Business Today

P-Watch Column

The why, what and how-to of policy making.


Balaji Chandramouli | Print Edition: Nov 4, 2007


 MEA Culpa

PwatchThe Ministry of External Affairs (MEA) has been under fire in recent times for supporting oil investments in Myanmar, where pro-democracy protests are being crushed. It appears to be making another mistake: choice of persons to implement its policy.

The senior official handling the Libya desk has recently been denied travel to this dictator-run country. The reason: when his passport was scrutinised by Libyan officials, they found that he had travelled to Israel at some point in time in his official capacity. Diplomatic immunity has little meaning in such situations.

 Less Paperwork

Trimming bureaucracy borders on wishful thinking. A few years ago, when their salaries were up for revision, they took the easy route and did not implement the entire package that included downsizing.

However, in another sphere, a ‘genuine attempt’ is now underway. The back office of the Cabinet is now seeking proposals in as few sheets of paper as possible. In fact, the Cabinet proposal for the FDI policy will be in no more than five pages. One thing is for certain; brevity brings clarity.

How to save Pheidippides

The scorching pace at which the Sensex is ascending northwards is being greeted with applause as well as apprehension. The latter, for obvious reasons. One would not like a replay of a Greek tragedy, of the kind played out in circa B.C. 490. Around that time, Pheidippides, a sprinter, successfully completed 26 miles and 385 yards to inform Athens of Greece’s victory over Persia in Marathon (the basis for the Olympic event). However, shortly thereafter, he died.

First, the reason for the sprint. The rising Sensex, which has crossed the 18,000 mark, can be largely attributed to the gushing flow of FII funds. First, it was the subprime debacle in the US, which directed capital flows to destinations like India. This was bolstered by the US central bank’s decision to cut the benchmark interest rates, lest the American economy chokes.

The inflows, unfortunately, have not been discerning about their destination; in effect, driving up even poor quality stocks. The danger: flight of capital at the slightest provocation to better investment destinations.

The government, on its part, is attempting to stem the inflows by partially closing the gates. FII inflows through the Participatory Notes route are planned to be discouraged by raising the transaction costs for such investments. Further, to mitigate a side effect of this development—a rising rupee—RBI has mopped up large volumes of dollars and is releasing the domestic currency, a transaction that involves a cost.

Checking the demand side is, however, one half of the solution and perhaps a sub-optimal option. A better alternative will be to address the supply end. The government should consider equity offerings in quality public sector companies to satiate the demand of FIIs. Past experience has it that there is significant appetite for such stocks. In fact, the most recent of the lot, Power Grid Corporation, got a warm reception in the market, enjoying an oversubscription by a factor of 64. I

n fact, one of the reasons for NTPC to plan an equity offering is the lack of adequate liquidity in the stock to reflect valuations. This approach will also ensure that the government gets a good price for the investments made in these companies. Unfortunately, political compulsions do not allow privatisation. And, that should define the extent of equity offering—up to 49 per cent equity in PSUs. And, there is plenty of headroom left in quality PSUs across sectors.

For instance, in the power sector, in NTPC alone, the 37.5 per cent equity headroom could technically fetch as much as Rs 60,000 crore at current market prices. Equity offloads in PSU oil companies like IOC, GAIL and ONGC will also reap rich rewards.

 The politics of such a proposal only makes it, if anything, attractive. Given that the government is busy placating the Left parties on the nuclear deal issue, it might as well extract a concession on this count. That will be a fair quid pro quo.

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