Opportunity in setbacks

The AAP win and the spy scandal in the capital should be used as springboards to illustrate the power of competition

By Mohan Sule
The sweep of the radical Aam Aadmi Party cloaked as an anticorruption crusader in the national capital has spooked the market. The impact was particularly severe on the two power distribution companies servicing the region. During its short stint a year ago, AAP had demanded an audit of the discoms by the Comptroller and Auditor General of India. The idea was to spot instances of inflating profit to prod them to cut their consumer bills. The inference the market drew was that the statutory auditors could not be relied upon. Stocks of energy explorers suffered a setback on revelations that their officials were caught ferreting out policy papers from government offices. The episode revealed the pervasive role of the government in influencing the fluctuations in the bottom lines of oil and gas producers. The fear is that, in the aftermath of these two developments, caution could subsume courage. The fallout could be a slowdown in the pace of rollback of subsidies. Already the moderate increase in the minimum support price to farmers’ crop this year is being blamed for BJP’s poll debacle in an urban region like Delhi instead of acknowledging its contribution along with soft crude prices and deregulation of diesel to bring down the wholesale price index to below zero and the consumer prices index to the 5% level. Populist pressure is forcing the government to rethink the amendments to the land acquisition bill to ease buying of farmland to put up transport and industrial corridors through public-private partnership.

On the positive side, the crackdown on companies’ spies will accelerate the process towards transparency by both the government and the corporate sector. Companies will have to work out the cost-effectiveness of acquiring the rights to dig out natural resources. Service and pricing will determine the margin rather than monopoly status. With a healthy inflow of tax receipts due to more players, the government can concentrate on its social obligations. HDFC boss Deepak Parekh will not have room to complain about the difficulty in doing business even after the Modi Sarkar completing nine months. In fact, the prime minister can point to the changes in the housing finance sector to emphasis the point that market forces can be the best leveler. Atrocious practices like pre-payment penalty have faded and barriers to transfer the loan to another lender offering better terms have come down. Players have realized that lobbying with the government for favors and to create artificial controls to curb competition will not attract good discounting despite a bulging bottom line. A steel and power producer, with the promoter close to the erstwhile UPA regime, saw its market cap plunge after the Supreme Court cancelled coal blocks allotted since 1993. The stock has bounced back after the company won the bids for the same blocks it had to surrender. Many companies have reworked their business models to stay on top of the game. The IT sector has focused on exports. Had it concentrated on the domestic market, PSUs would have been the main clients. Pharmaceutical companies chained to tight controls in the domestic market have used their copycat skills to become cheap producers of generic drugs for the developed markets. Facing the onslaught of foreign competition, Bajaj Auto shifted gear to cater to overseas customers.

On the other side, the failure of the 2G spectrum auction in November 2012 to attract any bids for regions with a high base price is a reminder to the government that there is a limit to milking the corporate sector to bridge the fiscal deficit. The increase in tax revenue as the market expands due to healthy competition in the marketplace is a better solution to widen the tax base. Competition in buying coal and supplying electricity will moderate tariffs and also ensure uninterrupted supply the same way competition to buy land to put up projects in the healthcare, education and infrastructure space will benefit farmers rather than a law that makes it time-consuming to even put up a bid. The symmetric opportunity for wealth creation will boost valuations, like those of e-tailers, rather than by accessing confidential information. Consumers, too, will realize that competition and not subsidies will lead to efficiency, enabling reform-minded political parties to reclaim the space from fringe parties. Elimination of waiting lists to procure two-wheelers and telecom connections post reforms is the best illustration of the power of a level-playing field. The Delhi election results show that a lot of work has to be done to transform the prevalent socialist mindset accumulated over the last six decades of government being the provider of all essential services and at the same time keeping taxes low and using PSUs to provide lifelong low-paying jobs.