India’s Abbottabads

By Mohan Sule

Wrong response to inflation, weak corporate disclosures, and silence of fund managers are testing investors’ patience

The discovery of Osama bin Laden in a military town near Pakistan’s capital has raised questions about that country’s preparedness in nabbing terrorists and detecting intrusions. Investigations will eventually reveal whether it was complicity or incompetence. Alas, our neighbour does not have proprietary stake on complacency and carelessness. If only the US Federal Reserve had noticed that cheap mortgages were fuelling asset bubbles. In India, the conspiracy to sell scarce second-generation telecom spectrum at throwaway prices to favoured companies happened in the heart of the capital, with everyone else too cynical or compromised due to compulsions of coalition politics to put an end to the looting. Similarly, there are many more Abbottabads in the country, with forces inimical to the well being of the economy lurking in the neighbourhood of policy makers and regulators, waiting to be confronted. One of the most insidious threats is inflation. Apart from the Reserve Bank of India, which scaled down the growth target for the current fiscal early this month, even finance minister Pranab Mukherjee has admitted that it would not be possible for the country to achieve 9% growth if inflation is not tamed. What he did not do was to identify the long-term contributors to the present situation excluding temporary factors such as disruption of foodgrain supplies and spurt in oil and metal prices. A constant factor for India will be the demand surge from rural areas triggered by the tilt of the present government: loan write-offs for farmers and employment schemes, which have provided liquidity to this segment.

At the same time, there is timidity to undertake painful reforms including phasing out of subsidies, taxing farm income and aggressive PSU selloffs to blunt the spending. Instead of a precision attack, like that undertaken by the US Navy Seals on bin Laden’s compound, the RBI has been enlisted for carpet bombing by ramping up interest rates. The drone attacks are inflicting damage throughout the economy already reeling from high commodity prices. The chain reaction is inducing across-the-board price spiral. Already, investors are dumping companies that are absorbing input costs for fear of losing market share. In contrast, China recently fined Unilever for trying to pass on the raw material costs to consumers. Right now, the economy needs higher capacities to cater to expanding demand so as not to affect prices adversely. The rising interest rates are sure to hinder rather than help in bolstering production. Costly money could also boost non-performing assets. The increase in provisioning by SBI in the last fiscal has raised concerns about the health of our financial services industry. If low cost of money fuels bubbles, high cost pricks them, causing pain all around as seen after the collapse of the property market in the US. Higher interest rates also attract hot money from hedge funds on the lookout for arbitrage opportunities, turning the domestic currency volatile and scaring long-term investment from pension funds.

Besides insider trading, unwillingness of companies to issue clarifications and the habit of going into denial mode before confirming the ongoing buzz are undermining the confidence of investors in the sanctity of the markets. Of the lot, the IT sector is held as a mirror to companies in traditional industries. Yet, the succession struggle in Infosys Technologies and the abrupt top-level changes at Wipro have highlighted Indian companies’ difficult transition to become transparent. Even those with substantial foreign equity stake are reluctant to open up as illustrated by the lack of clarity on the terms of the split between the Hero group and Honda Motors. Another puzzle is the silence of institutional investors even as egoistical promoters diversify into unrelated ventures, using up their cash or taking on debt. Local and foreign funds choose to remain mum or make a quick exit instead of publicly chastising these megalomaniacs. Not a single institutional investor has demanded that promoter-CEOs of listed companies linked to the allotment of second-generation spectrum withdraw from day-to-day management. Only the Norwegian partner, Telenor, suggested that the boss of its joint venture with Indian collaborator, Unitech Wireless, step aside till the probe reached its logical conclusion. Not surprisingly, the Indian promoter rebuffed this sensible suggestion. If the Apple board could sack its founder-CEO, why cannot independent directors speak out? In fact, this could win back the trust of investors in these companies. The important thing for the government, regulatory authorities, companies and institutional investors is to demonstrate that they are responsive to the needs of ordinary investors and the absence of adequate reaction is not a result of insensitivity.

Mohan Sule