Author: Thyagarajan

Gold trumps stocks for third Diwali in row

The yellow metal is on course to record sparkling returns for third year in row despite a strong year for equities.

While investors in gold have reaped over 15% returns since last Diwali, the returns from Sensex has been a fixed deposit-like gain of about 8.5 % for the same period.

While the precious metal has risen from Rs 26,700 levels last Diwali to Rs 30,700 currently, the BSE benchmark Sensex has risen from near-17,300 levels to 18,755 since last Diwali. Gold prices have also more than tripled from Rs 10,000 levels to Rs 31,000 in the last five years. India is the largest consumer of gold with an annual demand of about 700 tonnes.


The fact that gold jewelry and investment demand remains robust despite the rising prices is a reflection of the inherent desire among Indians to hold gold driven mainly by its alluring appeal as a jewelry and as a safe-haven against inflation that erodes both savings and income.

The impact of the European sovereign debt crisis, inflationary pressures and the still-shaky outlook for economic growth in developed countries is driving high levels of investment demand for the precious metal.


From gold coins, gold jewelry to MFs and ETFs, robust consumer appetite in gold’s cultural heartlands, India and China, has seen global prices rise from $270 an ounce in 2001to more than $1700 an ounce as on November this year. India, the world’s largest gold consumer and China account for over 55% of global gold jewelry demand and 52% gold investment demand.

Gold is being seen as a safest hedge against credit risk, currency risk and inflation that has besieged the financial world in the last decade. With the financial world navigating from one hurdle to another like the mortgage crisis to the banking crisis to the current sovereign debt crisis, investors have sought refuge under gold to protect their wealth.


Apart from sluggish growth in stock markets and high inflation rates, a spurt in central banks gold buying since 2009 after being net seller for over two decades has also contributed significantly to demand and thereby prices.

Off late, gold ETF investments are gaining ground at a rapid pace and are increasingly emerging as preferred route for long term investment in gold.

Technical Analysis

Despite the Finance Ministry’s measures to discourage investments in gold, assets under management of gold ETFs crossed the Rs 11,000 crore mark in September this year from Rs 10,701 crore in August and Rs 5,000 cr in May 2011, reflecting the robust appetite for the yellow metal.

Even as jewelry demand has been declining due to the volatile prices, a reflection of the price-sensitive nature of this segment, the rush for gold ETFs has meant that AUMs have soared from Rs 138 crore in April 2007 to Rs 11,198 crore in September, 2012 — over 80 times in 5 years.

With Diwali and Dhanteras round the corner, festive flavor is expected to add more color to the yellow metal and garner greater portfolio share of investors.

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India’s subsidy trilemma threatens growth

The subsidy hole that India has sunk itself deep into threatens to kill its famed growth story. The major subsidies in the system at present are on fuel, fertilizer and food that corner 95% of subsidy share.

Reducing subsidies is critical from the resource point of view, as, subsidies have been very high as a percentage of GDP. The subsidy bill in the current financial year is expected to rise to 2.4% of GDP from 1.9% estimated in the budget, Finance Minister P Chidambaram said last month.

The government’s major subsidy burden has ballooned over the years from Rs 67,498 crore in 2007-08 to Rs 208,503 crore in 2011-12.


According to the budget proposals, the government’s subsidy bill on food, petroleum and fertilizers is estimated at Rs 179,554 crore for 2012-13 fiscal, which is sure to be surpassed.

High crude oil prices, pending reforms in the fertilizer space and the proposed National Food Security Bill are further expected to swell subsidies.

In 2011-12, the revised estimates (RE) and budget estimates (BE) highlight the government’s failure to rein in subsidies. Petroleum subsidy rose from Rs 23,640 crore in BE to Rs 68,481 crore in RE. The RE for food and fertilizer stood at Rs 72,823 crore (against BE of Rs 60,573 crore) and Rs 67,199 crore (Rs 49,998 crore), respectively.

Apart from the size of such subsidies, other factors like strains on government finances, target group of such subsidies and their after effects on economic growth have dominated the discussion around subsidies.

clip_image001The food subsidy has swelled in recent years due to widening gap between the central price of wheat and rice and the economic cost of delivering these food grains. Huge stocks and the carrying costs associated with it have driven subsidies further.

The LPG subsidy is completely unfounded as bulk of it benefits people in the middle and upper income classes. Only about half the kerosene distributed through the PDS actually reaches the farmers or the poor and the massive under-pricing is only leading to large scale diversion for adulteration with diesel and petrol.

The cost of India’s agricultural input subsidies as a share of agriculture output almost doubled from 6.0 per cent in 2003-04 to 11.6 per cent in 2009-10, driven largely by subsidies to fertilizer and electricity.

clip_image002[10]In the process of subsidizing the so-called ‘poor farmer’, state electricity boards have run into massive losses and have recently landed a Rs 2 lakh crore bailout.

Fertilizer subsidy as a ratio to the value of crop output, which hovered between 3 to 3.5 per cent during 2000–06, rose to 4.8 per cent in 2007–08, and to more than 10 per cent in 2008–09 due to a spike in the price of imported fertilizers.

Fertilizer subsidy should be on nutrient basis, and ideally given directly to farmers. The sector must be freed from price controls and fertilizer imports must be opened up for the private sector through low import duty. This will help in rationalizing and containing the subsidy bill.

The poor must be insulated from price hikes, which should be directly targeted, but energy prices cannot be delinked from global prices, especially at a time when dependence on imports is rising.

Direct subsidy to a target group of small and marginal farmers is ideal against the present system of uniform indirect subsidy, which tends to benefit the larger farmers more.


Even as you and I continue to enjoy the current ad-hoc subsidy regime, the intended subsidies do not even reach the deserving segment. The subsidy dilemma has now started impacting the country’s growth in the form of persistent inflation, high fiscal deficit and high rural wages.

And since growth is a pre-requisite to eliminate poverty, as acknowledged by PM Manmohan Singh, the economy may dive into a downward spiral if the current regime of distorted subsidies is not uprooted.

How Crony Capitalism Scammed India

It is the season of scams and the cozy nexus between the Great Indian political class, babus and corporate India has exploded. Apart from unraveling the Indian style of doing business, the expose threatens to lay bare ‘the dirty picture’ of crony capitalism. The coal block allocation scam is the latest loot of national resource in various sectors like coal, oil, gas, power, mobile-phone licenses etc.

The sharp spurt in economic growth has been matched by an equally sharp increase in the quantum of frauds. While the ruling Congress-led UPA has sunk deep into corruption, history reveals that other parties like the BJP, SP and other regional parties are not any better.

Just like the 2G scam where a scarce resource like spectrum was doled out by Union Telecom Minister A Raja to his hand-picked companies, the latest CAG report on coal block allocation shows how land was given at throwaway price to GMR’s Delhi airport, coal was given to private players like Essar Group, Jindal, Adani, ArcelorMittal and Tata Steel without bidding. [stockquote]TATASTEEL[/stockquote] [stockquote]ADANIENT[/stockquote] [stockquote]JINDALSTEL[/stockquote]


While the recent CAG reports have thrown the spotlight back on crony capitalism, India is no alien to business-politics nexus. Jagan Mohan Reddy created a multi-million dollar empire in no time, thanks to undue favors from his then Chief Minister father late Rajasekhara Reddy.

The Bellary brothers including billionaire and mining magnate G. Janardhana Reddy ran their illegal iron ore mining business with impunity, thanks to BJP’s patronage. Their political clout ran across party lines and they were also linked to both Jagan Reddy and his father.

Even BCCI’s billion-dollar baby, the Indian Premier League, which included businessman, politicians and film stars, has been implicated for financial irregularities that run into crores.

The controversial S-Band spectrum deal between ISRO’s commercial arm Antrix and private firm Devas Multimedia was scrapped after it emerged that undue favors were given to the private company. The loss from the scandal was pegged at more than Rs 2 lakh crore.

The issue of black money, currently the toast of the nation, gathered steam after Pune stud farm owner Hasan Ali Khan was nabbed in a massive money laundering scam and accused of amassing wealth of over $8bn in Swiss banks. While many influential politicians have been linked to the scrap dealer turned billionaire, none have so far been substantiated.

imageSeasoned watchers explain that the perfect example of crony capitalism was played out in one of the country’s largest companies. Till Murli Deora was at the helm of the oil ministry, Reliance Industries, run by Mukesh Ambani had a free run as Deora was seen close to the Ambanis. Ever since he was shunted out and Jaipal Reddy took over, the fortunes of RIL turned worse and the company’s run-in with regulators over KG-D6 gas basin has intensified. [stockquote]RELIANCE[/stockquote]

Coming back to scams, who can forget Ramalinga Raju and his Satyam Computers [stockquote]SATYAMCOMP[/stockquote]. Raju was seen as close to both former CMs of Andhra Pradesh Y S Rajasekhara Reddy  and N Chandrababu Naidu. While both ministers rode on the back of Satyam Computers and Raju to showcase the city as an IT den, once the Rs 14,000 crore scam exploded, none wanted to associate themselves with the fallen hero.


Even as the tainted government battles to save its skin, the fallout of such scams has been widespread. Parliament functioning has been stalled due to political gridlock, macro environment for investment has worsened, policy reforms are in deep freeze, risk aversion has increased, decision-making at the government’s administrative machinery has completely slowed down and business sentiment has taken a beating. Is it any surprise that the country’s GDP growth is languishing at a decade low of 5.5% in Q1?

KG D6: Time to end the off-field drama

From being a prized asset to a pain in the neck for Reliance Industries (RIL) [stockquote]RELIANCE[/stockquote], the government, investors and other stakeholders, KG-D6, the country’s biggest gas discovery, has been mired in several off-field controversies than on-field exploits. Production was expected to touch 80 mmscmd by April this year as per the original development plan after all the 31 wells are drilled and brought to production. However, in the last few months, output has dipped to below 30 mmscmd, sparking a ugly row between the government and operator of the eastern offshore block, Mukesh Ambani-owned RIL. This will be the lowest level since RIL began production from KG-D6 block in April 2009.

imageWhile a drop in pressure in the wells and increased water and sand ingress pulled down per-well gas output, the flagging Krishna-Godavari (KG)-D6 fields has been subjected to several other distractions like sharp downward revision in provable reserves by partner Niko Resources, tussle between RIL and the government after the centre refused to clear the operator’s investment proposals of over $1.5 billion and delays in regulatory approvals forcing the company to defer investments.

Under the production sharing contract, the government allows companies to recover their cost from revenues and then share profits with the government.

Last November, RIL sent an arbitration notice to the government over recovering its investments in the KG basin after the oil ministry disallowed the cost recovery saying RIL failed to meet drilling commitments, accusing it of violating the production sharing contract.

Some voices in the street also believe that RIL is deliberately allowing production to drift downwards as it is unhappy with the gas price of $4.2/ mmbtu that stays till 2014.

The ugly battle has created a climate of uncertainty and loss of confidence among global oil & gas majors, forcing them to stay away from India’s hydrocarbon sector.

imageInstead of adopting a confrontationist stance, the oil ministry and the company need to bridge the gap and work in tandem for the sake of the country’s energy security. Sagging output from KG-D6 has forced companies to import gas at almost double or triple rates. While KG-D6 gas is available at $4.2/mmbtu plus taxes and marketing margin, imported gas varies anywhere from $8.5/ mmbtu to $14/mmbtu.

While the government must get rid of its bureaucratic hurdles and cut down on red tape, RIL must ensure greater transparency in terms of the problems facing the basin, the costs undertaken, etc. Both the sides have taken steps in this direction. While the oil ministry has conditionally approved RIL’s KG budget for the last three years, the Mukesh Ambani-controlled company has agreed to provide the Comptroller and Auditor General of India (CAG) access to records of the KG D6 block. This paves the way for the company to obtain green signal for its integrated field development plan (IFDP), which is crucial to revive the declining KG-D6 production.

technical analysis chartThe conditional approval will not only facilitate investments but also lead to an amicable resolution of the pending arbitration between RIL and Oil Ministry over reduction in KG – D6 cost-recovery.

For RIL, its fortunes and growth outlook are linked to quick recovery in gas production from KG-D6 basin. Last fiscal (FY12) saw the company’s share price slump by 28.6% against a 10.5% fall in the Sensex during the same period, reflecting investors’ unease over the standoff. If RIL is to regain its aura as the darling of D-Street, it needs to step up the gas and ramp up declining production.

State power utilities must go bold or get whacked

It’s do or die situation for the country’s precariously placed companies in the power sector, especially distribution companies (discoms) or state electricity boards (SEBs).

The Shunglu panel, set up by the Planning Commission, last year pegged accumulated losses of discoms at Rs 82,000 crore from 2006-10. The committee was set up to look into the financial health of discoms. The losses of SEBs indirectly impact the power producers since SEBs are the largest buyers of power in the country.

imageAccording to a report released by the 13th Finance Commission, these financial losses may increase to Rs. 116,089 crore by FY 2016-17, much higher than Rs 63,500 crore seen in FY 2010. Non-revision of tariffs and non-realisation of subsidies has severely plagued these entities.

With debts at unmanageable levels and losses mounting, reports have hinted at a bailout for these distribution utilities that are tethering on the brink of bankruptcy. Is it a case of throwing good money after bad or will these companies get rid of their complacency and deliver hard-hitting reforms like raising power tariffs, eliminating theft and corruption through efficient delivery mechanisms?

Deteriorating financial position has handicapped SEBs ability to service debt. This has prompted banks to turn cautious in extending loans to the power sector as a whole. Nearly 70% of the SEB losses are financed by public sector banks. Some lenders have started insisting on riders like automatic pass-through of fuel costs and filing tariff petitions every year in their loan agreements with SEBs.


While a bailout is needed to avert a total blackout in the power sector, it must be backed by structural reforms like strict reduction in transmission and distribution losses and frequent revisions in tariffs to ease liquidity constraints faced by discoms.

Currently, regulatory framework for distribution utilities is marred due to political interference in tariff fixation.

The Shunglu panel has called for independence of the regulator, creation of a special purpose vehicle by the RBI to purchase the liabilities of distribution companies, non-creation of regulatory asset in the books of discoms, etc among other measures to prop up their finances.

imageSeveral states have seen the writing on the wall. All the top 10 loss making states have revised tariffs in the past 18 months.

Delhi raised tariffs by 24% this week, the fourth such hike in the last 10 months, after distribution companies complained of severe financial strain due to the rising power purchase cost. Tamil Nadu proposed a tariff hike of 38% while Rajasthan raised rates by 24% in September 2011. The hikes will give some room for state distribution companies to repair their balance sheets.


While the recent tariff hikes have held out hope of a turnaround, SEBs must resort to sustainable measures like annual tariff petition filing, timely revision of tariff, increasing private participation in the distribution business, computerisation of accounts, better monitoring of funds, etc. The Shunglu committee has also called for stern action against state regulators if adequate tariff revisions are not undertaken and penal action against utilities for not filing annual accounts.

The financial health of distribution utilities is critical for the success of the power sector that will see a capacity addition of 85,000 mw during the 12th five-year plan.