Finally, A Big Bang Reform

On 25th of this month (june 2010) the Indian Govt. took a major step forward in reforming the Indian Economy. It freed petroleum prices from all regulation and indicated its intention to do so for diesel as well. That's not all, it increased diesel prices by Rs. 2 a litre, LPG by Rs. 25 a cylinder and even increased the kerosene prices, long untouched from price hike. Read the details here.

Now opposition parties have a real issue to thrash the Government on. This statement sounds derisive of the opposition parties and yet there are real short term implications which are worrisome. Inflation, which has stressed the lives of common person on the street in the last several months, will flare up further. in fact this decision would result in price rise of a fairly universal nature affecting everyone including the middle class voter of this Govt. who had been benefited the most in the recent decade of reforms and Globalisation. If so, why did the Govt. take this step and risk facing ire of its vote bank? Why this shift (by no means a sudden one) from a long held policy of managed fuel prices? further, why am I happy about this decision?


First a quick reminder of the situation. According to CRISIL the oil PSUs were projected to lose Rs 74,300 crore on selling petrol, diesel, domestic LPG and kerosene below cost in FY10-11. The current hike in prices would recover Rs. 25,000 crores and would still leave a gaping hole of close to Rs. 50,000 crores to be subsidised by the Govt. Just for the sake of argument if the Central Govt. were to subsidise this fully - this adds three fourth of percentage point to its fiscal deficit. So here is one compelling reason for the Government to seal a leakage which was showing signs of going out of hand.


But wasn't this always the case, and the Govt. has been dealing with it in this way, unique only to us, Srilanka and Bangladesh, in this entire world. So why take the risk now?

Lets check another side of the picture - it is interesting to note that fuel prices are high in India because of its federal structure as well. Read this informative piece to get the complete picture - but in nut shell what it says is that state Governments levy a VAT of between 20% to as much as 35% on petrol. (In MP this happens to be one of the highest at 35%). On an average the central plus state taxes are equivalent to 40% of the price you pay for every litre of petrol, with the lion's share going to the state Govt. Further, what this means is that a price hike in fuel prices gets amplified at the state level, filling the coffers of the state govt., and creating a villain out of the central of Govt.
This is not all. Sales tax or VAT accounts for over 60% of the aggregate taxes of states, a good percentage of this comes from the levy on fuels. What this means is that states are heavily dependent for their revenues on taxes from fuels as they are unable to generate resources from where they should - levy of fee on services provided to citizens (but then that would be unpopular - isn't it?). In other words then - the Central Govt. when subsiding the fuel prices in part subsides the state Govts as well for their mismanaged administration.

What the central Govt. has done is that they have become a one time big villain now and then have left the states to defend themselves in future. Soon the media will start training its guns on state governments like Andhra Pradesh, MP and Tamil Nadu asking why are citizens paying such high taxes on petroleum. Better still Mr. Murli Deora has already asked the state Govts. to reduce taxes so as to mitigate the problems of people on the prices front. So the heat will soon turn towards the state Govt. Can you see why the opposition parties aren't creating half the "hulla" - of what they would on much more trivial matters. Well if you did not guess it already, most state Govts. belong to parties in the opposition at  the centre.

And then there is the ubiquitous connection between policy making in India and the Ambanis. Half a decade back the Big bro entered Petroleum retail trying to create a presence in the entire value chain of its flagship petroleum businesses. Many of us would remember the fate of the Reliance petrol pumps across the country which had to close shop (temporarily, it now turns out). I wrote this piece way back in May 2006. Little was I aware that I was so bloody insightful. I of course do not know this for sure - but why does my gut tell me that the connection is far too easy not to make out? So here is the story of why the government might have bitten the the proverbial bullet.

However, I am happy with he decision. Yes, I know what I am talking about. After lots of deliberation I bought a mid-sized car three years back - a delight to drive and a monster at the petrol pumps (I pay almost 5+ Rs. a KM to drive it on old prices of petrol). Little did I knew that Dr. Manmohan singh's govt. will stop sharing the cost. :)


What makes me happy is that on a macro front this is a step in the right direction. The monstrous and pointless subsidy on automobile fuels is a structural anomaly in the economy. Let me explain. When Central Govt. subsidises fuels - who pays the cost? The taxpayers (I am tempted to write - honest taxpayers). While most profligate consumers of petrol are not these honest taxpayers. So indirectly the Govt. is making you and me pay for these consumers (including the Govt. which is the single most profligate consumer of petrol). My very modest parents purchased their first car and ran it just over 60,000 KM in ten years. I am sure that if you are reading this you can relate many of their ilk. They have been paying for these subsidies for years now.

What decontrol has done is that it will make people pay for their usage. Simple. This can pave the way to reduced deficits for the Govt. (as they will not pay the subsidy at least not to this extent) which will result in two welcome developments for the honest tax payers - further rationalisation of taxes (read reduced tax rates) and a stronger rupee, both of which will help the "Aam Aadmi" in the long run. This Govt. is only two years into this tenure - they might be expected to reap some of the benefits by the end of this tenure, by which time the new Direct Tax Code might also become a reality. Cool. :) So while inflation would happen - I get a feeling that the step will also make the middle class more able to pay the higher costs.

What about the pain during the transition? Well, one of my profs at the IIML said way back in 1996 - that is a cost of past sins. But my take is that the decision is positive to the Indian economy in the long run.

The Best Teacher - An anecdote

Received this mail from my school time friend - Ajay. Could not resist putting it up here. If you have anything to do with the business of education don't miss it. If you have nothing to with the business of education - still don't miss it. Thanks Ajay for Sharing.
- Akash
*****************************

As she stood in front of her 5th grade class on the very first day of school, she told the children an untruth. Like most teachers, she looked at her students and said that she loved them all the same. However, that was impossible, because there in the front row, slumped in his seat, was a little boy named Teddy Stoddard.Mrs. Thompson had watched Teddy the year before and noticed that he did not play well with the other children, that his clothes were messy and that he constantly needed a bath. In addition, Teddy could be unpleasant. It got to the point where Mrs. Thompson would actually take delight in marking his papers with a broad red pen, making bold X's and then putting a big 'F' at the top of his papers.

At the school where Mrs. Thompson taught, she was required to review each child's past records and she put Teddy's off until last. However, when she reviewed his file, she was in for a surprise.

Teddy's first grade teacher wrote, 'Teddy is a bright child with a ready laugh. He does his work neatly and has good manners... he is a joy to be around..'

His second grade teacher wrote, 'Teddy is an excellent student, well liked by his classmates, but he is troubled because his mother has a terminal illness and life at home must be a struggle.'

His third grade teacher wrote, 'His mother's death has been hard on him. He tries to do his best, but his father doesn't show much interest, and his home life will soon affect him if some steps aren't taken.'

Teddy's fourth grade teacher wrote, 'Teddy is withdrawn and doesn't show much interest in school. He doesn't have many friends and he sometimes sleeps in class.'

By now, Mrs. Thompson realized the problem and she was ashamed of herself.. She felt even worse when her students brought her Christmas presents, wrapped in beautiful ribbons and bright paper, except for Teddy's. His present was clumsily wrapped in the heavy, brown paper that he got from a grocery bag. Mrs. Thompson took pains to open it in the middle of the other presents. Some of the children started to laugh when she found a rhinestone bracelet with some of the stones missing, and a bottle that was one-quarter full of perfume.. But she stifled the children's laughter when she exclaimed how pretty the bracelet was, putting it on, and dabbing some of the perfume on her wrist. Teddy Stoddard stayed after school that day just long enough to say, 'Mrs. Thompson, today you smelled just like my Mom used to.

After the children left, she cried for at least an hour. On that very day, she quit teaching reading, writing and arithmetic. Instead, she began to teach children. Mrs. Thompson paid particular attention to Teddy. As she worked with him, his mind seemed to come alive. The more she encouraged him, the faster he responded. By the end of the year, Teddy had become one of the smartest children in the class and, despite her lie that she would love all the children the same, Teddy became one of her 'teacher's pets..'

A year later, she found a note under her door, from Teddy, telling her that she was the best teacher he ever had in his whole life.

Six years went by before she got another note from Teddy. He then wrote that he had finished high school, third in his class, and she was still the best teacher he ever had in life.

Four years after that, she got another letter, saying that while things had been tough at times, he'd stayed in school, had stuck w ith it, and would soon graduate from college with the highest of honours. He assured Mrs. Thompson that she was still the best and favorite teacher he had ever had in his whole life.

Then four more years passed and yet another letter came. This time he explained that after he got his bachelor's degree, he decided to go a little further. The letter explained that she was still the best and favorite teacher he ever had. But now his name was a little longer.... The letter was signed, Theodore F. Stoddard, MD.

The story does not end there. You see, there was yet another letter that spring. Teddy said he had met this girl and was going to be married. He explained that his father had died a couple of years ago and he was wondering if Mrs. Thompson might agree to sit at the wedding in the place that was usually reserved for the mother of the groom. Of course, Mrs. Thompson did. And guess what? She wore that bracelet, the one with several rhinestones missing. Moreover, she made sure she was wearing the perfume that Teddy remembered his mother wearing on their last Christmas together.

They hugged each other, and Dr. Stoddard whispered in Mrs. Thompson's ear, 'Thank you Mrs. Thompson for believing in me. Thank you so much for making me feel important and showing me that I could make a difference.'

Mrs. Thompson, with tears in her eyes, whispered back.. She said, 'Teddy, you have it all wrong. You were the one who taught me that I could make a difference. I didn't know how to teach until I met you.'

Goof up again or is it something else....

Govt. came up with an ordinance on the issue simmering between the IRDA and the SEBI over who of the two should be regulating the ULIPs (Unit Linked Insurance Plans). Here is the news. Govt. has decided to take the IRDA side. Now that's puzzling and curious - everything the ordinance, its logic and its timing.


First a background -

ULIPs are considered/treated as Insurance in India  however they are sold as investments. Meet an insurance seller and they would start telling you how the ULIP will multiply your money and save tax - no one is really interested in telling you that its an insurance first.


To Mutul Funds, which are pure investments and have nothing to do with Insurance ULIPs are a competition.


One does not need to be an expert to see that in India, Mutual Funds (MF) are a better regulated and hence more transparent industry than Insurance. A MF manager has to inform investors about the way money in a fund has been invested. Recent improvements in regulation has stripped MF mangers of the ability to charge entry loads and commisions for their agents to be charged to their customers. On the other hand we very rarely come to know of what is being done to our money invested in the ULIPs. It is a well known fact that the upfront charges that a ULIP customer ends up paying are plainly ridiculously high. Further ground reality is that the agent of the Insurance company often misleads the customer on these charges and their real impact on their investment.

Recently SEBI asserted that the ULIPs should also comply with the rules and norms of SEBI as it was basically an investment product and hence deserves to be regulated by SEBI. IRDA took strong obejections. The question is currently subjudice whether SEBI's interpretation holds.

I am not an expert in investing - but common sense tells me that - SEBI had a strong case. ULIPs are an investment option wrapped in the garb of insurance. In fact read this excellent piece by Dhirendra Kumar making a case for stripping ULIPs' returns of their tax free status as well.

The ordinance by the Govt. makes the legal case in the court irrelevant. What it has effectively done is that it has prevented the court to pronounce its stand on the question. Why the hurry? Why this ordinance just a few days before the court hearing on the matter was due. And why in favour of ULIPs?

Obviously there are political compulsions - a fairly large number of investors are invested in ULIPs, Quite large numbers of them are unsuspecting middle class retail investors in search of future security, lured by attractive looking returns. Most of these were confused in the ongoing debate wondering whether they made a mistake committing themselves to the ULIPs. This pronouncement would make them feel comfortable as they would again see others buying ULIPs as they did earlier. For Insurance companies it will be business as usual. This would not rock the boat - so to say for the Govt. An ordinance timed now obviously means that even Govt. senses the possibility that the court might accept the logic of SEBI's orders.

Now, don't get me wrong. I am not saying ULIPs are useless products - but they have been packaged to misguide. It has a upfront cost heavy structure which makes them strictly a very long term option. Mutual funds are a far better option for an investor. Further, the ULIPs (read insurance companies) are opaque in their operations.  And, all said and done, a normal investor can, with just a little bit research, invest in MF at substantially lesser cost and achieve almost the same, if not better, returns.
 
Strictly from policy making view - Govt. seems to have snubbed the better regulator. There is a strong case for investors to be encouraged to choose MFs over ULIPs (or bringing ULIPs closer to MFs in their operations & sales) and some help from regulators would have been a good idea. Govt. seems to have taken a technically administrative view that IRDA is for insurance and have ignored the basic premise in the issue - that of ULIPs not really being an insurance.
 
SEBI although lost this round but did great service to common investors. Now IRDA will have to be more watchful and proactive - as they will be watched by everyone with great interest. My take is that IRDA will be pushed into reforming Insurance industry to make it more transparent and responsible.
 
My problem however, is that is this just another case of incompetent goofup by the Govt. or there is more behind the scene games?

Complacent scepticism : the Indian way of life?

"Mummy, Aaj school nahi Lagega - Bahut bada accident ho gaya hai. 1000 se jyada log mare hai" (Mom, Today there will be no school - there has been a big accident. More than 1000 people died)

Horrible but true. This was my first reaction to the news of "Bhopal Gas Leak Tragedy", which reached us through the morning newspaper (you see there were no 24/7 News Channels & no inetrnet).

I was twelve then - a boy who was secretely happy that he wouldn't have to go to school. As the realisation of more than 15000 death that fateful tragic night sinked in - its real impact distilled deep down in my conscience. I grew up to feel ashamed of that first reaction of mine.

I feel more ashamed today when - 26 long years after - eight accused have been convincted. One would expect to feel cathartic on finally listening to the news of the convictions. But what in this world would explain that the tragedy was presented to the court by the CBI (no less) as "culpable homicide not amounting to murder", "Gross Negligence" and "Causing death by Negligence". Ok. You convicted them - yeah you did - and awarded them what? A two year sentence to each of them from which they recieved an immediate bail for a ludicrous 25000 rs. each. The company was fined a princely sum of - hold your breath - Rs. 5 lakhs.

Should there be some difference between a car accident which killed a couple of people and a poisonous gas leak that led to 15000+ deaths, a generation of children with congenital defects (which might run in their clan for all we know), polluted air, water & soil; people with damaged psyche which can possibly never be addressed properly?

Here is an idea - the kith and kin of victims should run a truck over these eight convicted and then should fight a 26 year long case with their families finally getting convicted for "culpable homicide not amounting to murder" punishable by a maximum of two years that too bailable for laugably low amounts of deposit.
No I am not going to blame this on our system, weak CBI, corrupt politicians or even not to the excruciatingly slow pace of justice delivery. That a lot of "analyst" will do. What is important for us to ponder upon is how does all these happen in our country so easily? How do we the citizens allow this to happen? My take - the culture of "Complacent Skepticism".

Look around yourself - dusty, poorly built roads, corruption scandals one after the other - be it beautification of city or be it a housing project for people, Forests being cut, encroachments increasing, IAS officers and politicians amassing disproportionate (the word is really modest) amount of wealth, goons becoming politicians, even ministers. Wealthy are mighty - they can get away with practically anything. The size and depth of rot increases horrendously with every new scandal being unearthed. Also those involved in the scandals become increasingly more brazen as they cruise through case after case, not even bruised - in some cases - actually stronger than ever before.

The formula is simple - become thick skinned (read "without any ethics"), drag the issue till the media gets bored of carrying it any further, possibly buy the investigating agency/officers, use shrewed lawyers to entangle the courts in dilatory tactics, either let the case continue for decades or better still simply buy your way out of the charges or at best to the simplest possible conviction which can then be appealed against further - till then you are out on bail on a miniscule part of your ill gotten crores.

And what do we do about it? Everytime one such accident, scandal, negligence, corruption is unearthed - what is the typical reaction? Well the one I hear most now a days is "Kuch Nahi Hoga - yeh India hai". Absolute and total - the scepticism. Then when actually nothing happens for some time the reaction is "See !! I told you." Yes - we are amazingly complacent - almost smug - in the knowledge that we had predicted the outcome accurately. And so the life goes on.

If all these is happening around us with such impunity - we are the ones who are responsible. We get the systems we deserve, we get the rulers we deserve and we get the life we deserve. Our inaction, quiet tolerance of everything wrong around us, big or small, is alone responsible.

So friends speak up. And make it a habit to speak up everytime. As always I am asking for too much. But it really is time to ask for every bit of that too much. Please.

A rare gem

Received this poem through mail - Author not known to me. But worth sharing, Beautiful thought.

I was shocked, confused, bewildered

As I entered Heaven's door,

Not by the beauty of it all,

Nor the lights or its decor.

But it was the folks in Heaven

Who made me sputter and gasp--

The thieves, the liars, the sinners,

The alcoholics and the trash.

There stood the kid from seventh grade

Who swiped my lunch money twice.

Next to him was my old neighbor

Who never said anything nice.

Herb, who I always thought

Was rotting away in hell,

Was sitting pretty on cloud nine,

Looking incredibly well.

I nudged God, 'What's the deal?

I would love to hear Your take.

How'd all these sinners get up here?

God must've made a mistake.

'And why is everyone so quiet,

So somber - give me a clue.'

'Hush, child,' He said, 'they're all in shock.

No one thought they'd be seeing you.'

JUDGE NOT!!

Remember...Just going to a place of worship doesn't make you

religious any more than standing in your garage makes you a car.

Every saint has a PAST...

Every sinner has a FUTURE!