Well Done, Trivedi

Resist pressure to roll back much-needed hikes in passenger fares

    Railway minister Dinesh Trivedi has done a good job, even factoring in the advantage of low expectations. He has not surrendered completely to populism and presented a reform-oriented budget. His party boss, the mercurial Ms Mamata Banerjee, has threatened to force a rollback of the average 19.2% increase in passenger fares that have been proposed after a gap of 10 years. The UPA should not give in to this populist bluster. The reality is that no major party, save the Trinamool, is ready to destabilise the government and face mid-term elections. The UPA should stand by these proposals and call the Trinamool bluff. Mr Trivedi’s break from the tradition of freight and upper-class fares subsidising lower-class fares is wholly welcome. The plan to make automatic adjustments in tariffs to factor in rising fuel costs also makes eminent sense and would pave the way for deregulation of fares. Passenger fare hikes will yield an extra . 7,000 crore next fiscal. Freight earnings are projected to grow by a whopping 30%, with the Railways expecting to move 55 million tonnes more of goods. More than half of its plan outlay of . 60,100 crore for 2012-13 would be met from internal resources and market borrowings. So, revival of growth and removal of irrational bans on mining hold the key for the Railways. The good news is that the Railways has increased appropriation to the depreciation reserve fund, meant to replace old assets, and also pension fund to meet extra liabilities. The operating ratio, which measures how much of revenue is taken up by current running costs, has been estimated at 84.9% next fiscal against the dismal 95% this fiscal. Such financial improvement is imperative, if IR is to invest in safety and modernisation. 
Mr Trivedi has done well to accept recommendations of the Pitroda panel on modernisation and Kakodkar panel on safety. New rolling stock, reinforced bridges and tracks to enable higher speeds and better signalling are all required. Reforms on multiple fronts can be implemented only when the political class stops viewing the Railways as a platform for disbursing patronage. Surely, Mr Trivedi has broken new ground.


http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETM/2012/03/15&PageLabel=14&EntityId=Ar01403&ViewMode=HTML

Putin Returns

Putin Returns

He should try the path of reform now, for the sake of his legacy

    Defying critics, Vladimir Putin won his third term as the president of Russia after a gap of four years. Putin’s return will mark continuity from New Delhi’s point of view. Even as prime minister during the last term, he held the effective reins of power. But his return to the Kremlin has hardly been smooth sailing. Whether it will lead to stability in Russia’s managed democracy, remains to be seen. Trouble started last year when the Russian strongman publicly announced his intention to swap places with outgoing president Dmitry Medvedev. With pro-democracy movements in the Arab world going on at the same time, the brazenness of the declaration riled the Russian public. Things went from bad to worse during the parliamentary elections in December. Marred by widespread allegations of vote rigging, Putin’s popularity took a plunge as protests against him intensified. 
    Against this backdrop, Russia’s presidential poll results can be read in two ways. First, the popular protests against Putin are being led by the disenchanted urban middle class. A decade of economic growth, fuelled mainly by gas and oil revenues, has also led to its growth in numbers. This in turn has heightened expectations of long-pending governance reforms. But Putin’s core constituency continues to be the working class in Russia’s hinterland. Indebted to Putin for pulling them out of the economic doldrums of the 1990s, as long as they have a stake in Russia’s managed democracy, Putin has nothing to worry about. 
    But the realities that face Putin today are very different from the last time he was in office. Europe, Russia’s largest energy export market, is in slowdown mode. Increase in energy prices comparable to the last decade is not assured. Failure to diversify the Russian economy will hurt Russians across the board, making it difficult to put a lid on popular frustrations. In such a scenario, Putin can’t continue with the old style of functioning. Along with initiating genuine political reforms, he must break the hold of the wealthy oligarchs and take on the crony capitalism that plagues Russian society. 
    This might appear counter-intuitive to Putin, but strong-arm tactics to maintain political stability are no longer feasible. Trying to muzzle popular protests in the era of growing internet penetration is subject to diminishing returns. Russia needs a new social contract between its people and the government. As Putin begins his third term, he must start thinking of his legacy. If he wants to be remembered as Russia’s saviour, he must push reforms now.
http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=TOINEW&BaseHref=TOIM/2012/03/06&PageLabel=18&EntityId=Ar01804&ViewMode=HTML

Mine, All Mine

A merger is Anil Agarwal’s first step to creating a resource giant of global size

    Anil Agarwal-controlled Sesa Goa, India’s largest exporter of iron ore, will absorb another group company, Sterlite, in an all-share transaction. Sterlite shareholders are happy: giving up five shares of Sterlite for three shares of Sesa Goa makes them richer by . 30, on a 52-week average price. London-listed Vedanta will transfer its 38.8% stake in oil producer Cairn India as well as its debt of $5.9 billion for $1 to Sesa Sterlite. This will slash debt on Vedanta’s books, and earn it some brownie points from rating agencies. The combined debt of the group hit $9.65 billion after the near-$9 billion acquisition of Cairn’s India assets. With better ratings, Vedanta’s borrowing costs overseas could fall: the company reckons that the merger will save it about $200 million a year. Sesa Sterlite will be listed in India and the NYSE, becoming the world’s seventh-largest minerals and metals player, with a 58.9% holding in Cairn. Unlike group company Vedanta Aluminium, Cairn has strong cash flows, and after the restructuring, it can raise low-cost loans on behalf of the parent. Agarwal says that Sesa Sterlite will become the main vehicle for future acquisitions as he tries to take the group to the league of companies like Brazil’s Vale, Australia’s BHP Billiton, et al. 
Agarwal believes, correctly, that a metal-only company can be subject to massive global shocks, the likes of which forced Vale to diversify into coal and other minerals. The purchase of Cairn’s oil assets allowed Vedanta to diversify away from aluminium, copper and zinc. It is also trying to enter the coal business, now reserved for government, except for some captive mines. We have argued against both state monopoly and captive mining, and, instead, for opening up the coal sector to competition. These policy changes, along with a transparent system of auctioning mining leases and compensating people affected by mining, will boost the efficiency of India’s resources sector. With proper rules, specialised prospecting and mining companies will enter India, and the government must make sure they act in an environmentally-responsible manner. Then, we shall have national champions in the resources sector.

http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETM/2012/02/28&PageLabel=14&EntityId=Ar01403&ViewMode=HTML

Bravo, MCX!

Bravo, MCX!

The bourse’s public issue success holds out three positive messages

    The initial public offering (IPO) from the country’s largest commodity exchange by volume has been a huge success, by conventional standards, having been oversubscribed 54 times. It does credit to MCX and its promoters, who found the courage to go ahead with the IPO in a climate that many have found forbidding. It sends out a positive message on three different counts. One, it should encourage other companies that have been holding back on their public issue plans. The lesson from MCX’s success is clear: if your company and the price at which you are offering it to investors together create a value proposition, investors would lap it up, regardless of the immediate sentiment in the market. Two, the government should shed its diffidence over its divestment plans. Not only ONGC but other state-owned companies that have been under consideration for disinvestment are likely to be welcomed by investors, at the right price. Three, exchanges are eminently suited for listing. There is an archaic view, which got a boost from the Bimal Jalan committee report on ownership and governance of market infrastructure institutions, that bourses are natural monopolies and should not be listed. Now, MCX is a commodity exchange and not a stock exchange. As such, its IPO leading to its listing does not, by itself, repudiate the Jalan committee view that as a first-level regulator and a public utility, a stock exchange should seek ‘reasonable profits’ and not behave in the conventional profit-maximising mode of listed businesses. Since banks, which are part of the payments system and perform a public utility function, only gain by virtue of being listed, competing businesses, there is no reason to believe otherwise about stock exchanges. The MCX public issue does strengthen the view that exchanges are businesses in a space open to contestation that does not, aided and guided as it is by regulation, minimise public welfare. 
The extent of oversubscription of the issue suggests the issue was underpriced. This is not a great result for the issuer, even if good for the investor. Other issuers can try to avoid this flaw that many overlook while celebrating oversubscription of a public issue.
http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETM/2012/02/27&PageLabel=14&EntityId=Ar01403&ViewMode=HTML

Liquidity Preference

How to unlock the large amounts of savings going to waste in gold

    Fixing the disrupted system of distributing saving products — mutual funds, insurance and pensions — is the key to drawing Indian investors away from their damaging obsession with gold. Billionaire Warren Buffett recently wrote that gold was a valueless asset: it is intrinsically worthless. It is priced high simply because a lot of people believe that it has value. Indians don’t share Buffett’s scorn for gold: we’re the second-largest consumer of gold in the world after China, which recently usurped our place at the head of the table. India’s gold imports suck out hard currency in exchange for an asset that will be stored in lockers, doing nothing productive for the economy. Can anything be done to curb India’s appetite for gold? Traded gold funds need to be backed by actual stocks of gold and allow people to own and trade it without physically buying, holding and selling the metal. These do nothing to reduce the demand for gold. Gold loans and deposits allow people to exchange gold for cash, with the metal as collateral. Unless someone buys up the collateral and exports it for cash, the economy’s gold holding does not go down. It is not easy to churn unproductive gold into productive liquid investments. But there are systemic ways to achieve this objective. 
Many Indian equity investors shifted to gold after losing heavily in the crash of 2008 and 2009. Yet, in the long run, equities always do better than gold in terms of returns. But an attempt by Sebi to trim the fat commissions of mutual fund agents that had knock-on effects paring the commissions of insurance agents, has whittled down the growth of both mutual funds and insurance. The National Pension System also had a very poor incentive structure in place for distribution until recently, and has never taken off properly, as potential savers just are not aware of the scheme’s superior benefits. As for small saving schemes, inflation has eroded their appeal and there are no inflation-indexed bonds on offer. In the absence of financial saving options, savers have fallen back on the traditional store of value: gold. Fixing the distribution incentives would appear to be the solution to mass desertion of financial saving products for gold.
http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETM/2012/02/24&PageLabel=14&EntityId=Ar01403&ViewMode=HTML

Needed, Political Will

Needed, Political Will

To carry out prescriptions of the Prime Minister’s Economic Advisory Council

    The Prime Minister’s Economic Advisory Council (EAC) headed by Dr C Rangarajan expects the economy to grow by 7.5% to 8% in 2012-13. But this is contingent on some assumptions: a relative lack of external shocks, fiscal consolidation and a pick up in fixed capital formation, which has slipped, as a proportion of GDP, by four percentage points over the last four years, to fall below 30% this fiscal. The Council’s Review of the Economy is constrained to talk only in terms of economics. It is not its job to talk of the political resolve that is required to make some of these growth-friendly assumptions come true. But, in the real world, taking tough decisions such as cutting oil subsidies, so as to reduce the fiscal deficit and “phase out… suppressed inflation on account of incomplete cost pass-through” calls more for political toughness than for economic savvy. A major factor hindering investment in the economy has been drift and dither in decision-making. Loss of political authority after a series of scams hit the government and botched attempts to tackle the anti-corruption agitation launched by Anna Hazare contributed to that drift and dither. Restoring political authority and exhibiting the political will and resoluteness that are required to administer bitter medicine are not things that the learned Dr Rangarajan can prescribe, but what the economy needs is nothing short of that. 
Receding chances of fresh financial turbulence in the eurozone, which the EAC counts as a favourable external factor, might well persuade investors to deploy abundant global liquidity with greater zeal in commodities, including oil. Rising crude prices suggest this is already happening. This makes it all the more imperative that the government decontrol oil prices, scrap diesel subsidy and allow independent marketing of fuels. Widespread black marketing of fertilisers in north India suggests that scrapping fertiliser subsidy is both feasible and necessary. Farmers already pay a high price and the industry needs incentive to make fresh investment in the sector, and raise output. Similarly, power theft must be stamped out. What growth calls for, in short, is political will.

http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETM/2012/02/23&PageLabel=14&EntityId=Ar01403&ViewMode=HTML

A Step Forward

A Step Forward

The latest coal initiatives are sound, but why stop short of scrapping state monopoly?

    In a scenario of tight supply and actual coal shortages at thermal plants (despite extensive proven deposits of the mineral), it is welcome that administrative initiative is reportedly boosting fuel supply for private power producers who now provide the bulk of incremental capacity addition in electricity generation. But in parallel, we need to thoroughly revamp market design for supply and evacuation of coal, our main source of commercial energy. The reform is essential to provide the right market signals to take appropriate action, given the sheer logistics involved in delivering bulk supplies of coal, if need be from abroad. Reports say that the Prime Minister’s Office (PMO) has impressed upon Coal India (CIL), the public sector monopoly, to enter into legallybinding supply contracts with power producers. The PMO rightly wants letters of assurance from CIL to be redrafted into legally-obligatory fuel supply agreements (FSAs). Such a course of action is necessary, given the vagaries of coal delivery on the ground. For instance, reports say that during April-November, while CIL ought to have supplied about 220 million tonnes to thermal stations, actual delivery was just over 190 MT. But it would also make sense to mandate that the FSAs be freely tradeable, either wholly or partly, so as to incentivise coal usage and also red-flag supply bottlenecks. 
The plan is that should CIL fail to supply coal to thermal stations, it would be required to import the quantities required. Such contingency planning presupposes spare port capacity and railway rolling stock that is available for the asking. This is unrealistic. Hence the pressing need for coal traders, akin to power traders mandated by the Electricity Act, 2003, to have a more complete market. Multiple coal traders actively seeking custom would be better placed to garner the requisite infrastructure and resources to timely deliver supplies. Further, coal traders ought to have the go-ahead to supply from captive mines, to reduce glaring distortions in the policy on mining. And sooner rather than later, we need to withdraw the anachronistic Coal Mines (Nationalisation) Act, 1973, for stepped up investment and output.

A Bird, a Plane, a Dud?

A Bird, a Plane, a Dud?

DGCA and creditor banks must take decisive action on errant Kingfisher

    Good times can indeed bubble up, but not float indefinitely on thin air, it would appear. Accumulated losses of over . 6,400 crore and loans exceeding . 7,000 crore are dragging Kingfisher Airlines to the ground. The airline is not helping its own cause by cancelling flights indiscriminately, that too without informing the Director General of Civil Aviation (DGCA), and apparently adding to its customers’ woes by not paying full refunds on their aborted fares. The situation is bad enough for strong remedial action by the aviation regulator and by the consortium of banks led by SBI. Cancelling flights without notice and full justification amounts to cheating would-be fliers. A cheat cannot be licensed to fly. Till being reassured of good behaviour, DGCA should suspend the airline’s licence to operate. This would almost certainly make its finances even worse. The promoters should either infuse fresh capital or the banks should convert their loans into equity and take over the airline. No foreign or domestic investor is likely to buy into a company with the incumbent management still in charge. Once creditor banks acquire majority control, they can bring in an investor who has the expertise to run an airline. A sizeable minority stake is sufficient for an investor who expects to deploy its own managerial expertise to turn the airline around, provided the bulk of shares are held by financial investors whose primary interest is in seeing their investment prosper rather than in meddling in the running of the airline. This option is superior to the other alternative before the lenders, of foreclosing their loans and liquidating the airline. 
It is welcome that the civil aviation minister has made it clear that the government would not seek an artificial bailout, and let the banks make their call. This, indeed, is how it should be. With such clarity in the government, the banks should act with speed. Delay can only make matters worse. If they make it clear that they mean business, it would help the promoters concentrate on the core question: should they cut their losses and run or pump in fresh equity? The state of the industry and the fate of Air India should not be allowed to cloud the issue.

Hasten Slowly

Hasten Slowly

Do not rush into telecom policy that stands to reduce competition

    Telecom minister Kapil Sibal recently announced some policy decisions that raise some fresh knotty questions even while providing answers to some others. The Supreme Court order of February 2 not only cancelled 122 licences and called for auctions but also cautioned that the “state is bound to act in consonance with the principles of equality and public interest and ensure that no action is taken which may be detrimental to public interest”. Does a policy that allows incumbents to retain spectrum for which no separate charge was paid, in addition to what they paid for their licences, respect the principle of equality as when new entrants would have to bid and pay large amounts for spectrum? Or would it have been better for a policy change to be considered after implementing the court’s order to auction licences (not spectrum)? An incumbent sitting on, say, 8 MHz of spectrum obtained for no charge over and above the licence fee can easily outbid new entrants for spectrum and scupper competition. If the number of players per circle turns out, after the auctions, to be lower than what obtained before the licences were cancelled, would public interest not have suffered? Would that be following the court order? Would the Competition Commission not have a view on a policy change that potentially reduces competition and sets up a playing ground tilted against new entrants? What is the rationale for allowing sharing of 2G spectrum issued gratis while prohibiting sharing of 3G spectrum that operators have bought paying huge upfront amounts? 
The larger question is why should forward-looking policy continue to designate particular bands of spectrum for specific technology and specific use? Why not simply allocate spectrum and allow operators to choose what technology and use they want to put it to? 2G is obsolete, spectrum-hogging, inefficient technology whereas India needs to use all its spectrum for wireless broadbandbased communications to unleash the productive energies of its 1.2 billion people. It would make sense for the government to carry out wider consultations before finalising a new telecom policy.

Temporary Respite

Temporary Respite

There is no ducking the structural challenges in containing inflation

    The sharp decline in inflation in January to 6.55% is definitely good news, but it would still be premature to declare victory over inflation and start cutting policy rates. If we take out the high base effect and the strengthening of the rupee in January, which helped rein in the rupee prices of globally-benchmarked commodities, inflation still remains a concern. After all, only by squeezing growth by two percentage points has inflation been tamed. The only way to beat it is to address the structural factors pushing up prices. The fiscal deficit is one. It contributes to excess demand in the economy. Large subsidy outlays financed by borrowings represent channelling of private savings into state-sponsored consumption, boosting consumption demand and depressing investment. The fiscal deficit must be cut, and what remains must be skewed more towards investment and less towards consumption. Oil and fertiliser subsidies are prime candidates for scrapping. While their removal would immediately push up fuel and fertiliser prices, such a move would contain overall inflation by paring down excess demand. Any reduction in petroleum product consumption would reduce the biggest item of imports, crude, and reduce downward pressure on the rupee as well. This, in turn, would cut the depreciation route to commodity price inflation. 
The other structural issue is food production. Our current policy stance is to transfer a share of the incomes generated in industry and services to the rural sector through a variety of government schemes. This feeds additional demand for food without any increase in rural production. This must change. There has to be intelligent intervention in the farm sector to augment rural incomes by boosting rural production. We need action ranging from removing restrictions on the farmer’s freedom to sell to changing the policy of letting power flow to rural areas only at night and promoting a shortened, efficient supply chain between the farmer and the urban consumer. Any time is a good time to begin structural change. When prices moderate is a better time to do it than when prices are still on the rise.