Power up Trading

Power sector being in the concurrent list has developed through the years with a state level bias and hence the developments vary significantly across the geography of the country. While the need for national level attention and need to frame policies from a national perspective was understood and action was taken as early as the late seventies, it was confined to Power Generation and Transmission of such power generated by these central plants. Only a few years ago, centre has provided funds and intervened directly for implementation of schemes at the distribution level.

This skewed thinking severely affected the Power market developing as a national one till the enactment of Electricity act 2003. The national policy and act of 2003 is an excellent guide and clearly envisages an integrated network where all key players have a choice which is the fundamental for any market driven approach to creation of a national asset.

It is now for the implementing agencies to come out in full force and provide the linkages which will help in interconnecting the grids and develop a national market for Power so that Power Traders can play a more active role.

However these linkages, as is now the practice, terminate at state level power injection / delivery points and from then on, it is the local network that provides the last mile connectivity even for large power consumers / demand centers. To free the market and Power up trading, it is this last mile connectivity which needs to be freed as envisaged under "Open Access".

To attract investments in this sector, the government has provided one major comfort namely a tariff based approach to guarantee investments, backed by a strong regulatory mechanism. There are severe execution risks posed by issues caused by non availability of right of way to environmental issues, which the promoters should grapple with. Such issues delay the project execution and increase the capital costs. These are beyond the reasonable control of the investor. Providing the incentive of long term cheap funds is one way of balancing these risks.

It is therefore essential that to increase cross regional power transfer capacity significantly together with last mile connectivity, government should identify sources of Long term cheap funds. It could be done by way of providing access to these investors to low cost Long term loans through the Infrastructure Funds being created with our foreign exchange reserves so as to reduce the capital costs of these projects.

The government, should do well to take these steps for bringing in the much needed integration of the grid and making the dreams of Electricity act 2003 a reality.

Credit Policy - Reddy has called it wrong

Reddy has called it wrong this time.

Indian economy is not leveraged asCredit Policy, Housing, much as that of the other developed economies and it is the supply side dynamics which is contributing to the double digit inflation. Some even argue that this effort of the central bank may further accentuate the problems caused by supply side dynamics due to the capacity addition being delayed mainly due to the steep increase in funding costs.

The policy initiatives of the nineties have dismantled the Long term Funding institutions, which has pushed India Inc to look at the global markets for raising long term funds. Having taken this route they are now forced to call correctly the exchange rate movement. The companies which are not capitalized adequately, or are afraid to go to the international market for want of loosing control, silently suffer. This in the long term, affects the economy as planned capacity additions do not take place. Policy makers have failed to acknowledge this void and take steps to correct.

At the other end of the spectrum, the needy do not have any access to institutional funds. Attempts to eliminate the usury rates charged by the middleman have failed miserably. With the so called growth in bank credit being fueled by indiscriminate lending to salaried and self employed persons for consumer durables and lavish spending, it is repaying time for these institutions, with even the central bank taking special interest in these advances. Defaults in certain locations are a staggering 40 % in this segment, if we are to believe unconfirmed reports.

For lending to the housing segment and make it robust, we have important lessons to learn from US. The Fed had openly issued government guarantees to Fannie Mae the share holder owned financial institutions with a public mission. These institutions are private in nature but backed by the government. Hence these banks could approach the international market to raise cheap funds and provide funds exclusively for the domestic housing market.

It is time we also did the same thing. The government should guarantee the bonds issued by say a division of ICICI or AXIS or HDFC bank or a combination of the divisions of the banks with a caveat that funds raised thus are exclusively used for a defined housing market.

In the last 3 years the housing sector saw a robust growth and provided the much needed overall growth in GDP. The current attempts by the central bank to chase the inflation is hurting these segments and will once again deprive many a citizen the chance of owning a home in his or her life time. Will the government at least intervene?

Oil Prices and Policy options for the Government

With oil prices zooming past US $ 130 and breaking new highs every week, policy makers have an issue at hand. Having relied heavily on prolific spending of the resources raised through indirect taxation of Petroleum products, the government is now being compelled to reduce the taxation to ensure that the recent spurt in the international prices do not hurt the economy and the poor alike. 

This would mean that the government should look at alternate sources of revenue to bridge the shortfall in revenue generation as one can not expect the government in election mode to cut down on freebies / cutdown on salaries etc. The main options are Direct taxes from services and new segments. With large scale retail formatting taking off, it is necessary that the taxman look at ways of cornering the piece of the action. as after all large scale retailing does use more of the public resources.

Export of petroleum products should also be taxed and influential corporate houses can not be allowed to have their say on avoiding the taxation. If refining margins have risen up to US $15 from US $ 6 a few years ago, such company's can well afford to share some of the largesse. I am sure with the capacities available in India, international buyers cannot ignore us.

Two more initiatives need to be put in place simultaneously. 

The first and foremost is to discourage the growth of private transport in cities and metropolis. To put in this practice the government should invest heavily in public infrastructure quickly. The other initiative is on natural gas and coal gasification process. Having identified huge reserves of gas we need to ensure that these are brought to market at the earliest possible dates and sold devoid of any subsidy from start. The deceleration of demand on foreign exchange which such locally available sources of energy can bring in, will have transformative impact on foreign exchange management of our currency and fuel the Indian growth engine to newer highs.

With oil prices zooming past US $ 130 and now retreating from life time highs, policy makers have an opportunity to correct the policy stance. Having relied heavily on prolific spending of the resources raised through indirect taxation of Petroleum products, the government was compelled to reduce the taxation to ensure that the recent spurt in the international prices did not hurt the economy and the poor alike.

This would mean that the government should look at alternate sources of revenue to bridge the shortfall in revenue generation as one can not expect the government in election mode to cut down on freebies / cutdown on salaries etc. The main options are Direct taxes from services and new segments. With large scale retail formatting taking off, it is necessary that the taxman look at ways of cornering the piece of the action. as after all large scale retailing does use more of the public resources.

Export of petroleum products should also be taxed and influential corporate houses can not be allowed to have their say on avoiding the taxation. If refining margins have risen up to US $15 from US $ 6 a few years ago, such company's can well afford to share some of the largesse. I am sure with the capacities available in India, international buyers cannot ignore us.

Two more initiatives need to be put in place simultaneously.

The first and foremost is to discourage the growth of private transport in cities and metropolis. To put in this practice the government should invest heavily in public infrastructure quickly. The other initiative is on natural gas and coal gasification process. Having identified huge reserves of gas we need to ensure that these are brought to market at the earliest possible dates and sold devoid of any subsidy from start. The deceleration of demand on foreign exchange which such locally available sources of energy can bring in, will have transformative impact on foreign exchange management of our currency and fuel the Indian growth engine to newer highs.

Clearing the muddle of Rising Food Prices

Many column centimeters in leading newspapers, including your paper combined with interesting sound bites in all TV channels have put before us multiple reasons responsible for the spiraling price rise. Out of these a few stand out which has to be tackled by policy makers on a war footing.

The planned increase in agricultural production shall meet the increasing population, the additional demand created by new generations aspirations and affordability. This is best achieved by careful planning and timely implementation of irrigation projects, making available at the retail level advanced improved seeds, tested soil enriching techniques to improve the yield and above all easy rural credit with minimal collateral to the rural agriculturist. In the absence of such a coordinated approach there will be gaps which will leave us exasperating at the slow agricultural growth rate.

On the other hand diversion of land from wheat to Bio fuels in developed economies is one more self centered approach of the developed economy which we need to understand to live with. Financial centers have established and put in place procedures & mechanisms that make it easy for the non informed to bring in their savings in to commodities and make a fast buck on scarcities. We should have sufficient negotiating clout to bring them around to stop such a move which we sadly lack (as proved in various WTO forums).

Further, given the depth of scientific community available with in the country and the financial resources available with us (we have invested hundreds of billions of dollars in other country's instruments for a rainy day!) it is really surprising that a concerted approach is not being taken to solve this fundamental problem.

Politicians should take note that their continued neglect of this fundamental issue will shake them up and even dislodge them from their exalted positions.

US Sub Prime Mortages

Much is written about the fall out of US Sub Prime mortgages and the impact it is likely to cause on US economy and the world at large. But an important lesson in it for India is that Sub Prime Mortgages served to prop up the US economy for the last 5 years at the expense of the Developing economy who had at the guidance of the developed economies, (had) developed a growth model which was predominantly driven by US consumption!

None of the planners outside US could foresee that such a model is not sustainable even in the medium term leave alone for ever. So the savings of poor countries like India, were being parked as foreign exchange reserves in US Treasury bonds which fueled the liquidity which boosted wasteful consumption. One must acknowledge the ingenuity of the US financial brains who planned this out and implemented it to the tee.

The hard lessons which we in India learn from this futile exercise, is that it is necessary to fund across sections to ensure growth and through growth consumption.

In the US with the treasury backing, funds have been extended on over valued assets to individuals who do not earn enough to even support their living expenses leave alone meet mortgage repayments and own assets. As reported in the press the abuse of credit facility, has been so rampant that even basic norms such as insisting on minimum down payments for availing mortgages have been waived off. All these to maintain excessive consumption!
Take a leave out of Sub Prime mortgages and cox banks to fork out up to a nominal 5 % of their advances to fund persons in poorer section of society, whose repayment capabilities are limited, but willing to commit to repay. Such an effort will spur consumption and through consumption inclusive growth. Such advances shall be refinanced by the RBI through long term instruments directly and eventually provided for in the budget.

Planners in India are staring at growing disparities caused by excessive urbanization and phenomenal growth of white collared jobs and compensation. While our financial systems are robust and fund these sections of society, it is time that we addressed the poorer sections across the board.

India is unique in many ways and needs novel solutions to maintain its growth path and achieve inclusive growth. It is necessary to be bold and the time is ripe to take such populous steps given the fact that this is an Election year.

Question waiting for an Answer !

Question waiting for an Answer !

A thought provoking column from one of your regular columnist and a senior distinguished bureaucrat. The answer is obvious, but like the Roman citizen nobody wants to say the King is naked. If a Senior bureaucrat after so many years of distinguished service to the country is still waiting for an answer what will poor soul like us will do?

The reform process has not even approached the bureaucracy leave alone prepare a plan for changing the organisation and its people. Enough proof is available to all, on the capabilities of our entrepreneurs from the airlines and telecom sector. Scientists & technocrats of Indian origin, have made startling inventions and contributions which have been acknowledged world over. Some of these individuals have studied in India, but have been lured to the foreign shores by the ease with which they can pursue their passions abroad.

Even now it is not late. Let us encourage Venture capitalists to move in instead of hedge funds. They should be allowed to come in and move out freely and allowed to encash their inventions as is done in the valley. The risks which these venture capitalists bring in is negative compared to the chaos which the hedge fund operators and fair weather friends bring in.

If enough seed capital is there to pursue individual's passion I am sure the day is not faraway when we can boast of some radical inventions. We need to reinforce these efforts through greater autonomy for higher institutions, tax subsidies and inverted duties etc.

Let us think out of box and still not grapple with the question.

Stock Market Volatality & need to curb it

Mature markets in the developed world seldom show intra day variation in excess of 1% in the major indices tracking companies across sectors like the S& P 500. This goes to reflect the maturity of the market and reflects that the players are in it for the long run. This is helps the long term players to plan their actions and book profits.

Any volatality in these indices is clearly interpreted as a sign of some of the players need to show more than actual profits in the short term. This results in manipulated trades with out sound fundamental forces guiding the action (other than plain hood winking) resulting in Rapid-fire Trades. This may either bring loss to him or gain at other participants loss. This though an essential part to guide in price discovery at extreme situations, can not be allowed to continue for extended periods lest the serious players loose interest in the market. New entrants will also shy away; Or become gullible with the distorted view that money can be made in the market in a short period and look for such opportunities.

It is obvious now that the build up in some scrips prior to mega IPO issues was due to such unhealthy trades.Since then our markets have been extremely volatile and the regulator has done little to cool it. Given the low volume of free float and the concentrated action on the bourses from some sections of the stake holders, our tendency to believe in new stories and theories (read rumors) we are allowing a few to distort the market. This exposes the retail investor to greater risks. For the retail investor even the Mutual fund route is not with out risks for the mature operators also fall prey to such large scale manipulations.

We are now becoming aware of another new threat through FII like the Bear Stearns, who are compelled to exit our market to save their day in their home base. We are not aware how many more are to follow! That the local Derivatives segment helps them in clouding their actions is another story.

It is therefore essential for the regulator to step in quickly to stop such actions.

Reliance Power IPO fiasco

PO lessons

After the debacle of Reliance Power at the bourses, the way price discovery has been done through the book-building process will henceforth be questioned by retail investors who are typically not used to booking losses, and that too from the house of Ambanis, who, they believe, will never let them down.

The quota fixation for the QIB, which is believed to bring in a sense of measured valuation for new issues in an increasingly globalising economy, has been belied. QIBs, by their recent actions, have proved that they are not long-term investors but in for a quick buck.

The rating agency which gave the Reliance Power issue a Grade of 5 has derated itself.

The phenomenal over-subscription at the IPO counter quickly dried out and evaporated.

No demand was seen for the scrip on listing. The grey market which is functional has added to the distortion.

As reported in some sections of the press, this market was till recently competing with the registered exchanges! It is now apparent to the naive investors, how uncertain the entire process of IPO issue can be and that the gullible can easily be led down the garden path. It was a hasty exit for the member of the Ambani family at the listing quickly followed by the who is who of investment bankers.

On price issue, Reliance Power pales in comparison with its peer NTPC. Having said that, one cannot, of course, wish away the phenomenal clout and competence of the ADAG group to bring in value to the shareholder, and quickly.

Whether they bring it in by aggressive and open means, such as extending support to their stock or through innovative demerger, or merger of assets they hold amongst their various holdings including that of Reliance Capital remains to be seen.

For the sake of the retail investor and the public at large, it is hoped ADAG group acts quickly.

TATA Nano

Some moments in history happen and others are planned & created, like this one by the house of TATAs. While the leader RATANji hogs the limelight as he truly deserves, this moment is the culmination of the efforts of the numerous dedicated engineers and workers, both with in the house of TATAs and those who over the years have reposed faith and extended unflinching support to the effort.

By any standards, an investment bet of Rs.1700 crores on an innovative product is no small bet. It again goes to the credit of the TATAs indomitable spirit, who believe in their convictions and to their social commitment of envisioning a world where an ordinary Indian need not drive in two wheeler with his two children! It was interesting to read about a few of the the very difficult choices they had to make in the process of finally deciding on the various components of the nano, which they did, to reach this stage of launching the product and honoring their promise. With such display of unflinching commitment of the team, the stake holders in this mega enterprise have reason to be proud of their association and ownership at this moment.

The launch of nano signifies amongst others, the coming of age of our design capability in the domain of the so called western world. That this has happened in India signifies that there is more to come. It also means that others can aspire to emulate and follow the foot steps of Narayan Murthy, Ratan Tata and the like. The government should recognize the revolutionary nature of this launch and support the product by way of rationalizing the tax structure and providing incentives for early recovery of the investments committed by the TATA house. That this is truly a people's care and caters to the basic modern day needs of the common man has its own political significance and the day is not too far when the politicians would catch it for credit irrespecive of their idelogies.

TATAs are special and we as Indians are truly proud of this Indian Multinational, who also make cars!!