Lessons we should learn, but don’t, from other countries’ mistakes

Yes, everyone has the right to make his own mistakes, even countries, but, simultaneously, everyone has an obligation to learn from the mistakes of others so as to avoid making them, even politicians. Yet they don’t.

The most obvious case is to study what’s happening in Greece. The Economist of July 2, 2011, ‘What have we become?’ talks about the interrelated woes facing the nation – a malfunctioning judicial system, a kleptocratic civil service and impunity for the corrupt. Sounds familiar? Our judicial system is slow, and sometimes malfunctioning, as pointed out in my previous column, letting off those who ignited to death a district collector whilst denying bail to white collar employees. We, too, provide impunity to the corrupt. In order to try and get out of its financial mess, the Greek have had to (1) cut entitlements (2) raise taxes and (3) privatise. The first two are politically difficult, the third is practically impossible. Given its precarious condition, state assets, including the heavily subsidised railway, will fetch a fraction of what they could have, in better t imes. Why do we not use the bull market to be more aggressive in selling off our assets? Why, for example, does the Government continue to hold on to a debt laden Air India which will be on financial life support for at least a decade, at tax payer cost? Only due to lack of political will and the ignorance of being blind to what is happening elsewhere.

Or take Ireland, another of the financially weak PIIGS (Portugal, Italy, Ireland, Greece and Spain) European countries that may be required to exit the eurozone. It, too, set a blistering pace of economic growth, but had overleveraged. At one point, its shipbuilding firm Harland & Wolff, hired 35,000 people. Now they have 135.

Mexico’s GDP growth was tepid but picked up once the police clamped down on criminals. Yet criminal gangs made contributions in 60% of campaigns (Economist, July 2). Sounds familiar?

Global investors are now focused on the US. Its two political parties have a month to strike a deal to take to the US Congress, which would allow the latter to raise the debt ceiling. If the parties don’t agree to a deal, the Government would have to default on its debt, and have its rating lowered from AAA. That would trigger a fresh bout of selling, including from India, by nervous investors. Luckily for the US it has two parties, and is not a multi party democracy like India, with several (loud) political voices to be heeded. One should imagine it would thus be easier to reach a consensus; at least President Obama believes so. He has called leaders from both the Republican and Democratic parties to the White House for a discussion and dinner. The Republicans have to agree to raise taxes/cut exemptions and the Democrats have to agree to cut entitlements. Both are obdurate and unwilling. What should we learn from here? Obviously, that there is a limit to which a coun try, even the largest one, can borrow and that it is better to live within its means especially when the economy is booming, as India’s is, and not build up too much debt.

The problems of a country invariably spill over into another. As is the case with the threat of Somali pirates who threaten merchant shipping companies and recently held the crew of an Indian vessel hostage for 40 days. What was the background of this? When it got independence in 1960, Somali embraced democracy. A socialist military dictator, Siad Barre, grabbed power in 1969 and embarked on bad policies, including nationalisation and collective farming, which drove the country to bankruptcy and borrowing and to his ouster after a civil war in 1991. Thereafter there was an absence of Government, as the country was in chaos, and no navy/coast guard, to guard its fishing interest. This chaos was exploited by foreign countries, who not only stole an estimated $300m. of fish annually, but also dumped waste, including radioactive waste, in Somali waters. The pirate fleet was an attempt to prevent such abuse, which, itself, was a failure of international maritime governance . We are all now paying the price. Lessons for India? Part of the Naxal problem can be traced to a denial of land rights to tribals, Gujarat, which has done a proper allocation of land rights, does not have such problems.

In corporate news of interest last week, Vedanta may face legal challenges from its minority shareholders, if it accepts the Government’s condition to withdraw its arbitration proceedings in its dispute with ONGC over how royalty paid by the latter should be treated, for the Government to approve its acquisition of Cairn. This is strange. Why didn’t minority shareholders of ONGC similarly legally challenge its acceptance of payment of 100% of royalty for a 30% ownership of assets?

HDFC has come out with good results for the June quarter, with total income rising 36% to Rs 3821 and PAT rising 22% to Rs 845 crores.

The BSE-Sensex gained 95 points over last week to end at 18858 and the NSE-Nifty was up 33, at 5660.

Where next?

The Economist has compiled an index of how overheated emerging markets are?

The index is based on the criteria of: inflation (India’s inflation is high), GDP growth (we are doing well here), unemployment (we are doing badly here, more later), credit growth (not too bad, though borrowing for capex has fallen, not least because of a policy paralysis, which is worrying), real interest rates (negative for India) and current account balance (negative, thanks to oil).

The Government would need to rethink whether its inflexible labour policies are helping, or harming, labour interests. Taiwanese textile companies shifted first to China, and, when Chinese labour became expensive, to Indonesia thereby providing employment and developing skillets, there. The companies are moving up the value chain and producing ‘technical fabrics’. Our textile manufacturers need to remain small, to avoid the labour laws that make it difficult to shut down should the enterprise fail, or consumer demand change, and so do not get the scale to move up the value chain.

The above index by the Economist shows India to be among the 7 emerging markets which are overheated, and so due for a fall. The coming week may, perhaps, see the markets rising as early corporate results for the June quarter would be encouraging, but would then face resistance at a sensex level of around 19,500 -19,700. Global investors are nervous, especially if there is a crisis coming to a theatre near you!


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