India’s imperious policy-makers, who Lord over the economy via directives and fiats, were humbled by the markets this week:
- Without even a courteous fig-leaf, the Finance Ministry announced the merger of three banks, whose Boards and CEOs were clueless. They were ordered to do it. Bank of Baroda, the strongest with nearly $80 billion in deposits, crashed by 14 percent. The $25 billion Vijaya Bank was mauled by 12 percent. Irate shareholders, taken for granted by an insensitive bureaucracy, had voted with their feet
- With much fanfare, the finance minister announced “bold measures” over a weekend to stem the free-falling rupee. Unfortunately, these actions were puny, designed to somehow suck in short-term dollars to buy a few days’ time. No structural or strategic thought was in evidence. In a brutal repudiation, the rupee crashed by nearly over 100 paise on Monday morning
- The co-founder of Yes Bank was summarily sacked by the regulator. He had helped create billions of dollars of shareholder wealth. But he wasn’t shown cause; he wasn’t asked to defend or clarify his “mistakes”. Could these have been genuine errors triggered by fuzzy guidelines? At least that question should have been asked and settled in a transparent manner. But no. Wham. Sacked. The stock fell by 30 percent in one day, in sympathy with an unfairly treated entrepreneur
That day, I walked jauntily into a gathering of over 100 top-notch foreign investors in India. Usually, I sound like a dissonant, carping critic in such a group of cheering Modi fans. But today I carried some tailwind. I began the Q&A (Question & Answer) session with a short set-up.
Modi’s “Original Petrol Sin”
I: Ladies and gentlemen, I understand you’ve met top officials since the morning, who’ve stuffed your head with all the wonderful things this government has done for our economy. But I am afraid I have another story to tell.
This is the most statist, interventionist, market-unfriendly regime in post-liberalisation India, that is, in the last quarter century.
The Economist has described Prime Minister Modi as a “tinkerer”. I marginally disagree. I prefer to call his government a bunch of voluble, aggressive incremental-ists who started with the “original sin” of swapping their “petrol bounty” for a tax-and-spend binge.
Narendra Modi was Napoleon’s proverbial “lucky general”, the first to enjoy a single-party majority after India freed its economy in 1991. His fortune was compounded when Brent crude collapsed from $108 per barrel in 2014 to $30 per barrel in 2016. His government got a windfall gain of nearly $100 billion over three years. Just imagine if it had gifted this largesse to consumers by cutting fuel prices at the pump? What a tax stimulus it would have been for private demand and corporate investment.
"Or if Modi had used the hundred-billion-dollar war-chest to create a TARP-like(*) facility for stressed banks and infrastructure companies? With one stroke that would have solved our “twin balance sheet problem”, unlocking the fetters on growth."
(*) TARP was the “Troubled Asset Relief Programme” launched by President George Bush and Federal Reserve Chief Ben Bernanke to handle the sub-prime crisis in America in 2008
Instead, Modi doubled, even trebled, the taxes on oil to soak up the bonanza; and made the problem worse by spending it on grand welfare programmes that are notoriously inefficient and leaky. To illustrate just one stark example: 200,000 tonnes of grain was illegally diverted using dummy Aadhaar/biometric identities in one district of Uttar Pradesh!
Today, this “original sin” has trapped Modi in a pincer. As the dollar strengthened, and Brent crude leapt back to $80 per barrel, the Emperor is without his clothes.
If he cuts those sky-high taxes, his fiscal arithmetic gets whacked. If he rolls back welfare schemes, his political narrative and constituency get shredded. But if he does nothing, he risks alienating his nationalist horde who will castigate him for weakening the rupee, a mistaken proxy for India’s pride.
So, ladies and gentlemen, the chickens spawned by Modi’s “original petrol sin” are truly coming home to roost.
Oppressing Minority Shareholders and Capturing the Regulator
This excited a chorus from my audience: Fine, we agree that he messed up India’s oil economy. But one swallow does not make a summer. How can you call him a statist on just one bad call?
I: Okay then, here’s another egregious instance of oppressing minority shareholders and capturing the regulator. Early this year, the Modi government was woefully short of its disinvestment target. It needed emergency cash. So, it thought up this awful fix for its failure. The public sector oil exploration behemoth, ONGC, was coerced to pay nearly $6 billion to buy the government’s shares in HPCL. The oil minister defended this subterfuge to claim that such a “vertical merger” made business sense. But hey, it wasn’t a vertical merger – if that had been done, ONGC would have saved $6 billion, aligning with the interests of millions of shareholders.
Instead, the government had virtually oppressed the rights of minority shareholders by unilaterally picking up cash from ONGC’s balance sheet to fill its own coffers. Worse, it did not stop here. Under the law, ONGC was required to make an open offer for 26 percent additional shares, providing an exit to HPCL’s shareholders who wanted out of this transaction.
But the Modi government trotted out a 40-year-old law, the Nationalisation Act, to claim that the “public sector character” of HPCL had not changed, even though control had passed from the Ministry of Petroleum to ONGC. SEBI (Securities and Exchange Board of India) queued up and waived the open offer!
It was naked regulatory capture by the Government of India. The sheer arrogance of “big government” was on display.
An Even Heavier Hand of Government Control
Now the foreign investors fell silent. My words were sinking in. Yet a few voices piped up: Alright, those are two bad instances. This government has really done much better on several other scores. How can you ignore that?
I was waiting for this cue. I latched on to it with undisguised glee.
I: Ah ha, you want more evidence, right? About how Modi swears by the heavy hand of government control instead of the invisible hand of the market? I hope you do not enjoy the sorry spectacle about to unfold before you.
After that, I let fly, rat-a-tat-a-tat:
- “Angel tax” imposed even before a penny of profit is realized on investments; a small waiver is possible provided you can convince a committee of government secretaries about your “innovativeness”
- Companies forced to borrow 25% of their debt from the bond markets
- Not one bidder for Air India because of ridiculous conditions: no layoffs, no re-branding, no merger with the new parent
- Coal mines opened to private ownership, but the decision rolled back before any investment was made
- Pharmaceutical and stent prices capped; decades’ old medicines like Saridon banned
- Monsanto effectively driven out of the country after their royalties were capped
- Private traders in Maharashtra to be criminally prosecuted if they buy grain under minimum support prices, free markets be damned
Clearly my audience had had enough. Most began to get up and leave the hall. Somewhere, a gong rang to announce the cocktail hour. It was time to hit the bar and drown one’s disappointment.
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