10 Questions about Supreme Court's cancellation of 122 2G telecom licences

In a historic judgement today, the Supreme Court has cancelled 122 2G telecom licences issued irregularly during the tenure of the former Telecom minister, A Raja (currently cooling his heels in a government hospitality center). The judgement was hailed by all concerned. After an initial dip, even the stock market celebrated by closing higher.

The judgement raises several questions. Here are 10 of them. Knowledgeable or enlightened readers are welcome to provide some answers.

1. By cancelling the licences, is the Supreme Court pointing the finger of blame towards the UPA government?

2. Isn't the business community equally to blame for trying to get something for nothing (well, not exactly nothing)? What happens to the not-exactly-nothing passed on to the badminton-playing government guest at Tihar jail?

3. Many of the 2G licences were acquired with no intention of providing any services, but merely to sell them off to others at huge profits - defrauding the government exchequer. Who will recover the immoral profits, and how?

4. A new licencing process will be formulated over the next 4 months and the licences will be reissued. Who will ensure that the new process will not turn out to be 'A Raja - Part 2'?

5. What happens to the licence fees already paid by the cancelled licence holders? Will those fees be forfeited?

6. What if some of the cancelled licence holders do not bid in the new process? Will the existing licence holders (whose licences have not been cancelled) be allocated extra spectrum?

7. Most of the licence holders borrowed money from the banks to launch their services. Will those loans become NPAs? Is that the reason why the Bank Nifty took a dive?

8. The Supreme Court judgement must have sent shivers through the spines of foreign investors in the telecom sector. Will FDI flows into India - badly needed to get our economic engine revving again - get affected by this judgement?

9. The charges against P Chidambaram brought by Subramaniam Swamy will be judged by a lower court later this week. If the judgement is adverse, can it bring down the UPA government? If yes, will the stock market crash?

10. Will the Supreme Court judgement open up a proverbial Pandora's box? Will all scams - whether in mining, CWG, Adarsh Housing, fodder - come under the Court's scanner? Will that be good or bad for the country?

Some of these questions may get answered over the next few days, as the government assesses the detailed judgement and formulates its plan of action. Till then, it will be good to hear what readers think.

How FDI has helped 6500 farmers in Bengal

From the responses to last Thursday’s post, it is quite apparent that there are a lot of apprehensions about the benefits of FDI in multi-brand retail among educated citizens. The big show of opposition by the BJP was expected – not because they are concerned about the ‘kirana’ stores becoming defunct, but because small traders and businessmen form a big part of their vote bank. The Marxists opposed it because that gave them some thing to do. They have become irrelevant otherwise.

The timing of announcing the much-expected policy reform could have been better. With some important state elections round the corner, even ruling party stalwarts voiced their doubts. But objections from allies in the ruling coalition forced the government to back-track and postpone implementation of 51% FDI in multi-brand retail. The policy flip-flop got wide coverage in the international press and hasn’t gone down well with FIIs, who headed for the exit doors.

What got lost in the brouhaha was that there was no opposition to the announcement of 100% FDI in single-brand retail. Why? Because 51% FDI in single-brand retail was already a fait accompli. That means good news for IKEA, Rolex, Tommy Hilfiger but bad news for Tesco, Carrefour, Walmart. Instead of getting into the pros and cons of 51% FDI in multi-brand retail, let me relate what is happening to 6500 farmers of West Bengal. It was front page news in The Telegraph two days back.

There is a potato crisis in Bengal. The crop is harvested during Feb-March and kept in cold storages for selling through the year. While a third of last year’s crop is yet to be sold, bumper harvest in Punjab has led to a flood of potatoes into the state. Farmer’s prices have dropped to 90 paisa per Kg against the usual Rs 3.50 per Kg. Middlemen, who ‘buy’ from the farmers and store the crop, pay the farmers only after they sell. With prices crashing lower, they are refusing to pay the farmers at the higher rate.

But 6500 farmers in Howrah and five neighbouring districts have cocked a snook at the antics of the middlemen. All of them supply their produce to the potato-chips factory of PepsiCo in Sankrail, Howrah. This is how the system works. PepsiCo, a multinational giant, has appointed 150 registered ‘vendors’ and help them to get loans to enable them to buy seeds, pesticide and sacks for the farmers. The farmers produce special chip-grade potatoes with less sugar and water content than the local variety, for which the vendors were paid Rs 6.10 per Kg by PepsiCo in Mar ‘11. The vendors pay the farmers promptly.

The vendors’ job is to coax more farmers to join the scheme because PepsiCo plans to increase their procurement by 50% from the current 40,000 tonnes. Due to the higher rates paid by PepsiCo and the prompt payment from vendors, these 6500 farmers hope to make a profit upwards of Rs 20,000 per acre as opposed to the likely loss of Rs 10,000 per acre that farmers of local variety of potatoes may face if they get paid at 90 paisa a Kg.

The prosperity that is spreading down the chain is remarkable. Some of the farmers who joined the scheme a few years back have replaced their hutments with ‘pucca’ structures, have bought more land and are sending their children to schools. Some of the top vendors, who have several hundred farmers under contract, make Rs 5 Lakhs per year.

Most multi-brand retailers overseas sell branded products as well as ‘house’ products, i.e. products manufactured by local vendors which they sell under their own brand name. These products are sold at a slightly lower price than competing branded products, but earn better margins. Even local multi-brand retailers have adopted the practice. For example, Spencers sells Kellogg's cereals as well as their own branded cereals. If and when the Tescos and Walmarts are permitted to open retail stores, they will find it profitable to engage local vendors in their procurements. Some are already doing it for their overseas stores.

A champion of small farmers has argued that initially the foreign retailers may pay top prices for local produce, but over the long term they will squeeze the small farmers for lower prices. The example of such a practice in the UK has been cited. The learned gentleman needs a lesson in geography. The entire UK will probably fit inside the state of UP in terms of size. India is a vast country in comparison. To reach the stage where all the small farmers get contracted to foreign retailers and then get squeezed in the long term is unlikely to happen even in the distant future.

Will FDI in retail be good or bad for India?

Let me make it clear at the outset that the people of India should respond to that question. Or, at least a small subset of the people of India who have access to the Internet and may read this post. In other words, you, dear reader, get a chance to voice your opinion.

An opinion based on gut feel, or hearsay, or belief does not count for much. So, I’m going to present some cold, hard facts (from a reasonably reliable though may be a biased source – the current Secretary General of FICCI – published in a newspaper article today). Please read the facts, and then decide.

1. The idea of FDI in retail was proposed by the NDA government 7 years back. (It also found a place in BJP’s election manifesto in 2009. Yes, the same BJP which is now making a song and dance about opposing it and stalling Parliament proceedings.) The UPA is finally taking steps to implement this important economic reform.

A very uncomfortable Yashwant Sinha, when cornered by a TV journalist about the above, said: “Lot of water has flown down the Ganges. I have become older and wiser.” (Why is it that people become wiser when they are no longer in power? It’s a rhetorical question – no need to answer it!)

2. The retail market is expected to double from its current size of $490 Billion to $1 Trillion over the next 20 years. The current share of organised retail (including foreign ones) is expected to quadruple from 4% to 16%. That means, the market size for the ‘kirana’ type stores will go up from the current $470 Billion to $840 Billion over the next two decades. (Forget about job losses!)

3. Large format retail stores with FDI will be permitted in cities and towns with a population of 10 Lakhs or more. About 53 such cities and towns will make the cut today. This number is expected to increase to 76 in the next 20 years. (Not likely to be a plunder of the country like the East India Company did.)

4. More than 30 Crore people are expected to migrate to urban locations from the hinterland over the next two decades. The ‘kirana’ stores are unlikely to be able to meet the extra demand or employ a significant percentage of the influx.

5. To maintain India’s GDP growth rate at 9%, 1.2 Crore additional jobs will need to be created every year for the next 15 years. Such a large number of jobs are unlikely to be created by manufacturing units (which rely more and more on automation) or IT services (which is reaching growth limits).

6. Despite presence of large format retail stores like Spencers, Big Bazaar, Reliance Fresh, Trends - ‘kirana’ stores haven’t gone out of business. Both small and big format stores are co-existing.

7. The real differentiator in retail business is not at the front-end, the actual stores where we go to buy clothes or lipstick or kitchenware. It is the back-end operations involving logistics, supply chain management and sophisticated computer systems. These require knowledge, experience and large investments.

Large format retailers in India have managed the front-end well, raising the shopping experiences of Indians. But they have fallen way short in the back-end operations.

You have the facts. Now, it is your turn to opine. Will FDI in multi-brand retail be good for India, or will it be bad?

Related Post

Is Organised Retail a Great Business or a Mediocre Business?

RBI raises repo and reverse repo rates - again

Most economists and stock market analysts were expecting RBI to raise the repo and reverse repo rates by 25 basis points (i.e. 0.25%). So, the markets should have already 'discounted' the interest rate hike. Then why did the Sensex drop nearly 150 points to slip below the psychological level of 18000?

Before I attempt to answer that question, a little digression.

Many Indian working/earning men have different types of addictions. Some are addicted to tobacco. Some like to go to the races. Others like to hit the bottle. All such addictions cost money. And that money comes off from the top - i.e. before the monthly expenses are incurred.

In other words, to feed the addiction, needed monthly expenses have to be curtailed. Which doesn't make sense to any one - except the addicted person. Month in and month out, he blows money up in smoke (or in torn race tickets, or in drunken stupors), while bills remain unpaid. And then, money has to be borrowed to pay the bills - making a bad situation worse.

The RBI is facing a similar predicament. Time and again, they have raised the repo and reverse repo rates in a graduated bid to curtail inflation without hampering growth. Without much success. In fact, inflation rate has started climbing again. Why? 

The global downturn followed by the massive money printing (better known as Quantitative Easing - Part 1 & 2) 'exported' inflation to the developing countries like India, by buying up stocks in better performing markets. The Indian government has continued with wasteful expenditure - better known as 'subsidies' - which inevitably doesn't benefit ordinary citizens. 
 
Vote bank politics ensured that required financial reforms and tough fiscal policies were avoided (or at best, not pushed through). Prices of diesel and kerosene have not been increased with the excuse that inflation will climb even higher. Nor have the punitive taxes on petroleum products been reduced, which could have partly mitigated the price hike.

Lot  of sound bytes have been issued about curbing black money generation and bringing perpetrators to book. The fact of the matter is that the few arrests in the various scams have only come about due to prodding by the Supreme Court. The government departments and the ruling party remain the biggest sources of black money generation. 

No concrete improvements will happen in transparency and governance till the elected leaders reform themselves. All the talk about identifying account holders in Swiss banks has led to some of the black money getting re-routed through 'hawala' channels back into the country - further stoking the fires of inflation - and into real estate deals. Probably the reason why debt-burdened real estate companies are refusing to lower the prices of apartments and buildings.

And food inflation? That can be eliminated in one simple step - by allowing FDI in food retailing. All the apparent concern about 'kirana' stores going out of business is nothing but crocodile tears. There are too many middlemen with close ties to the one in Power (pun intended). The humongous wastage will be eliminated through modern refrigerated storage and transportation facilities. Removal of middlemen will be a win-win for farmers and consumers.

Sorry about that long rant. The point is, without appropriate fiscal and policy measures to support the RBI's monetary tightening, inflation is not going to come down any time soon. That is what came out of the RBI's statement today. Which means more tightening and further increase in repo and reverse repo rates in future, while the governments 'addiction' remains uncured.

That is why the Sensex dropped. 

BSE Sensex and NSE Nifty 50 Index Chart Patterns – May 27, ‘11

Last week, the BSE Sensex and NSE Nifty 50 index chart patterns had thrown up bearish and bullish possibilities. The scales remain tipped in favour of the bears, in spite of the FII buying on the last two days of the week that ensured that both indices closed about 1.5% higher on a weekly basis.

Why? For three easy-to-observe technical reasons:

1. The down trend lines (in blue) from the Nov ‘10 tops are intact

2. Both the Sensex and Nifty are trading below their 200 day EMAs

3. Both indices have spent 4 straight weeks below their falling 20 day EMAs; the 20 day EMAs are below the 50 day EMAs; the 50 day EMAs have slipped below the 200 day EMAs – the dreaded ‘death cross’.

Are the indices getting ready for a bigger fall?

BSE Sensex Index Chart

All the signs are pointing towards a deeper correction. What should investors do? The answer will depend on what kind of a fish they are! The Anagatavidhatas should sell and preserve capital; the Pratyutpanyamatitwas may set a stop-loss 3% below the Feb ‘11 low of 17300; the Jadvabishyas will await their destiny.

The technical indicators are showing signs of life, but are still bearish. The MACD is deep in negative territory, but has moved up to touch the signal line. The ROC is above its rising 10 day MA, but both are still negative. Both the RSI and slow stochastic have emerged from their oversold zones, but are below their 50% levels.

Observant readers may notice the positive divergences. The Sensex reached a lower bottom of 17786 on Wed. May 25 ‘11. The ROC, RSI and slow stochastic made higher bottoms. Was the net buying by the FIIs on the last two days of the week a mere coincidence?

Nifty 50 Index Chart

There is every chance that the Feb ‘11 low of 5200 (or 5178, if you want to be precise) will be tested, if not broken. I’m not a gambling man, but if I was, I would put some money on 5200 level holding. Why?

Three reasons. First, despite all the negative news and lack of buying support from investors, the Nifty has not crashed. Second, the time-wise correction of the 20 months long bull rally (from Mar ‘09 to Nov ‘10) is almost over. Third, the MACD, the RSI and the 10 day MA of the ROC are forming bullish saucer-like rounding-bottom patterns. My guess is that the FII buying was triggered by these technical reasons.

Food inflation went up again. The proposal to allow FDI in multi-product retail – should it become a law – will not only help tame inflation, but provide huge job opportunities for semi-educated youth. The impending hikes in the prices of diesel and cooking gas, and the likely moderation in the GDP growth rate have already been discounted by the market.

Bottomline? The BSE Sensex and Nifty 50 index chart patterns have entered bear markets, and may face steeper corrections. There are signs of reversal of the down trends in the near term. Unless the down trend lines in both indices are convincingly breached, one should not go on a buying spree. This may be a good time to nibble into fundamentally strong stocks that have corrected a lot.