27th April

Allocate through auction

The article praises the govt decision to allocate the spectrum to the telecom operators on auction basis rather then on the basis of subscriber-base. It also talks about the issues that such system can face and its possible solutions. 

A government committee suggested the auction based system is better to allocate the spectrum to the existing operators. It would be more transparent and equitable then the existing system and enable efficient use of the scarce resource. The policy change comes after the TDSAT (tribunal for telecom disputes) verdict that the telecom policy doesn’t promise GSM operators more then 6.2 MHz of spectrum. Beyond this, it’s up to the government to decide the criteria of allocation. Subscriber based criteria could be misused by the existing operators by showing inflated figures of subscriber base. It also encourages inefficiency. Auction based allocation would compel the operators to debate whether to invest money in the bidding or improve the efficiency of the current spectrum by using new technology or simply erecting more towers. However, there are few issues as well in the auction based method for the existing operators. Like, the policy needs to clarify who would get the priority for the spectrum – the operators already having 6.2 MHz and needing more or the ones who are below that level and require additional spectrum. The best thing to do would be to go for auction of the entire additional spectrum beyond the initial level of 4.4 MHz. The funds raised by this could be used to create additional spectrum for auction and ensure steady supply of spectrum.

If other countries can allocate as much as 25 MHz of spectrum for operators, India can surely go for 15 MHz. 

Smokescreen as policy

The article throws light on the government’s proclamation to phase out tobacco production in the country within next five to 10 years. What has happened is exactly opposite. The author insists on fiscal measures to discourage tobacco consumption and thus, its production.

While 14 months back, the minister of state for commerce planned to phase out tobacco production in next 5-10 years, Flue-Cured Virginia (FCV) tobacco production in Karnataka was hiked to its all time peak at 100 million kg in the meeting of all stakeholders, convened by the commerce ministry through the Tobacco Board. For AP it was hiked to 170 mkg and for Karnataka, this time again, it was held at 100 mkg. This time, no election manifesto for LS elections or AP assembly elections talks about phasing out tobacco. Not only that it is grown in almost half of the constituencies in AP, but other reason for this crop’s success is that it is the only crop whose per-kg price-realizations have almost doubled over the last few years. The reason for this is that worldwide the production of the crop has fallen down. While in Zimbabwe, eco-political turmoil has lead to decreased production, Europe has been phasing out subsidies on the crop for cultivation as per EU norms. Decreased production in Brazil, the leading producer of the crop, also affected the prices. In these conditions, with cheap production cost in India, Indian tobacco enjoys the competitive edge. This is precisely the reason why the authorized crop is regularly hiked. 

In order to discouraged production of the crop, fiscal measures like more excise duty and indirect taxes should be imposed. People should also be educated about the ill-effects of tobacco. Without this, the action-plans to phase out the crop remain a smokescreen.

Tennis Australia double-faults

The article expresses dissatisfaction over the decision of Tennis Australia to skip the Davis Cup tie between the two nations to be played at Chennai over the security reasons. It also insisted on joint efforts of sports federations of India and Union Sports Ministry to convince the other nations about India’s preparedness for security for any international sports event.

The grounds on which the Tennis Australia scrapped the events are totally unjustified. Citing the shifting of IPL T20 as a reason is disgusting since the difference between the scales of the two events is incomparable. IPL is a mega event that needs massive security compared to Davis Cup. After the Lahore attack on the Sri Lankan team on March 3, there is a perception among the foreign teams that they could become target of terrorist attacks. It is important for India’s sports federations to work with Union Sports Ministry to convince their counterparts that the security levels here are fool-proof, considering the fact that India would be hosting three mega events in the next two years i.e. Commonwealth Games, Hockey World Cup in 2010 and ICC Cricket World Cup in 2011. 

Taking the cue from China, India should clearly demonstrate that if its neighbour can host Olympics 2008, India also has the well and capabilities to provide security to any international event of any scale.

25th April

RIL earnings growth muted

The article talks about the better then expected growth of Reliance Industries and its future prospects considering the fact that the worst part is over for oil industry. The company would also get the boost with discovery of gas in the KG basin.

The forth quarter performance of RIL has beaten the market expectations despite 1% net fall in profits and 25% in revenues. While gross refining margin fell from $15.5 per barrel to $9.9 per barrel Y-o-Y, it is still better then global benchmarks. Demand has contracted for hydro-carbon industry in both domestic and global markets as well as price softening of crude and products, both petroleum and petrochemical. Reduced production hasn’t helped. Refining and marketing business that accounted for 70% of company’s revenues has seen 31% fall in EBIT and 25% in revenues. But petrochem business has seen 31% decline in revenues but 17.5% increase in EBIT. E&P business also saw 5.8% growth in EBIT despite 11% drop in revenues. However, the worst is possibly over. The feeling is attributed largely to the recent beginning of gas production from KG basin as well as commissioning of new refinery. 2009 is expected to be a transformational year at least by the company CMD, Mukesh Ambani. The new peak gas production combined with increased demand in by the end 2009 would be a big boost for company’s topline. Company has tied up with fertilizer producers and is expected to sign up contracts with power plants and manufacturing industries. 

Finally, the merger of RPL with itself would also help with 25% of world’s complex refining capacity and greater bargaining power with respect to price and quality of crude would rise. Improved efficiency would be an added advantage in this volatile industry.

Shares as currency 

The article advocates for use of shares as a currency in certain cross-border transactions such as import of capital good and technology. Such facility would also help the companies to revive their investment plans. 

Indian companies have already been allowed the issue of equity shares in lieu of lump-sum fee, ECBs and capital goods imports after the approval from Foreign Investment Promotion Board. But wider use of shares as currencies would help cash-starved companies to fulfill their needs as well as revive their investment plans. Such an arrangement might result in better appreciation of shares of the buying company and the arrangement would be certainly better then barter system. But the only doubt here could be that in the current risk-averse environment there might be fewer takers for equity payment. However, this system can also bring two needy parties together. For example, there might be a company for want of capital goods but might not have enough cash for the purchase while on the other hand there might be a capital goods manufacturer who might not be getting and buyer in the current demand-starved economy. Share payment might be the right deal for both of them. Thus the arrangement has the potential to generate more economic activity in these times of liquidity crunch and credit freeze. The proposal can also be used for payment of salaries to employees. ESOPs are already there but companies can go one step further to make monthly payment of salaries in the form of stocks instead making them loose the entire salary altogether. Legal partnership firms already work on the basis of providing a percentage share of equity and profits to all partners.

However, in this entire exercise, care has to be taken that the interests of all stakeholders are protected.

24th April

PMO in the coalition era

The article offers a counter-argument to Narendra Modi’s statement that the current PM Manmohan Singh is indeed a weak prime minister. The article explains the dynamics of the coalition politics which has made politics more regionalized.

While Manmohan has been stated as a weak PM, it is important to know that PMO has acquired a different character in these days of coalition politics. Pre-coalition era has parties who won the elections with simple majority. PMs were more authoritative and sometimes to the extent that it threatened the democracy itself. These days politics is more regionalized and democratic. PM has to act with consensus which makes him look weak and vulnerable. Manmohan Singh looked weak when there was opposition for the nuclear deal to the extent that it was feared to fall at one point of time. This would have affected the credibility of PMO itself. Even Vajpayee looked weak and vulnerable during his times. But sometimes this apparent weakness can be strength in the sense that every major decision is discussed and highly debated. The exercise might be frustrating but at the end it gives more durable and lasting solution. Coalition politics gives shape to more inclusive governance which is why PM’s statement last week that regional parties are detrimental to growth is self-contradictory.

While Indian polity becomes more regionalized, it should be known that it is this politics only that has thrown a PM like Manmohan from nowhere. 

Financing infrastructure

The article talks about the need of huge amount of debt financing for the infrastructure projects in the country even at the current reduced economic growth projections. IIFCL (India Infrastructure Finance Company) has to play a big part in it.

While IIFCL has stepped up its lending to Rs. 6000 crores from Rs. 3200 crores last year and Rs. 1500 crores in 2007-08, it is still a drop in ocean considering the total debt requirement of Rs. 988035 crores in the 11th Plan period according to Secretariat for the Committee on Infrastructure. The projects are worth Rs. 2056150 crores. But these projections are based on 9% GDP growth. But as the story is different today, IMF has projected 4.5% growth in the current calendar year and 5.6% in the next, after 7.3% growth registered last calendar. However, downturn has little to affect the infrastructure project since the country already has a backlog in infrastructure project financing. While corporate investments grew by 9% of the GDP between 2002 and 2007, infrastructure investments grew by only 2%. Thus there is a huge debt financing required to catch up and government has to play a pivotal role in this. IIFCL, a special government-owned SPV, with guarantees extended by centre, can raise funds since it plans to sell taxable bonds of Rs. 5k crores and tax-free bonds of Rs. 30k crores.

While IIFCL could do more, for the present it should identify bankable projects that need financing and ensure the funds get available to them as soon as possible.

23rd April

Optimism on generation

The article talks about the reforms that need to be implemented in the power sector to minimize power thefts which forms the major part of AT&C (Aggregate Transmission and Commercial) losses.

The 4000 MW ultra-mega Sasan power project of Reliance got financial closure in the form of legally binding commitment from its equity holders and debt financers. With low fuel prices, exploration of gas from KG basin, more power projects would take off in future. But without reforms in electricity distribution, everything is vain. Seven states haven’t been able to unbundle their SEBs as per the Electricity Act of 2003. AT&C losses are still over 30%, with some states even recording 40-50%, in spite of govt grant of Rs 40K crores over the tenth plan through Accelerated Power Development and Reform Program (APDRP). AT&C is euphemism of power theft which can be curbed by installing Distribution Transformer (DT) meters but it is still not implemented in most of the states. By March 2008, only three states achieved 80-100% DT metering. Average realization remains lesser then average costs resulting in huge losses by SEBs. While incentives haven’t worked evidently here, it is important to build political consensus to achieve large power reform. Gujarat govt has shown that power sector reforms are possible without losing vote banks. 

While cost of providing free electricity to farmers is so low that if govts curb the theft effectively, they would have spare electricity for all their vote banks without compromising with viability of SEBs. Shrewd politicians have already realized the benefits of power reforms.

Civilian plight in Lanka

The article emphasizes on prioritizing the refugee relief in Sri Lanka and providing them a country where they feel more a part of the nation rather then a segmented community. Such atmosphere would also help curbing resurrection of militarism in future.

While humanitarian crisis are at its peak in the region, it is a litmus test for Rajapaksa regime to provide the relief and rehabilitation to refugees before going for post-LTTE reconstruction and inclusive govt when the war would be over. Given the history of chauvinist Sinhala form of military tactics, the strategy for the future governance is debatable but for now as he send a special emissary to India to discuss rehabilitation measures for the refugees, he has send some positive signals. For India, it is important to prevent the spill over effect of crisis to Tamilnadu. It should, like other countries, immediate ask Sri Lanka for ceasefire to enable the remaining civilians to escape from the war-field. With more casualties and civilian sufferings, Tamilnadu would definitely react. But the state should make a distinction between the legitimate rights of Lankan Tamils and existence of LTTE. 

As of now, Colombo should have delivery of its promise of rehabilitating refugees as a top priority. A human catastrophe at this stage could act as an ingredient to resurgence of military extremism in future.

22nd April

Hobson’s Choice

The article comments about the policy rate cuts that RBI announced yesterday. While the rate cuts clearly reflect the limited options RBI has, it also signals the banks to react to this and reduce their lending rates. 

As the 25 basis points cut comes on both, repo rate and reverse repo rate, the bank has done a little for both the opinions i.e. those who believed that the bank should succumb to industry pressure and drastically reduce the interest rates and those who believed that the bank should wait and see the effects of its policy measures. However, its statement answers almost everything except the major problem faced by the banks today which is of increasing credit risk in the times of slowdown and reduced growth rate. However, RBI has clearly signaled that the interest rates are sufficiently low and that banks should reduce their lending rates further. While RBI’s urgency to bring down the retail lending rates is understandable, there is very little it can do about it owing to the abysmal fiscal policy status which would remain so in the near future. 

With low interest rates, huge government borrowings would act as a villain as RBI tries to spur investment demand. The net result would obviously be 6% project GDP growth.

Reality Check for Aviation

The article expresses necessity to restructure the cost structure in the Indian aviation sector since the present one doesn’t allow the airlines to reduce the air fare without which they would run out of volumes and deepening their losses.

While Jet Airways reduced its fleet size due to reduced demand, Air India reduced its fares by up to 70%. With high growth rate that the airline industry saw in the past three years up to 2007-08 (15.1%, 31.4% and 21.2%), the large part of it was owing to the low fares that airlines offered. But these fares weren’t viable with the operating costs of the airlines because of which they were sitting on huge losses. But now most airlines have raised fares despite dropping volumes. At this time Air India’s decision to slash down fares comes as a paradox. However, Air India is a state-owned enterprise and would definitely be there for eternity with the use of public funds. While such a large player’s tactics obviously affects the market, AI shouldn’t abuse its public sector strength. At the same time the airline shouldn’t also be burdened with its social commitments. Airlines have started adjustments through capacity cuts and reducing flights as the domestic traffic goes down by almost 10% in February 2009. Current costs are high as new airports are being developed and existing airports are modernized. But the costs should go down as these airports become more efficient. 

As the bulk of these costs are in govt domain like fuel charges and mandatory capacity on unviable routes, unless govt pitches in, aviation prices would settle at levels beyond a common man’s reach.

21st April

Ouch!

The article talks about the realization that has come to the Indian consumers about the ill effects of credit cards as their numbers decline in the last fiscal by about 28 lakhs while on the same time the number of debit cards issued increased exponentially to 2.37 crore. 

In the times of economic slowdown, the decrease in the number of outstanding credit cards is good news. Largely responsible for irresponsible consumerism in the good times when salaries increased exponentially and people started buying things beyond their immediate reach, credit cards also brought, along with it, a huge pile of overdues. Card companies also didn’t worry much since they enjoyed the interest rates being charged to consumers on their overdues. But now both, banks and consumers, are all left with huge pile of overdues. While the number of outstanding credit cards decreased from 2.83 crores in April 2008 to 2.55 crores in March 2009, payments made through credit cards have also gone down. At the same time, the number of debit cards issued this fiscal is huge 2.37 crores. This is a welcome rebalancing.

The slowdown has forced us to go to our ancestors’ philosophy of saving something for the rainy day, something alien to US consumers and something inherent in our DNAs. Now people would see credit cards for actually what they are – huge convenience and not the escape from reality.

Sugar pricing

The article criticizes the huge amount of government intervention that goes into the pricing of sugar in India which in turn affects the demand-supply equation of the entire industry. 

Govt’s step to stop futures trading on sugar is a welcome step but it should be known that sugar crisis is not only due to futures but largely due to policymakers. Govt wants to keep retail sugar prices low but still expects sugar mills to pay high prices to sugarcane farmers. While India is second largest producer of sugar, it is also the biggest consumer. Intense government intervention forces sugar mills to go into losses because of which they are not able to pay high prices to farmers, who in turn switch to other crops creating a shortage down the line. Global sugar prices are largely dependent on the demand-supply equation in India. Sugar production this year has gone down drastically by 40% to 15 million tonnes against the consumption of 23 million tonnes. While sugarcane factories have stopped crushing sugarcane owing to lack of supply, the retail prices went up Rs.30 per kg before govt threatened to intervene and allowed duty-free import of both, refined and raw, sugar. Global prices of sugar have gone up in anticipation of huge imports from India. Sugarcane needs to be crushed as soon as possible after harvesting otherwise the sucrose content in it decreases which is not good for farmers. State governments like UP always insists in pricing the sugar at prices higher then scientifically calculated Statutory Minimum Price (SMP). 

While such actions need to be resisted, government should also provide subsidized prices of sugar only to the weaker sections of the society instead of all consumers.

20th April

Get Real

The article emphasizes on the factor of improving the sentiments of the banks towards lending rather then completely relying on RBI’s monetary policy changes to improve the economic scenario in the country.

RBI has very limited options with respect to monetary policy changes. With WPI touching 0.18% on the week ended on April 4 and industrial production down by 1.2% in February 2009, RBI is under pressure to revive the economy big time. But the options with RBI are limited. Even if it decreases CRR to its long term goal of 3% and decrease the reverse repo rate to disincentivise banks to park their funds to RBI, it does not necessarily result into spur in lending or economic activity to the benchmark growth rate. Although growth in auto sales, cement prices and dispatches, and steel production indicate development in some areas. While there is no dearth of money in the economy, making it cheap would risk the currency itself. Unless and until the commercial banks do not lower their interest rates, there is nothing much RBI can do. Cost of funds tend to be low for banks owing to the host of administered interest rates and that reduction in rates could wash out the funds off the banks to alternate avenues. On the lending side as well, the mandated lending rates for certain loans shackles the banks to lower their prime lending rates. 

Thus, there is a very little in RBI’s hands to do to revive the economy and one should not expect any miracle tomorrow.

Mockery of governance

The article condemns the government’s decision to allocate 2% of PSU oil companies’ profits to social programmes. These are listed companies and so government has to take into account shareholders’ view before imposing any such decision that mocks the governance.

Already been a victim of forced unviable pricing by government, the new decision comes as a blow to the investments and returns of other stakeholders. The BIG Four – ONGC, BP, HP and IOC – are all listed and have public shareholding from 20% in IOC to 48.9% in HP. The new CSR decision would not only affect the valuation of these companies and make them less competitive against private sector companies but would also hamper their capital investment and dividend plans. This kind of social extravaganza is targeted more towards the oil minister’s constituency or the other top leaders of ruling party. It would only increase the already widespread misuse of PSU funds. Companies have to conduct their affairs in order to improve social and environment sustainability but not at the cost of corporate governance and opinion of stakeholders. The reason these companies are listed in stock markets is to make their governance more transparent and make them accountable to non-government stakeholders. But if government still treats these companies as their fiefs then it is better to delist them. 

Finally, a publicly listed state-owned company must respect the shareholders democracy as well. 

Promiscuous politics

The article talks about the habit of premier politicians of the country preferring to remain single pre-polls in order to enable them to make post-poll alliances without any bonding or dependency. 

These days, promiscuity hardly ever raises any eyebrows when it comes to post-poll alliances. Even if they swear undying fidelity to the so-called common agendas, many senior leaders believe in this philosophy of ‘short-term marriages’. Taking the example of Rahul Gandhi who has remained virtually non-attached along with many of the senior leaders who have remained single and ready to mingle with any party after the elections to form the government speaks a lot about the business opportunity seen by these leaders in the matrimonial market of politics just like common Indian sees in the actual matrimonial market. Other high profile single leaders include big names like Mamta Banerjee, Navin Patnaik, Mayawati and Jayalalita. But it is interesting to think whether this singleness amount to any peculiar inverse brand equity for politicians as they seek out best alliances to suit their interests say every five years, if not less then that. 

Rahul’s present singleness may pay his party rich dividends post-elections although he may not be personally happy about it given the fact that such post-poll marriages make strange bedfellows.