that making such boxes interoperable will increase piracy and copyright violation.

TRAI has referred the matter to the Bureau of Indian Standards, to examine whether the interoperability is viable or not.

As of now, CAS has been implemented only in Chennai. The cost of the set top box is high - as much as Rs. 3,500. There are two Multi-System Operators (MSOs) in Chennai offering CAS, one of the companies - Sumangali Cable Vision (SCV), is owned in part by the current Minister for IT & Telecom Dayanidhi Maran. A third option is also available, but via Direct-to-home satellite - from Zee group company called DishTV.

The MSOs purchase the set-top boxes from the consumer electronics companies in India or outside India. From the set-top box I have at home (supplied by SCV), it seems that the technology is owned by a dutch company (Irdeto Access), and the hardware manufactured by a Chinese company (Coship).

Consumers face a major problem because of lack of interoperability. If I purchase an STB, and then am transferred from the city, my STB won't work in the new city where the MSO may use an entirely different platform. Another problem is, I have no recourse against poor quality of service from one operator (amongst the duopoly!), and if I have to switch to another operator, I am expected to cough up more money for another STB.

It seems funny that the CETMA is raising the bogey of copyright violation and piracy. I am assuming by piracy they are talking about people making unauthorised STBs and access cards and break into pay-tv signals. I don't think it is CETMA's job to worry about this. The MSOs and broadcasters will have to worry about this.

Previous entry on Broadcasting: Telecom & Broadcasting: Jaipal Reddy wants a new regulator for broadcasting

Food: Merger of Agriculture and Food ministries extolled, but a long way to go

Article from Business Line

The above article by Harish Damodaran praises the decision to merge Agriculture, Food, Civil supplies, Consumer affairs and Public distribution under one cabinet minister - Sharad Pawar of NCP - as a good move and a step in the right direction. However also points out that crucial issues related to agriculture and food production are still outside the ambit of this ministry. For example:
  • Chemicals and fertiliser has a separate ministry, managed now by Ram Vilas Paswan, with Cabinet rank.
  • Irrigation is under Ministry of Water Resources, under Priya Ranjan Dasmunshi, another Cabinet Minister
  • Apparently, till recently there was a department of Sugar and Edible oils, headed by a secretary, but has been merged now with the department of Food and Public Distribution.
  • There is a separate ministry for Food Processing Industries, handled by Subodh Kant Sahay, a Minister of State with independent charge. But Dairies, sugar plants and edible oil industry will come under Sharad Pawar.
  • Plantation crops such as rubber, tea, coffee, spices and tobacco and the commodity boards are however under the Ministry of Commerce, headed by Kamal Nath, another Cabinet Minister.
  • The job of framing food safety standards are under Health Ministry, headed by Anbumani Ramadoss, a tyro to this area.
  • There is a separate Ministry for Rural Development administering employment generation and poverty alleviation schemes (which seems okay to me, though predominantly these jobs may be in agricultural sector).

The author shows a comparison to USDA - US Department of Agriculture - where
The USDA's role today is not limited to just agriculture per se or crop research.

It also "helps ensure open markets for US agricultural products and provides food aid to needy people overseas", is "responsible for the safety of meat, poultry and egg products", "brings housing, modern telecommunications and safe drinking water to rural America" and operates Federal anti-hunger programmes including food stamps and school lunch.

Moreover, the USDA is the country's largest conservation agency and "steward of our nation's 192 million acres of national forests and rangelands".
I think there is a clear need to bring the concerned departments together, to ensure that agriculture and food production is developed considerably, agricultural income including export income is increased manifold and rural poverty is alleviated to a great extent.

Commerce: Exports rise, but imports rise even more

News from The Hindu, Press Release from Ministry of Commerce and Industry.

Nothing to do with the new commerce minister Kamalnath. The exports have registered a growth of 19.95% in April 2004 (US$ 5.01 billion) compared to April 2003 (US$ 4.18 billion). However, the same is only 11.23% in rupee terms, as the rupee appreciated heavily with respect to the US dollar over this period.

Imports have also risen by 20.78% in this same period. It was US$ 6.75 billion in April 2004 and US$ 5.59 billion in April 2003. Of this, the main outflow was in purchasing oil from outside. The oil imports came to US$ 2.20 billion in April 2004 compared to US$ 1.45 billion in April 2003. This must be due to both a higher intake (a sign of growing economy) and the price increase.

Trade deficit for the month of April 2004 was US$ 1.74 billion. (In April 2003 it was US$ 1.41 billion.)

India will have to seriously look at home grown energy needs.

We also have to look forward to the exim policy from the new Commerce Minister.

Power: PM Sayeed says 'free power is okay' provided it is paid for!

News from The Hindu

Sorry for the corny title. Sayeed seems to indicate it is okay for any state to provide free power to any specific section of its people, provided the State Government makes allowance for the same in its budget, and pay the generation and supply company appropriately.

The new victorious Andhra Pradesh Government announced that farmers will get free power, thinking it was this issue which really threw Chandrababu Naidu of TDP to lose power. The Tamil Nadu state government headed by AIADMK which lost the Lok Sabha elections badly, also gave free power to its farmers.

However the Prime Minister Manmohan Singh has clearly showed his unhappiness over giving away any utility free. There are other ways of providing the subsidy, the one that was partially rolled out in Tamil Nadu, but has however been rescinded now. This method enforced setting up of electricity meters to all the farms, monitored the usage and asked the farmers to pay the electricity charges. The state government then paid this money back to the farmers as subsidy.

You may ask: "What is the big difference?"

The difference is huge. In case of free power, there could be reckless usage. There is no monitoring. Also the farmers fear that, the subsidy amount may be restructured at a later stage. For example, a new governmental initiative may say all small farmers - those that use less than a certain amount of electricity and use a smaller field may get 100% subsidy, while the medium range farmer gets only 75% subsidy and large farmers get only 50% subsidy. Farmers, particularly the big ones, obviously do not like this. So they do not want to even open this area up and give in to Governmental pressure.

There is also the cash flow management - which is admittedly a problem for the small farmers. You have to pay upfront and then expect the money to come back to you from the government and this could take 3-4 months. Also unscrupulous officials can ask for bribes to release this money, or take a commission in this amount. However, such problems aside, the state governments will still have to institute this sort of a disciplined approach.

As we move towards private power distribution companies, we cannot live with this unmetered power distribution. While I am all for giving measured, and justified subsidies to farmers, the farmers will also have to be made aware that there is a cost to the Government in providing free power. One may even have to charge for agri water - perhaps a nominal charge - to encourage more sensible use of the water. There could be subsidies here too.

Then there is the issue of state fiscal deficit, if electricity is given free. The assumption by most of the states is that somehow centre will pick up the tab. When the states reel under pressure to pay the salaries (a bit on the higher side because of the fifth pay commission) of their employees, there is no money in the coffers. There is additional borrowing, which results in huge interest costs. It appears that a lot of state governments have very high cost debt, of money borrowed from the central government.

On other matters, PM Sayeed has given some statistics:
Tenth Plan, 23,000 MW was being commissioned in the Central sector and 11,000 MW in the State sector; only 7,000 MW was being set up in the private sector. The total additional power generation target was 41,000 MW.
So we are massively behind target, and the private sector has not trumped up enough. The key job for the ministry would be to find more private participation (despite whatever the Left may say), so that they produce at least 50% of the target in the medium term, with the remaining 50% produced by State and Central.

Tuesday, May 25, 2004

Telecom & Broadcasting: Jaipal Reddy wants a new regulator for broadcasting

News from The Hindu

While the IT and Telecom Minister Dayanidhi Maran is sulking (because his grandfather wants him to), new Information and broadcasting minister Jaipal Reddy says he would like to see a different regulator for broadcasting.

The previous NDA government made a mess of CAS (Conditional Access System) and faced with massive resistance from all sections of the society, forced TRAI to be a regulator for broadcasting as well, besides the telecom space TRAI was regulating.

Since then TRAI has gotten into trying to understand the issues behind CAS as well as FM radio licensing issues. I had recently attended an open house session organized by TRAI in Chennai on FM and Cable TV related issues and was fairly impressed with Pradip Baijal, DP Seth and gang who were present.

There is no need to look for a different regulator, if the current bunch perform their job adequately. In fact, I am of the view that Telecom and broadcasting should be regulated by a single body as the future is convergence. This is exactly what happens in USA: Federal Communications Commission (FCC) regulates "interstate and international communications by radio, television, wire, satellite and cable". In UK, Office of Communications (Ofcom), does precisely the same: "regulating across television, radio, telecommunications and wireless communications services." UK in fact brought the Telecom regulator and the various Broadcasting regulators together to create Ofcam only recently.

Water: PR Dasmunshi says river linking project will be reviewed

News from The Hindu
  • River-linking project to be reviewed.
  • "The country needs water augmentation on an aggressive scale, but certainly not at the cost of human problems and adding injury to human habitation. We must find a collective and harmonious approach to the whole issue rather than an approach of confrontation", says the Minister.
  • Major pending issues are: Cauveri water dispute, the Sardar Sarovar project and the Sutlej-Yamuna link canal.
It would be interesting to note what this Government's views are on the river-linking project and whether or not, the task force on linking of rivers will be totally scrapped. Surely there should be several localised micro-irrigation possibilities. At least, at a smaller scale, the Government may look at building a cooperative venture between Kerala and Tamil Nadu (say). Kerala keeps accusing Tamil Nadu of trying to steal Kerala's water (or already stealing Kerala's water). But most of Kerala's water goes waste. A green Kerala, however continues to depend on agricultural produce from a dry Tamil Nadu for its food needs.

Finance: Chidambaram's first press conference

Reports on The Hindu, Financial Express, Business Standard

  • There will be a full budget presented and not vote-on-account.
  • There may be some policy announcements before budget.
  • Budget session will begin perhaps late June.
  • Chidambaram believes the economy is in a resilent mood in terms of growth, inflation and balance of payments situation.
  • There will be a major emphasis on agriculture, manufacturing and emplyment generation.
  • There will be massive public and private investment to influence growth, jobs and income.
  • However Chidambaram is confident that this will not unduly increase fiscal deficit and will fit within the Fiscal Responsibility and Budget Management Act 2000.
  • India to be made shining for all Indians...
Adi Godrej, on NDTV, set the agenda for the finance minister, from his viewpoint. He concurred that it is possible to increase investments in agriculture and manufacturing and still manage the fiscal deficit.
  • Manufacturing needs excess capacity. Over the last few years, all the excess capacity has been utilised.
  • If the economy has to grow by 8%, the industrial sector has to grow by at least 12%+
  • Specific sops to be given to investments in manufacturing sector, as that would result in increased job creation
  • Tax net to be widened.
  • Import tariff to be reduced and rationalised in the following form: Lowest tariff for raw materials coming in, and maximum for finished goods, where even this should be only 20%. Intermediate rates for semi-finished goods.
  • Finance minister should target zero revenue deficit by 2006, and fiscal deficit to be not more than 4.5% of GDP.
[For the readers: If you want to know more about the FR & BM Act 2000 - Rediff column, and here is an article which doesn't concur with the need for the FR & BM Act from and on why fiscal deficit need not have to be reduced on Financial Express. However IMF's Chief Economist Raghuram Rajan has his views on fiscal deficit in India.]

The new council of ministers

Dr. Manmohan Singh is the new prime minister for the country. His council of ministers (all but the sulking DMK chaps) have taken over.

In my opinion, the following ministries are important, for they have to set the direction for key initiatives to make India a thriving economy, and a relatively more satisfied people all across. The ministries and ministers are:

Finance - P Chidambaram (Congress I)
Commerce - Kamalnath (Congress I)
Food and agriculture - Sharad Pawar (NCP)
Power - PM Sayeed (Congress I)
Water resources - PR Dasmunshi (Congress I)
Surface and Road transport - TR Baalu (DMK)
IT and Telecom - Dayanidhi Maran (DMK)

There are several other key ministries, but I would like to focus on the seven I have mentioned. In most state elections the issue of 'bijli, sadak & pani' has resulted in throwing out the incumbent state governments. The common people have increased their expectations from their ruling state governments. However, it would be the central government ministers who can set long-term goals and help the state governments achieve their respective targets.

I intend to cover whatever these ministers and their ministries say which is reported in newspapers, their web sites and in parliament proceedings. I will also try to follow what the opposition says about the policies of these ministers over the days to come.

Tuesday, May 18, 2004

Sissy Congress MPs bring shame on themselves on National TV

A drama is being played on the National TV as I write this, broadcast live from the parliament hall. The only person who has conducted herself with dignity is Sonia Gandhi. While I do not think she will be a great prime ministerial material, she is at least clear about what she can do and what she wouldn't want to. I bow to her!

Not mentioning that she was not a prime ministerial candidate before the elections could be considered a tactical move as otherwise, the coalition headed by her would have disintegrated. However she did commit a mistake by not announcing her decision publically the day the results were announced. She strung her party MPs and allies along till yesterday. Only yesterday, some rumours came out that she may not want to be the PM.

The post of PM carries a lot of dignity and hell of a lot of responsibility. If someone is not willing to take it up, it is silly to persuade her to take the job up. Would her mind be fully on the job if she was reluctant? I wouldn't want to hand over the responsibilities of my country to her, after seeing her reluctance.

It is time for the Congress (I) to move on and find another leader. Dr. Manmohan Singh is a reasonable man, and perhaps can take the country to greater heights.

But the Congress goons are turning the parliamentary party meeting into a massive sob story. Tears flow all around. It looks a pitiable sight seeing so many grown up people not willing to come to terms with a simple fact read out by Sonia Gandhi. She doesn't want to be the Prime Minister. Now which part of this sentence can they not understand?

Jayalalithaa wakes up late

After the complete rout Jayalalithaa faced in the parliamentary elections 2004, with an eye on Tamil Nadu assembly elections in 2006, Jayalalithaa has announced the following:
  1. An ordinance to repeal the Prohibition of Forcible Conversion of Religious Ordinance, 2002 (promulgated on 10th October 2002) will be passed shortly.
  2. All punishments meted out to Government employees and school teachers revoked.
  3. All cases filed under TESMA against DMK, Congress (I), and the communist party leaders will be withdrawn.
  4. AIADMK Govt. will move a resolution in the assembly to drop the privilege proceedings against The Hindu and Murasoli.
  5. Electricity will be free to all farmers, irrespective of their land holding. The state Govt. will reimburse the State Electricity Board the costs incurred.
What a mighty fall it was for the supreme leader? Of the above list, with the exception of the electricity subsidies, the rest were entirely flimsy and imposed on the victims by an inflated ego and a vengeance streak. She cannot redeem herself with this fallback. It would be easy for anyone to see through this charade.

The worrying thing is, any kind of sensible reform in the state government machinery has been set back by several years.

There are several things still to be addressed. Here is a partial list:
  1. Withdrawal of POTA against Vaiko, though now it is in the hands of the public prosecutor. Perhaps POTA itself may be repealed.
  2. Re-instatement of the kannaki statue, and a honest explanation of what really went on behind the scenes.
  3. A statement on why Queen Mary's College was chosen for demolition.
  4. Stopping the attempt to build the new secretariat in Kotturpuram, Anna University Campus, and perhaps shift it to Mahabalipuram.
  5. Perhaps, rebuilding Seerani Arangam.
I should look through the list of her inexplicable misdeeds to find out what else she should be doing. Doing all of that would still not absolve her of the last three years of misrule.

Support from outside = power without responsibility

The allies of Congress (I) have all given letters of support to Sonia Gandhi. However the important allies are refusing to be part of the government, and have said they will support the government from outside. These parties include all the left parties comprising close to 60 MPs, DMK with 15 MPs and NCP with 9 MPs. It is unclear what RJD's views are in this regard. Only PMK with 6 MPs have openly agreed to be part of the government. SP's Amar Singh has exchanged acrimonious exchanges with a few Congress (I) leaders and Congress (I) has not explicitely sought SP's support, nor has it tried to work out a deal with SP.

This is not good for the stability of the government. The left parties will get the opportunity to constantly threaten the government on several key economic issues and would not offer any alternate solution. Since they are not part of the government, they have no responsibilities - particularly to balance the budget or at least keep the fiscal deficit within a reasonable limit. Nor would they be interested in understanding the difficulties the government will be facing in managing trade negotiations with WTO countries, various other commerce ministry related issues, fiscal policy, policy related to VAT, policies related to regulations on broadcasting (say CAS), foreign direct investment and so on. I am not even touching disinvestment.

Observers may point to Chandrababu Naidu doing the same for the previous government. However the situation is quite different here. The NDA coalition that took part in the ministry had substantial (240+) numbers. Naidu brought only 30+, and an outside support was okay in such a scenario. Whereas now, only 150 or so members will form the government, while another 160 will provide outside support. As you can see, this is certainl to cause instability.

Further, unlike Vajpayee, Sonia Gandhi doesn't have the nous to manage this kind of a difficult government. She is not thick skinned (she should be one) and was apparently very unhappy about BJP/RSS propaganda yesterday and almost tried to cop out. It took fair amount of persuation from the allies and her own party members to get her to accept the top job.

Let us hope that this government lasts its full term, for stability is very much necessary to sustain the 8+% economic growth in India.

Time for smart investors is now - says The Economic Times

As you might have read in my yesterday's blog item, The Economic Times today carries a more detailed story and provides information on stocks with better dividend yield on current prices.

Though the markets are a bit up on yesterday's fall (as I write this, about 207 points up @ 10.30 AM), the dividend yields will be close enough.

Monday, May 17, 2004

Stock markets crash; trading frozen

Markets crashed today by a record percentage; then trading was frozen at around 10.15 AM. After an hour, when the trading resumed the crash continued! This is the record crash in the entire history of stock markets in India. Sensex crashed by 550 points when the first halting happened, and a further crash of 230 points has resulted in a further halting for two hours. Sensex has crashed so far by 787 points (15.5%). Nifty has crashed by 276 points (17.5%).

Foreign based hedge funds are thought to be the reason behind the massive crash. A hedge fund, unlike a standard investment mutual fund will employ a variety of methods to enhance the fund value. Besides buying and selling stocks, the hedge fund will also buy put options, call options and short selling as methods of making money. The hedge fund is basically highly risky and short term oriented. Unlike a foreign institutional investor who has a longer time horizon on his investments, the hedge funds have probably adopted (a) cash in on forward options (b) cut the losses and run, and not wait for the volatile next few days.

The result is thinly traded volumes and massive stock depreciation.

However there is a lot more to the "India story" than this short term crash. This crash is not like the stock scam induced crash of the past engineered by Ketan Parikh or Harshad Mehta. So investors needn't worry.

With no government yet at the centre, there is bound to be uncertainty and any number of statements from non-portfolio holding Manmohan Singh, Pranab Mukherjee and Jairam Ramesh. Let Sonia Gandhi take over the administration and appoint her council of ministers quickly and that may help in arresting this decline.

Also this opens up some interesting investment options - particularly the much maligned PSU stocks. Some of the PSU stocks are now so attractive just on their dividend yield. Dividend income is tax free, and because the government relies so much on them for its income, thiese companies keep declaring significant dividend. Since the key ones are in the oil sector (IOC, HPCL, BPCL, GAIL etc.), they are also profit generating. The dividend yield at current prices and past dividend pay out is as much as 8-9% and may now be even 10%+.

So a prudent investor can reap a lot of rewards even in the depressed market climate!

Fiscal deficit, Jayaram Ramesh and Sitaram Yechury

The stock markets have been choppy in the run up to the results of the elections 2004. Down by 100, up by 30, and generally down from the highs. On the counting day when contrary to the market's expectation, NDA started doing badly, Sensex started 200 points less but when it was clear that it won't be a hung parliament and Congress (I) will cobble together a working majority, the sensex ended the day 40 points up from the previous day.

However on Friday, the 14th, certain utterances of communist leaders made the markets nervous, and the market witnessed its largest intra-day fall in four years. The communists were very critical of the previous government's policies related to disinvestment. Sitaram Yechuri demanded complete ban on disinvestment of profitable PSUs. When repeatedly questioned on NDTV, he suggested that Congress (I)'s also has similar views. After a phenomenal victory the communist leaders started basking in glory in front of the TV cameras and started talking about scrapping the disinvestment ministry. It now appears that Bal Thackeray also supports this move. [Not that he knows anything about economics.]

The Chief Minister of West Bengal and an influential communist party leader Buddhadeb Bhattacharjee kept stating that there will be reforms (like he has done in West Bengal) but that we will not like to be dictated to by IMF and World Bank.

In the meantime, on NSE and BSE, immature speculators hammered down PSU stocks by as much as 17% (GAIL), and several other PSUs by at least 10-11% down. Panic set in. Manmohan Singh read out a prepared text and indicated that sensible reforms will continue. Jairam Ramesh appeared on NDTV yesterday and explained about not cutting subsidies, working hard on increasing tax revenue without increasing tax percentage, widening the tax net, introducing VAT and continuing reforms process. We will hope the market at least partially recovers on Monday.

Now few key issues:

1. There is a world of difference between privatising a profit making PSU and offloading insignificant stock to the public to raise valuble cash for the Government to reduce the fiscal deficit. The communists and rabid fanatic Thackeray do not seem to understand the difference. In fact, I doubt if the communists even understand the concept of fiscal deficit, having never been in power in the centre. When the Government offloaded 10% of ONGC to the public, they were not privatising that company! The Government used to hold 84% of the equity with the remaining 16% held by public and institutional investors (and less than 1% held by FIIs) and traded in the exchanges. After divesting 10%, the current shareholding pattern is 74% with the Government, 6% with the FIIs and 20% with the public and Institutional investors in India. The management control is still firmly with the Petroleum Ministry and will continue to be. Offloading the 10% raised over Rs. 12,000 crores for the Central Government. The Government could retain just 26% equity or even less and still retain complete management control over ONGC, and can even ensure that the rest of the equity is held only by Indian public and various institutions in India. After all, most of the public companies (not owned by Government) are like this. The Ambani family only controls about 47% of the Reliance Industries. Tatas control only one third of Tata Motors.

The Indian Government can raise massive amounts of capital from its jewels like state controlled banks, LIC, UTI, BSNL etc. by only selling dribbles to Indian public and Indian Institutional investors, while at the same time restricting the amount of foreign ownership. The communists needn't be afraid that in the process workers will be sent home. We can retain all the workers, pay them good salaries (and also make them deliver value to the companies), and also raise massive amounts of capital for development projects such as laying roads and heck... even paying subsidies to distraught farmers.

In the process, the Government also redistributes some of the value enhancements to its own citizens. With the interest rates coming down, investment in the above mentioned PSU navaratnas will help senior citizens earn more money than any Bank deposits.

Now, why would the communists and Thackeray oppose this kind of 'disinvestment'? It would be because they do not understand the meaning of such disinvestment.

2. All that the communists are saying is disinvestment should be done only on sick PSUs. Here, the Government will only be looking for complete sell-off. And the money you will make will never be more than a few crores. There is no guarantee then of what will happen to these employees. At least the Government will be cutting its losses and will hope that the new owners will be capable of salvaging something from that sick industry and hopefully retain some of the employees.

3. Buddhadeb, like a true rabble rouser rails against IMF and World Bank. IMF and World Bank are not jobless and nor are they meddling in the internal affairs of a state or central government in India. It just so happens that Indian State Governments go with a begging bowl in hand and ask for loans from these institutions. When I ask for a housing loan, my bank demands that I show them the housing documents, my salary details etc. and determine whether my investment is safe and whether I have the ability to pay back the loan and only then sanction the loan. On top of it, they have powers to take over my property if I default on the loan. What can IMF and World Bank do if Indian State Governments default? They have their own experience and merely demand that the Governments that take loans from them control their fiscal deficit reasonably. Fiscal deficit is the gap between the government's total spending and the sum of its revenue receipts and non-debt capital receipts. This deficit amount must have to be borrowed by the government to completely meet its expenditure.

Every government which is running a deficit budget must work on increasing its revenues. This is where Jairam Ramesh pointed out his desire to increase the tax revenues, and was quick to point out that he would like income tax revenues to go up without having to increase the taxation. I am not so sure whether it is easy. I think the government should temporarily increase the taxation as well as act decisively on those who avoid taxes. The government should certainly take a relook at the subsidies, but should do so with a human face. Jairam Ramesh was quick to indicate that farming subsidy should remain. Perhaps the subsidy should remain but the rich farmers should at least be brought under tax net. Farming income should become taxable subject to all the standard deductions etc.

Another suggestion that normally comes from IMF/World Bank as well as other economists is to reduce the direct government expenditure on its employees. Sadly this is another minefield and a vote loser. The salaries and pension payable by state governments are the biggest drain on them. Jayalalithaa tried introducing some measures which proved extremely unpopular amongst the government employees and teachers. Her subsequent iron fisted handling of the situation went out of control and also cost her lots of votes during the recent elections. However state governments cannot shy away from this. The most worrying area is government's pension costs. These costs have been going up because the life expectancy has gone up.

While it is rather drastic, the state governments may have to look at completely scrapping pension and instead ask the government employees to look at private pension plans. After all, the only group of people who enjoy such pension benefits in India are a small group of government employees and PSU staff. In a country that doesn't offer any kind of social secutiry benefits, why should one small section enjoy complete social security? I would rather that the pensions go away while farming subsidy to needy farmers remain. The farming votes are after all larger than the government employees votebank.

There is no point in railing against IMF and World Bank. Instead the government should look at raising massive amounts of loans from its own people to retire loans from IMF and World Bank. The funds can be raised both from the expatriates around the world and those who hoard black money in India. With very low yield from other forms of safe investments and decreasing interest rate on dollar deposits, and increasing foreign exchange reserves with the government, the government should look at coming up with a high yield dollar bond to retire massive debts that state governments have borrowed from IMF and World Bank.

Sunday, May 16, 2004

Elections 2004 - What happened and why?

Is the current result a verdict against the ruling NDA's policies?

The elections for the 14th Parliament are over. BJP led NDA coalition has been handed an unexpected defeat. None of the multitude of opinion polls and exit polls gave any indication of the final result. However there seems to have been enough indications as to why this outcome would have happened anyway.

It was not just Congress (I) making efficient and powerful alliances in Tamil Nadu, Andhra Pradesh and Bihar, but also BJP burning bridges with friends everywhere and making costly errors in its electoral arithmetic. BJP had cobbled together a working majority in the 13th Parliament through shrewd political alignments. But its state units did all they can to destroy several relationships over this period.

In Tamil Nadu, BJP's mistake in not supporting and helping MDMK's Vaiko eventually caused a complete rout there. In 1998, AIADMK allowed BJP to settle in Tamil Nadu by forging a grand alliance which also included MDMK and PMK. When Jayalalithaa pulled out of the ruling coalition and caused Vajpayee government to fall, DMK became the natural ally. The grand alliance once again involved MDMK and PMK on the side of the BJP. It is the presence of MDMK and PMK that brings in an additional 11% of vote bank. However during the current elections, BJP was on the wrong side of MDMK and PMK. Jayalalithaa, once in control of state power had misused POTA and put MDMK's leader Vaiko in jail. Tamil Nadu unit of the BJP did not come to Vaiko's rescue and let things slide. BJP, after a gap of two years, tried to water down POTA by introducing a panel headed by Justice Arun Saharya to examine whether POTA cases were misused to settle political vendetta. It was too obvious for everyone that Vaiko was put in prison on flimsiest of charges. However by not acting decisively and even going around making statements that arrest of Vaiko was not misuse of POTA, BJP completely lost the trust of Vaiko and MDMK.

As if, being anti-MDMK was not enough, BJP's state unit leaders continued to praise Jayalalithaa for her anti-conversion bill and 'free meal' schemes in temples. Normally, there would be nothing wrong in praising someone in the opposition, especially if they implement ideas close to one's own heart. But Tamil Nadu politics is based on personal enemity between DMK and AIADMK party leaders. DMK chief Karunanidhi certainly did not like Tamil Nadu unit of the BJP. When Jayalalithaa implemented the mid-night arrest of Karunanidhi on flimsiest of the reasons, the BJP Government and the state BJP unit did not show their displeasure enough in supporting their key alliance partner. It was only the presence of Murasoli Maran that helped in retaining the rather strained relationship between the two parties. Once Maran died, it did not take much time for Karunanidhi to snap the ties with BJP. The coming Tamil Nadu assembly elections in 2006 and considerable muslim votes in Tamil Nadu was also one of the reasons for the break-up in the ties..

As dominant political parties, DMK and AIADMK decide to side with either BJP or Congress (I) based on their own compulsions of whether such an alliance will help them capture power in Tamil Nadu. But with the level of strained relationship between MDMK and AIADMK on one hand and the not-so-happy relationship between BJP and MDMK, it was inevitable for MDMK also to walk out to the DMK camp.

PMK as a political party does not have any set agenda, except to further the interests of a powerful caste group in Northern Tamil Nadu. As such, it will make alliances with any party which will promise more goodies. While PMK was part of the DMK coalition in 1999 in fighting the parliamentary election, in the 2001 assembly election, it was part of the AIADMK coalition. But after the election, snubbed by Jayalalithaa, PMK went back to the BJP/DMK alliance and took part in the ministry at the centre as well. Even though DMK and MDMK together were formidable, PMK on the side of AIADMK and BJP could have helped them from escaping the rout. But instead, AIADMK was not interested in forging alliance with anyone. In fact, it seems, AIADMK was not even interested in joining with BJP. It was BJP that required the support of AIADMK. AIADMK allocated unwinnable seats to BJP and also meddled endlessly in even the candidate selection process of BJP.

AIADMK also had become extremely unpopular with its anti-press attitude, anti-farmer, anti- government worker etc. Thus, AIADMK+BJP combine was all set to lose the elections in Tamil Nadu well before the voting took place. This gave the Congress (I) coalition the entire state. DMK chief Karunanishi also was magnanimous in forming the coalition, and gave the minor partners Congress (I), PMK, MDMK, the communists and the Muslim League lion's share of 25 out of 40 seats, while retaining just 15 seats for himself.

In Andhra Pradesh, BJP had no go except to be part of TDP coalition. TDP had become unpopular after a 9 year rule and the coalition was booted out in both the assembly and the parliamentary election held simultaneously. Congress (I) had forged a strong alliance with Telengana Rashtra Samithi and the left parties nd won a landslide victory.

BJP also broke with its alliance partner Indian National Lok Dal led by Om Prakash Chautala. The result was a three-cornered contest and Congress (I) walked all over the opposition. In Assam also, AGP wanted to badly have an alliance with BJP. But the local BJP leaders felt they could win Assam all on their own. The result again was in favour of Congress (I).

In Bihar and Jharkand, Congress (I) and Rashtriya Janata Dal of Laloo Prasad Yadav forged a very strong alliance and handed a heavy defeat to BJP and Janata Dal (U). Infighting in an already weakened Janata Dal (U) didn't help BJP much. In Maharashtra NCP and Congress (I) fought the elections together, despite differences over Sonia Gandhi's foreign origin issue. After all, the two are the partners in the coalition government in Maharashtra, and the coalition could overcome the challenge from BJp-Shiv Sena combine.

In Uttar Pradesh, it was a four cornered contest between Samajwadi Party of Mulayam Singh Yadav, Bahujan Samaj Party of Mayawati, BJP and Congress (I). Had Congress (I) forged an alliance with SP, BJP would have been in deeper soup.

Thus, sensible electoral alliance by Congress (I) and very poor mathematics from BJP ensured that BJP coalition could not reach the position they had in the 13th Parliament.

The current result should not therefore be seen as a verdict against the policies of the current government as most anti-BJP commentators have pointed out.

Once Congress (I) came down from its lofty pedestal and decided to go in for alliances, BJP's position automatically weakened. Now, BJP has a lot of work to do over the next five years if it wants to regain power at the centre. Sure, it has to shed its agenda of hate politics championed by the Narendra Modis. But it needs to do much more than that. Just as Congress (I) succeeded in bringing all the anti-BJP forces together, BJP will need to strengthen its relationship with all the anti- Congress (I) parties. It is a natural platform for all anti-BJP parties to come together claiming secularism. What will BJP bring in as a slogan for bringing all the anti- Congress (I) forces to come together?

Why this blog?

I have been maintaining a blog in Tamil for about 15 months now. I would like to raise several issues of interest to me and several others in the blogdom - in English, to reach out to a larger audience base and engage in meaningful debate.