FUEL PRICE HIKE - OPPOSITION SHOULD SEE REASON

The opposition took the unprecedented step of staging a walkout during the finance minister Pranab Mukkerji’s budget speech on the government move to hike fuel prices.

Public sector oil marketing companies will incur a loss in excess of Rs.45, 000 crore in 2009-10, according to Petroleum Minister Murli Deora. The expert group constituted for suggesting sustainable pricing policy submitted its report recently, suggesting for market driven prices. Fuel price hike is made to cover the under recoveries in oil prices and not to facilitate the Oil Marketing Companies (OMCs) earn huge profits.

The oil marketing companies are the backbone of the country’s energy security, hence their health is a cause for the government in power. When global oil prices touched record highs during 2008, the government had provided the oil companies financial support of Rs.1,06,000 crore. Such kind of subsidy is neither desirable nor sustainable in the long run. One of the recommendations of Dr. Parikh committee is, rationalisation of fuel prices to mimic free market prices that promote efficient fuel choice and substitution. The opposition parties, who are opposing the government move should see the reason and rationale behind the increase and should not oppose just for the sake of opposing. They should display wisdom and more maturity in dealing with sensitive issue like this, which is in the national interest, in the long run.

SACHIN CREATS HISTORY

Sachin Tendulkar has many records against his name. Today he has created one more, by scoring a double century against South Africa, first cricketer do that feast. TIME FOR CELEBRATION.

MICRO FINANCE: USURIOUS RATE

Look at this irony – the wealthiest and the richest industrialists/business men in the country have access to the cheapest credit, around 8% p.a. from Banks and Financial institutions. Where as the poor, the down trodden and the and other unfortunate sections of the society pays the highest interest, anywhere between 30%-40%p.a. when they borrow from the Micro Financial Institutions (MFI).


Micro finance – objectives

Despite the vast expansion of the formal credit system in the country, the dependence of the rural poor on moneylenders continues in many areas, especially for meeting emergent requirements. Such dependence in the case of marginal farmers, landless labourers, and petty traders and rural artisans belonging to socially and economically backward classes and tribes whose propensity to save is limited or too small to be mopped up by the banks.
Micro finance is the provision of financial services to low income clients, including consumers and the self employed that traditionally lack access to banking and related services. It is a movement whose object is to create a platform, for as many poor and near poor as possible, to have permanent access to an appropriate range of high quality financial services, including savings, insurance and fund transfers, at an affordable cost. Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is one of the tools that can reduce the suffering of people by financial services that enable the poor to use the existing knowledge and experiences.


In 1994, the RBI constituted a Working Group on NGOs and Self Help Groups (SHG). On the recommendations of the Group, the Reserve Bank advised that the banks’ financing of SHG should be reckoned as part of their lending to weaker sections and such lending should be reviewed by banks at regular intervals. As a follow up of these commendations, the RBI took a series of measures in April 1996 to give a thrust to micro-finance based lending. Currently, all loans by banks to MFIs are categorised as priority sector lending, that banks have to fulfill as part of their social obligation and regulatory requirement.


Usurious rate

The interest rate applicable to loans given by banks to micro-credit organisations or by the micro-credit organizations to Self Help Groups/member beneficiaries is left to their discretion. Since the advances to MFIs are classifieds as priority sector advances, the applicable interest rate is around 15%p.a. However, the MFIs are collecting interest between 24% to 36% p.a. from the hapless borrowers. The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. Micro finance should not be viewed as a business venture where one can expect very high return on investments. RBI should put a cap on the interest to be charged on the end users, as most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions.
The RBI should also exercise greater control over MFIs, bring more transparency in their operations and derecognize the MFIs, which are known for bad corporate governance.

WHAT AILS THE PRIMARY MARKET: GREED, GREED, GREED AND GREED

The response to the public issues that hit the market in the recent past has been very tepid, particularly from retail investors, barring few exceptions. There is no dramatic change in the BSE index from first week of Jan until date. In spite of this, the sentiment of the retail investors, in the primary equity market, has been very badly shaken. The highly competitive merchant banking business making the merchant bankers to offer unrealistic and un reasonable premium to the issuers, to get the merchant banking assignment. Equally, the greedy promoters are exploiting the situation by unreasonable pricing of the issues.

The law of economics tells us that if the price is right, there would be demand for practically any scrip. It appears that the greed of the issuers got the better of their discretion and judgment. The lead managers to the issues also need to take the blame for poor professional judgment and advice whereby they could not persuade the issuers to price their issues realistically, leaving some thing for the investors too. Some issues get over subscription due to high premia in the grey market, which disappears, once the issue closes. The uninformed investors becomes victims of such market manipulations. Together, the issuers and the merchant bankers are responsible for the pathetic condition of primary market.

BUSINESS ECONOMICS - FORTNIGHTLY MAGAZINE

Dear readers,

The ipo analysis on Texmo Pipes and Products Limited by the same author has appeared in the above magazine in Feb 16-28 issue.




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ABSENCE OF ‘WALL’, MADE ALL THE DIFFERENCE

The South African team scored an easy winnings win over India in Nagpur test. Having won the toss, the SA captain, rightly decided to bat first. Zaheer Khan struck early to send both the openers cheaply. The all weather specialist, Jacques Kallis and emerging player with right kind of test temperament Hamish Amla,upset the Dhoni’s calculation of winding up of SA’s innings early. Hamish went on to score unbeaten match winning double century, while Kallis scored a superb 173 runs. SA scored a formidable score of 558 runs before declaring the innings. India failed to reply strongly. Barring Sewag’s century and Badrinath’s half century the India’s response was poor. Dale Styen, speed and swing master did the maximum damage to India by claiming seven wickets. Indians were all out for 233 runs in the first innings and were unable to avoid the follow-on. The SA task become easy, since the Great Wall of India (Rahul Dravid) was not playing in the test because of injuries. Rahul Dravid, definitely would have stretched the India’s first innings, thus avoiding the follow-on. Then it would have been a different story. Though, Sachin scored a century in the second innings, the other batsmen failed to score. Unexpected support came from tail enders - W Saha, Harbajan and Zaheer, all scoring thirty odd runs. We need consistent performance from our bowlers, if we want to defeat SA. One only hopes they deliver something better in Kolkata test. Good luck to Team India.

A STEP IN THE RIGHT DIRECTION

The recent decision of RBI, not allowing the real estate loans, one more restructuring, is a step in the right direction. After collapse of Lehman Brothers in 2008, banks were permitted to restructure the real estate loans until 31-03-09. The real estate companies instead of reducing the prices held on to properties at high prices and earned substantial profits, when the economic activity picked up after June 2009. There are sectors still under pressure like textile, leather and handicraft, particularly SMEs in this sectors who deserve more incentives and stimulation. According to Assocham report - there is no bubble-like situation in real estate sector. It is the greed for more profit by real estate developers that is keeping the sector in temporary liquidity crunch. There is no reason to treat them at par with the farmers or the micro and small enterprises or even the large-scale industries, which are growth drivers of economy. The RBI decision, will force the developers to reduce their land/real estate holdings in order to clear/reduce bank loans/exposure, in time, to keep the credit ratings in tact. This will also helps the real estate prices to stabilize at realistic level.

INNOVATION, NATURE, WILL PROVIDE THE SOLUTION

The views expressed by Swaminathan S Anklesaria Aiyar on future oil price movements is highly exaggerated – ‘Start preparing for oil at $ 200 a barrel’ (TOI 07-02-10). The prices of all commodities in developing economies tend to raise for obvious reasons, including petroleum products. The movement of international oil prices are influenced by many factors, the prime mover apart from demand, is speculation. In 2008, oil was quoting at $ 147/barrel. If you factor average inflation in to that, in 2010, the price should have been around $ 165/barrel. The experts, at that time, predicted oil would touch $ 200/barrel in a year time. However, in 2010 it is quoting around $70/barrel, inspite of emerging economies recording robust GDP growth during 2008-2010. Comparing the decontrol of steel with that of oil products is not appropriate. Steel is not a product used by every one 24/hrs a day, like petrol, diesel, kerosene and coking gas. We are a country with huge poor and middle class families. Decontrol of petroleum products will hurt them very hard. Under-recoveries are a problem, which the government should tackle in different way without increasing the burden on the middle class, poor and other oppressed sections of the society. The energy crunch should be addressed by encouraging renewable sources of energy like solar and wind energy. Innovation, technological break and/or nature will provide the solution to the problem of energy crunch. Who imagined, five decades ago, that Information Technology and Internet would revolutionize the world as it is today? There is no need to press the panic button unnecessarily.

ENOUGH IS ENOUGH

Chetan Bhagat’s views on Indo-Pak relationship –‘Let’s not confuse peace with love’ (TOI 07-02-10) are well intended and interesting. However, our good neighbour is not interested in establishing permanent peace with us for the reason best known to them. There is something wrong with the mindset of their leaders – both military and political. The epicenter of international terrorism is Pak. The perpetrators of 26/11 and host of international criminals are sheltered and protected by the establishment there. Recently, Vir Sanghvi had written a thought provoking and excellent article in Hindustan Times – ‘There is a method to their madness’ clearly explaining the sequent of events in their madness. Our Prime Minister having tried his level best with different leaders in Pak, has finally made the statement not long ago –‘I donot know whom to talk in Pakistan’. Leaders in Pak talk in different tones, change their stance according to their convenience and there is no consistency in their stand on issues. What kind of peace initiative one can expect from such leaders. Peace has been given enough chances, now it is time to show our might.