Andheri Nagri main Chaupat Raja

Is the title of a play, which roughly translates into a crazy king ruling over a dark kingdom. The failure of the entire Northern grid, which plunged over 600 million people, a tenth of humanity, into darkness and ensuing chaos, over two days, made India literally a dark kingdom and condemned it further in the eyes of not only global investors but its own people.

Power grids are NOT supposed to collapse as they did. They are supposed to switch power off to states who withdraw too much of it. The culprits were three states, U.P., Punjab and Haryana, which overdrew, and were permitted to, thus endangering the whole system and plunging a tenth of humanity into utter darkness.

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Why were these states allowed to? As always, blame it on the compulsions of coalition politics! Their support is needed for the Congress to stay in power, even if the cost of doing so is to keep 600 m people of the country bereft of it. A chaupat raja, Prime Minister Manmohan Singh, is increasingly demonstrating his capacity to be unable to lead. Why could he not order power supply to be shut to errant states? How much would the people of India accept compulsions of coalition politics as a feeble excuse for policy inaction?

The cost to society was enormous. Metro rail services in Delhi were shut. Traffic signals failed, causing chaos. Water treatment plants stopped working. Outside of Delhi, where hospitals may not have back up generating facilities, patients suffered, and some, on life support systems, may have died.

The play Andheri Nagri, Chapuat Raja is a story about a student who goes to the weird kingdom where the king has decreed all things to be sold at the same price. Taka ser bhaji, taka ser khaja (vegetables sold at the same price as exotic dates). Thieves, intending to rob a house, get killed by the collapse of a wall they broke and the mother seeks justice. There then follows a ludicrous blame game, with the owner of the house blaming the mason, who blames the bricklayer, who blames a passing Mullah who diverted his attention, whom the judge orders to be hanged, but since his neck doesn't fit the standardised noose, the judge orders the nearest person whose neck does fit to be hanged instead, which happens to be the student. He later escapes the noose. The blame game is quite familiar in India today, each time a corruption scandal ensues.

Where India digresses from the story is in the 'taka ser bhaji, taka ser khaja'. The cost of everything is not equal. The cost of corruption is borne by the people, in the form of higher prices of vegetables, fuel, taxes, and levies, whilst the influential corrupt are free to enjoy their ill gotten gains. Not a single corrupt politician in the 2G telecom scandal, the CWG scandal, Adarsh scandal or others has been penalised, by collecting the ill gotten gains and depriving him of his freedom. Why can't the Government follow the practise Securities and Exchange Board of India (SEBI) does, to forfeit ill gotten gains?

For all the meek cowing down by the UPA Government to its coalition partners, whether in terms of financial bail outs to state Governments, or turning a blind eye to overdrawals of power, and other misdeeds, the UPA Government has got little to show for it. As Bob Dylan sang 'how many times can a man turn his head, and pretend he just doesn't see?", the Government is turning a blind eye to all the corruption scandals.

The corruption scandals have arisen thanks, again, to the compulsions of coalition politics. Each of the coalition partners is given a ministry or two to run, from which that party can extract gains by trading permissions. This has been seen in the case of airlines, railways, coal or telecom, all of which have hit the sector badly. As a result of improper allocation of telecom spectrum, the Supreme Court cancelled 122 of them, and ordered the sale of future spectrum to be conducted only through auction. The Government has used a Presidential reference to the Supreme Court to seek clarity on some issues.

In the interim, it is trying to meet the deadline for auction of end August, set by the Supreme Court, but will be unable to. The Cabinet, just on Friday, has cleared a price of Rs 14,000 crores for 5 MHz of spectrum in the 1800 band, (and Rs 18,200 in the 800 band). This adds a higher burden of cost to a sector, hitherto successful, which is reeling under the costs needed to maintain and expand its infrastructure.

Telecom companies are stating that this will significantly increase call rates, perhaps by Rs 0.30/minute. The Government is arguing the increase would be modest, citing the example of 3G spectrum, though sold at a high rate, without an increase in cost.

As Sanjeev Aga points out perhaps call rates may increase modestly, as the companies may strategically decide to absorb it, after borrowing money from banks to pay for the spectrum in the auction. But should they, over time, not be able to generate adequate returns, it would be the banks that are saddled with the problem of non performing assets. This is exactly what has happened in the airline sector. Airfares were low, thanks to competition, and it is only after troubles hit Air India and Kingfisher Airlines, leading to cancellation of flights, that airlines such as Spice Jet and Jet Airways have been able to show a profit, after 5 quarters. So, perhaps, in the short term, the increase in call rates may be muted, but that would not be a validation of the high reserve prices in auction, feel the telecom companies.

Stockmarkets are, however, increasingly concentrating on the short term, more's the pity. As CNN points out, the Wall Street Machine is Broken.

Basically, as this column has pointed out, the pumping in of liquidity by Governments, in order to sustain consumption, to spur economic growth, and investment in plants, has largely spilt over into financing of assets. This causes the asset prices to collapse when the bubble bursts, as happens, frequently, in stock markets, and often, in real estate markets. The total stock of financial assets is over $ 200 trillion, more than 3 times global GDP. Since growth in GDP is aenemic, the asset managers take short term risks in a bid to generate higher returns. Often those risks fail, and lead to collapse of the institution, such as Lehman Brothers, MF Global or, last week, Knight Capital Group, which lost $ 440 m. in a matter of minutes due to faulty software, and is on the verge of bankruptcy.

The U K Government appointed a committee under Professor John Kay, which submitted its report last week. It, too, talks about excessive short termism, and what authorities could do to tackle it.

Here is one suggestion that SEBI may consider.

Why not encourage long termism by giving preferential treatment to long term holders, in terms of voting rights (which can be graded according to duration of holding)? Today, globally, institutions hold over 2/3rds of corporate equity, and individuals 1/3rd (the ratio used to be reverse before the growth of mutual funds in the 70s). It was felt that greater institutionalisation of savings would lead to better corporate governance, as they would have more voting clout than individuals. True. But they do not use that clout! Instead, institutions vote with their feet, and exit the stock, if they find companies doing things inimical to shareholder interest. There are very few activist shareholders, like the Children's Investment Fund, founded by Chris Hohn, which has filed a suit against Coal India for underpricing coal, that take on corporate management.

In fact there is an ongoing debate about whether 'shareholder value' should be the only value which companies should pursue. This, basically, is a swinging back of the pendulum, towards stakeholder capitalism, after the various scandals that have erupted, especially since 2008.

As regards the problem of grid collapse, one solution may be micro grids which keep the power local, cheap and reliable. Until such time as micro grids are set up, grid discipline has to be maintained, even if it means cutting off power to a political ally. Politics is about doing what's best for the country, not for the party. Sadly, our political leaders ignore that.

Just like companies need to listen to the environment and to their constituents, political parties must listen to those that voted them in. The consequences of not doing so are disastrous. In the case of companies, Eastman Kodak's market capitalisation is now 0.5% of its peak, because its management failed to move fast enough into digital photography. Nokia, once a respected leader in mobile handsets, quotes at 3% of its peak market cap. RIM, the makers of Blackberry, got thrashed by I Phone and other smartphones, and quotes at 4% of its peak. Sony at 9.

Unless the UPA listens to the environment and its constituents, and starts to take steps to a) curb corruption b) really punish the corrupt, not merely eyewash c) take some serious steps towards economic reforms d) end favours to coalition partners that hurt national interest whilst protecting party interest, it, too, can witness the same fate.

Foreign investors feel hopeful that the Government will take some , measures. Despite, for example, a statement by Parthasarathy Shome, the CEO of ICRIER, that the GST rollout is unlikely before 2014. The Centre has been unable to address the long list of grievances of the States. Despite the statement by the Vice Chairman of the Planning Commission Dr. Ahluwalia, that GDP growth this year will be 6%. Of course, that's not because of poor policy and poor governance, but because of poor monsoon, right?

The foreign investors have been net buyers of Rs 10,000 crores in India equity in July, after having been net sellers of just under Rs 2,000 crores in April/May/June.

It is foreign Institutional Investors (FIIs) buying that is helping sustain the market. Last week the BSE-Sensex gained 258 points, to end at 17,197, and the NSE-Nifty added 115 to close at 5,215.

One hopes that the Government may yet take steps to show its reformist zeal, if only as a measure of self preservation. But can one really expect that, in an Andheri Nagri with a Chaupat Raja?