Mamta's exit from UPA II, will government find consolation in foster home?

Finally, Mamta Banerjee’s TMC quit the government over her disagreement on FDI in multi-brand retail and diesel price hike. Question still remains, whether she will modify her decision tomorrow and resolve to support UPA from outside.

Will government survive?

Government needs 272 seats in Loksabha (out of total 543) to survive. Currently, Congress (INC) has 206 seats - 66 seats short of majority. In her allies, there little chance for DMK (18) and NCP (9) to quit, at least for next one year. As far as IUML (2) and National Conference (3) are concerned it is close to zero. This will make the count to 238, still 34 seats short of simple majority.

Samajwadi Party (23) and Bahujan Samajwadi Party (21) have many reasons to support the government. Without generous contribution from Central government’s purses it may not be easy for SP to rule UP. BSP also has its own reasons.

Possible Scenarios 

One: SP and BSP supports government - will take the total to 281 [plus JMM(2) + 3 will make it 286].
Two: BSP walks out from Parliament in case of a non-confidence motion; then required number of voted will come down to 251. 238 + SP (23) + JMM (2) + 3 will make it - 266.
Three: Both SP and BSP walkout. Then the required majority will come down to 228. Congress and its staunch allies can reach this magic number.
Four: SP/BSP vote against the government. Difficult, but may be able to survive.
Scenario Five: SP and BSP vote against the government. Government may go down and next elections may come.

I think the possibility of Scenario one and two are very high. The scenario three is also possible.

Even if government went down, there is little chance for any other party to form a new one. Most probably, we may have to face elections. How many representatives - from both sides – dare to do that, after all close to two years is still remaining?

Conclusion

Even before UPA-II finally rang the bell of reforms, their managers may sure about government’s survival even in the case of TMC exit. All these may not need if Mamta agreed to support UPA from outside. Let’s wait and watch. If government withstands the exit of TMC, it may finally be able to go ahead with reforms (new allies may ask for generous concessions).

Sajeev

Ghaziabad Riots and its victims

"Police firing in Dasna, Ghaziabad, on Friday night claimed the lives of six people, while a sub-inspector and a head constable suffered serious injuries in the rioting that ensued. The violence was triggered after a copy of the Quran was discovered on the railway tracks with number scribbled on its pages." - Hindustan Times

Only people whose feelings were hurt can experience and describe its true intensity, this is not different in the case of finding holy book in railway tracks close to Ghaziabad.

However, how far common people/ Police  responsible for the incident?

Finding the book close to railway station means,

a. It may come from a train passing through the area (TOI). In this case, there may be a good number of trains, carrying thousands of people passing through the area.
b. Somebody may planted the book there, with the intention of creating riots.

In both cases, common people/ Police have little control over the alleged incident. How Police could stop a person from throwing holy book, that too from a running train? There was no prior information, and it was totally an unexpected event. According to the second scenario, even if somebody planted the book there, do you expect Police know it beforehand?

People can protest peacefully/ file a Police complaint. But burning police stations, vehicles, damaging public and private properties etc are extreme reactions. After all, police and owners of the vehicles may not have anything to do with the alleged incident for which they end up as collateral damage.

Moreover, people whose property and vehicles were damaged too have similar reason for becoming angry. If they are starting another riot, then?

This incident already cost 6 lives, everybody has to make a full stop here.

Sajeev.

References

1. Six killed during protest against desecration of holybook in Ghaziabad - TOI

2. Ghaziabad riots: 6 die in cop firing - Hindustan Times

Reforms Season Two - Part III: FDI in Power, Broadcasting and selling some family silver

For reading rest of the articles in this series, please visit

Reforms Season Two - Part I: FDI in Indian retail sector - Movers and Freezers

Reforms Season Two - Part II: FDI in Indian Aviation - Falling short of expectations

Reforms Season Two - Part III: FDI in Power, Broadcasting and selling some family silver

"We have to bite the bullet. If we have to go down, let us go down fighting" - Manmohan Singh while declaring economic reforms in 2013.

John F Kennedy once said, "A man does what he must — in spite of personal consequences, in spite of obstacles and dangers, and pressures — and that is the basis of all human morality". At this point of economic crisis and stagnation, reforms are the essential bullet premier needs to bite, and which he did, even though it’s a little bit late.

III.   FDI in power trading exchanges

Power sector has some fundamental problems, which can only be solved by a decisive will power of government. FDI can do little help here. According to the new policy,

a. Combined (FDI & FII) can own up to 49% in power trading exchanges (FDI capped at 26% and FII at 23%).

Ironically, problem in power sector is NOT that we are,

a.       Unable to generate enough power.

b.      Not able to transport it.

c.       Unable to introduce new technologies.

d.      Unable to create "organized platform for fair, neutral, efficient and robust price discovery"

e.      Not able to come up with "extensive and quick price dissemination".

f.        Not able to create "price risk management for the generators, distributors, traders, consumers and other stakeholders"

The crux of the problem is we are not able to generate power and sell it to the end customer with a profit (or sell it with a small loss). Till we find a solution for this FDI will do little help.

IV.   Enhancing FDI in Indian Broadcasting sector from 49% to 74%

FDI limits increased in 'Teleports', 'Mobile TV', 'Headend-in-the Sky Broadcasting Service' etc to 74%. However, government didn't touch 'News and Current affairs' sector, where the 26% FDI limit will continue. I am not seeing any significant changes here unless government touching the news sector.

In other areas, soap operas and regionalized version of US programs will continue for a foreseeable future.

V.   Disinvestment of Central PSU's (through stoke exchanges)

GOI will sell, 9.33% of MMTC (current government holding is 99.33%); 10% of Oil India Limited (current government holding is 78.43%), 12.15% of National Aluminium Company Limited (current government holding is 87.15%), 9.59% of Hindustan Copper (current government holding is 99.59%).

Selling some shares in these companies will not create any broad changes in their policy. I wish, if government could use this money for some creative purpose.

VI. Amending the conditions for FDI in single brand retailing.

Amendment was expected after IKEA's plea. There are two changes,

"(i) The foreign investor should be the owner of the brand" changed to "Only one non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading in the country".

Secondly, (ii) involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from SMEs/ village and cottage industries artisans and craftsmen, changed to (ii) In respect of proposals involving FDI beyond 51%, sourcing of 30%, of the value of goods purchased, will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors, where it is feasible.

First change is purely technical, but the second change allows the companies to source their materials from their home countries or from current suppliers. Unlike, in the case of sourcing in multi brand retail, here we don’t have to worry about dumping; as these are niche products and customers expect it in that way. After all, people would rather by a hand-made Ferrari sports car from Italian plant than anywhere else.

Conclusion

Some decisions are in good direction and will act as an emergency kit for industry. Others are incomplete, which requires one more policy revision. Hope that, this time government will not retrace their path. It will be good for India to see Manmohan Singh retire with grace and as a man of reforms. Hope that he will be able to do enough things to change the opinion of TIME, Washington Post and millions of Indians about his second term as premier.

One more thing I would like to add here is, FDI and FII are not medicines for all sort of deceases. Their opinions and experience can act as a guide at its best; it’s our duty to create a free market economy – not crony capitalism – under a framework of fair competition, stable policies and justice. We can’t outsource it...

Sajeev.

References

1. Government of India

Reforms Season Two - Part II: FDI in Indian Aviation - Falling short of expectations

For reading rest of the articles in this series, please visit

Reforms Season Two - Part I: FDI in Indian retail sector - Movers and Freezers

Reforms Season Two - Part II: FDI in Indian Aviation - Falling short of expectations

Reforms Season Two - Part III: FDI in Power, Broadcasting and selling some family silver

J.R.D.Tata (b. 1904, d.1993) may be smiling, after seeing the messed up Indian aviation sector and hearing government's decision allowing foreign aviation companies to invest up to 49% in Indian air transportation segment.  49 holds a symbolic value, it is exactly the same percentage of shares he ceded to GOI in 1948; GOI bought an additional 2% in 1953 and took over Tata Airlines (renamed to Indian Airlines).

However, as one columnist wrote some time back, credit for opening up Indian Aviation also goes to Vijay Mallya, who 'created a non-bail-outable airline'.

II. Permitting up to 49% investment for foreign airlines in Indian air transport services.

Until now, Foreign Airlines were not allowed to buy equity in air transport sector, even though it was allowed in Cargos etc. With current policy change they can invest up to 49% in civil aviation sector.

FDI is essential for market’s survival and growth. In this cash burning arena, we already have two non-bailoutable airlines. Government, which is already under severe financial stress because of heavy bills from Oil & Gas subsidies clearly don’t have the stomach to pump cash for an airline bailout. Even if it wants, GOI can't do it. As far as banks are considered, they are already struggling to reduce the amount of non-performing assets. The burden to find additional capital to remain BASEL complaint is already looming over their heads. So who else will invest?

Will this work?

FDI will bring best practises, higher service standards etc. But the question is, will this work? My answer is, ‘it may not’ as there are certain problems with the policy.

First of all, 49% includes both FDI as well FII (Foreign Institutional Investment). This means, even if FII investment is 0%, foreign airlines will not get majority equity and control of the board. Assume that, there are some FIIs already invested in aviation companies then foreign airlines will remain as minority shareholders.

Will they swallow this status? My answer is no, they may wait some more time, till GOI increases FDI limit to 74%. After all, why should they burn cash in India without any management control, when they are facing cash problems in home itself? If Indian government is not sure about handing over the board control, then from where the so called best practices will come?

Problematic areas

There are some other restrictions as well,

1. Scheduled Operator’s Permit can be granted only to a company,

a. That is registered and has its principal place of business within India
My Take: Reasonable expectation.

b. Security clearance for all foreign nationals coming to India as part of the deal
My Take: Reasonable expectation.

c. All technical equipment that might be imported into India, required clearance
My Take: Reasonable expectation.

d. The Chairman and at least two-thirds of the Directors of which are citizens of India
My Take: Not reasonable, still its fine.

e. The substantial ownership and effective control of which is vested in Indian nationals.
My Take: Not reasonable, still its fine. It’s like ‘Tata Group’ buying ‘Jaguar and Land Rover’, but not allowed to put their own man from Indian on the top of the board.

Conclusion

I think foreign companies will wait till next policy change, which may raise the cap to 74%. Without a minimum 51% and control, risks are high for them especially in markets like India where there is little appetite for high end consumer spending and Jet fuel taxed like a luxury item.  Yet, they may come because of the attractions from a growing market. The curious question is will they invest in Air India or Kingfisher? Only time can tell.

In my opinion Manmohan Singh government could have raised the cap to 74% this time itself.

Sajeev.

References

1. Government of India

Reforms Season Two - Part I: FDI in Indian retail sector - Movers and Freezers

For reading rest of the articles in this series, please visit

Reforms Season Two - Part I: FDI in Indian retail sector - Movers and Freezers

Reforms Season Two - Part II: FDI in Indian Aviation - Falling short of expectations

Reforms Season Two - Part III: FDI in Power, Broadcasting and selling some family silver

After a long sleep and policy paralysis, Manmohan Singh government woke up to the realities - even though it was in the face of a possible degradation to junk status. Recent big bang actions from government, even risking the displeasure of allies, may be one of the best decisions by second Manmohan Singh government. The major decisions are,

I.               Permitting FDI in multi-brand product retail trading

II.             Permitting up to 49% investment for foreign airlines in Indian air transport services.

III.          FDI in power trading exchanges

IV.          Enhancing the FDI in companies operating in Indian Broadcasting sector from 49% to 74%

V.             Disinvestment of 9.33% of MMTC shares (through stoke exchanges)

VI.           Selling 10% of Oil India Limited (through stock exchanges)

VII.        Sale of 12.15% of NALCO  (through stock exchanges)

VIII.      Disinvestment of 9.59% of Hindustan Copper (through stock exchanges)

IX.           Amending the conditions for FDI in single brand retailing.

Let’s go through the policies one by one.

1. Permitting 51% FDI in multi-brand product retail trading

Long delayed, opening retail sector for FDI may be the most important decision in the block. Even though the policy is diluted, it can still kick start the aura of reform days. There are some changes in the policy introduced (and later withdrawn) in the last year,

a. Retail sales outlets may be set up in those States which have agreed or agree in future to allow FDI in MBRT under this policy.

b. outlets may be set up only in cities with a population of more than 10 lakh (States/UTs not having cities with population of more than 10 lakh, retail sales outlets may be set up in the cities of their choice, preferably the largest city) as per 2011 Census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities

c. 50% of total FDI brought in shall be invested in 'backend infrastructure' within three years of the induction of FDI, where ‘back-end infrastructure’ will include capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will NOT be counted for purposes of backend infrastructure.

  

d. at least 30% procurement from Indian small industries

Investment in backend infrastructure like cold storage, warehouses etc, will enable Indian farmer to reduce his/her post-harvest loss - currently calculated around 30-40%. It may not be as good and sweet as central government insists, but if implemented, will increase the bargain power of Indian farmers vis-a-vis wholesale and retail traders. Instead of retailers fixing the price and farmers swallowing it, there will be a competitive pricing system.

The customer is also stands to benefit, as the quality will increase and the expenditure may reduce.

At the same time measures like, 10 lakh population limit etc - the numbers may go down later - will draw a line for foreign companies to penetrate deep in to markets. 30% sourcing from local markets will also act as barrier for dumping low cost Chinese goods in Indian markets.

If 'Competition Commission of India (CCI)', which is currently doing a good job, is putting her one eye on unlawful, anti-competitive trade practices, then we are good to go ahead.

Support from States

Interestingly, contrary to the popular assumption of left leaning politicians that Indians are totally against FDI in retail, around eight states (Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana and Manipur) and two union territories (Daman & Diu and Dadra and Nagar Haveli) expressed support for the policy in writing. Jammu & Kashmir may also support the policy.

                           

However, West Bengal, Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha are in the opposite sides. This shows a virtual divide of Congress ruled states (except Kerala) supporting the measure, opposition ruled states opposing the measure.

Conclusion

Well, according to the policy, states who don’t want to implement can opt out. They can wait and watch how the game is going on other states losing their advantages/disadvantages in taking the first step. Broadly speaking, the excellent experiences of companies like Wal-Mart, Carrefour, Target, Kroger, Aldi Einkauf, Schwarz Unternehmens Treuhand KG, Tesco, Metro etc in terms of management, supply chain and ware-housing will be beneficial for India, of course under the watchful eye of Competition Commission of India (CCI).

As far as small retail stores/organized chains are concerned, this is to come today or tomorrow. In small cities, they can enjoy the protection for a longer time. However, in a globalized world, they can stand up and take competition in two ways – The LIC way (who withstood and succeeded in the battle against big names in insurance sector) or AirIndia way (which is not able to fight even against Indian private sector).

Sajeev.

References

1. Government of India