News: Indian demographics assure liquidity flow

(DNA 02/10/2006) Mumbai - The demographic profile of India ensures that it would have a young, working (and consuming) population for decades. China would be a country with an aging population, thanks to its one child policy. This demographic profile would ensure that the Indian economy would grow (it grew at a whopping 8.9% in Q1 of the current year, beating expectations). Little wonder that Singapore is to invest $1billion in two multiproduct SEZs in Tamil Nadu, in a JV with TNIDC. The RBI has cleared venture capital funds to invest $1billion in realty. In stock markets, too, it is FII-driven liquidity, far more than domestic money, which has provided boost to the ongoing rally. The BSE Sensex went up 216 points (1.8%) to end the week at 12447. Of this, ICICI Bank, accounted for 61 points and HDFC for 44. The Sensex is now within striking distance of 12671, the all time peak it hit on May 11. It looks likely to cross it, before correcting itself.

The reason it would correct itself is because of official policies that suggest we are not fully committed to market reforms and we don’t seem to learn from past mistakes. Take the latter. The Telecom Regulatory Authority of India is known by its acronym Trai, but it ought to be the phonetic equivalent, TRY!

When it started rolling out telecom reforms, it had proudly announced that Rs 10,000 crore would be collected by selling license fees to telecom companies. It auctioned licenses to two players in each circle.

Because of the exorbitant license fees telecom firms had to offer mobile services at an unaffordable Rs 16/minute, which, obviously restricted the subscriber base and made the business unviable. Trai then switched, wisely and belatedly, to a revenue sharing arrangement with low license fees. Voila! The market opened up and the telecom story became a success.

What Trai is now doing, for the next generation of mobile services (3G) is repeating the same mistake! It seeks to auction spectrum, (plus keep a 1% revenue share) in a bid to garner Rs 1,500 crore. What this will do is to (a) push up cost of service, since the telecom firms will collect the fees from subscribers and (b) give acquirers of spectrum squatting rights on it, so that even if the business fails they will make more money by selling the company along with spectrum allocation (similar to the landing/parking rights that Jet Airways sought when it made a bid to acquire Sahara). Trai ought to ensure that the auction of spectrum entails only usage rights and not ownership rights.
So if the buyer fails in his business, he has to return the spectrum allocated to DoT. Failure in a business cannot result in a profit from squatting rights! Trai can also explore if it is technologically possible to trade spectrum, like power trading, in order to ensure that ‘white spaces’ or unused spectrum with one operator, can be used by another at a price, through a seamless trade.

Then, there is the evidence that we don’t seem to be fully committed to market reforms. Take the case of airlines. The Civil Aviation minister says that domestic airlines will cumulatively lose some Rs 2,200 crore this year, and probably be in the red next year too. His remedy is to ask airlines to go slow on capacity expansion or face greater scrutiny by his ministry. He cites the ‘90s failure of airlines such as East West, NEPC, Modi Luft and Damania. But these were all private airlines and the ones who lost money were private investors, not the Government. It is okay for you to caution investors, but not okay to try and outguess, or legislate, market growth!

In corporate news of interest, ONGC, despite being milked by the Government to share subsidy burdens, has paid a whopping Rs 2,050 crore as advance tax, thanks to hitherto buoyant crude prices. Now that crude prices have fallen, it may contribute less the next time around, though it is also to gain from the non sharing of cess and royalty on oil blocks where private partners are not allowed.

OIL India, a wholly-owned Government company, plans to divest a 10 % stake through an IPO that ought to be well received. Another interesting IPO is from DCB, which seeks to raise between Rs 157 crore to Rs 186 crore through an IPO in a price band of Rs 22-26, slightly more than the book value. The past losses of this erstwhile co operative bank have been written off and a new management team has been put in place. The AKFED and other private investors have pumped in money at Rs 45/share. So, assuming that the turnaround sustains, the story could be interesting.

DLF whose mega IPO is awaited, has signed a JV agreement with Hilton, to open hotels. DLF will hold 74%, but Hilton would have the right to increase its holding to 49% over time.

The rally continues, driven by strong FII inflows. It could cross its previous peak, but caution remains the watchword. It is, after all, easier falling off a cliff than climbing one!