A semblance of an overdue correction set in last week, on global concerns. Oil prices hovered near $100/barrel and concerns surfaced that US GDP growth in the fourth quarter would be around 1-2 per cent, down from 3.4 per cent in the third. And more sub-prime follies continue to be revealed. The Sensex declined 1068 points during the week, to end at 18,907 and the Nifty fell 269 points to close at 5,663. Of the 1,068-point Sensex fall, ICICI Bank contributed 307 points, Infosys 149 and Larsen & Toubro 128. The biggest positive was from Reliance Industries at 25 points.
The India story has been good over the last few years because demand pent up by a system of obnoxious controls was freed. Producers were freed--largely though not wholly--from the perversity of senseless licensing controls and went on to supply consumers with things they coveted but were denied like phone connections and cars. Consumers were freed from the enervating wait for cars, telephone lines, even cement. This freedom resulted in an entrepreneurial burst of energy that led to the economic boom we are witnessing.
But maintaining a high growth rate depends on proper planning. This needs nothing more than a triumph of common sense over ideology. Alas, the fractured and myopic polity is determined to derail this growth. Examples abound.
The senseless continuation of a subsidy on petroleum products, much written about, is one. When oil prices are approaching $100 a barrel it is foolish to prevent fuel prices from rising and to put the burden on state-owned oil companies (60 per cent) and the government (40 per cent). The government’s share is not reflected in the Budget using an accounting fraud and is a legacy to future taxpayers. Meanwhile, undeterred by increasing fuel costs, the number of cars sold is increasing, causing huge environmental problems and congestions. There is thus no consumer pressure on automobile makers to improve fuel efficiency, nor, strangely, is there legislative pressure. It is a criminal folly for the government not to mandate, upon strict monetary penalties, fuel efficiency norms for automobile makers. It must also mandate them to offer a stated portion of the vehicles they make with alternative fuel platforms such as gas or alcohol.
According to Nicholas Stern, a 3 degree Centigrade increase in global temperatures will melt the ice in the Himalaya and can put India at risk of a rising sea level. All this requires intricate planning and not the immature ideological posturing of a political class that is outdated.
Another offshoot of the mess of the balance sheets of Indian Oil Corp, Hindustan Petroleum and Bharat Petroleum is their inability, because of it, to pay higher rents demanded by owners of petrol pumps and the likelihood of reduced petrol pumps in Mumbai with an ever-increasing vehicle population.
The other example of bad planning is in the telecom sector, and the prevailing war over spectrum. One firm, S. Tel, has offered an additional Rs 6,000 crore for spectrum to launch services. It is owned 51 per cent by Skycity Foundation, which, according to news reports, paid Rs 1 lakh for the stake, and 49 per cent by Mauritius Investments, which paid Rs 1,000 crore for its holding. So basically, spectrum is a resource over which owners have squatting rights if they buy it expensively. The cost of such outlays will be borne by consumers, through higher charges, and, even if the business fails, the ownership of spectrum gives owners some value. Why else would there be such a sharp variation in the valuation of stakes?
Far more sensible to allocate spectrum cheap, treating it as commons, but to allow only use of it and not ownership of it. If the business fails, it cannot then be sold along with spectrum rights. Auctioning spectrum for failed initially; the government reverted to revenue sharing. Why should one assume it will now succeed?
The correction will provide buying opportunities in the coming weeks. The India story is good. Consider one fact. The four BRIC (Brazil, Russia, India and China) nations generate 14 per cent of global GDP but have 5 per cent of the global market capitalisation. The total market capitalisation/GDP of BRIC countries is 25 per cent; compared with 100 percent in the US.