As I write this piece, the highest gains amongst the 50 shares that make up India's Nifty, have been logged by Sesa Goa, an iron ore producer. The good cheer comes from the Supreme Court ruling yesterday that the Karnataka government's ban on iron ore exports should be lifted.
At the same time, the biggest loser on the Nifty is Cairn India, whose investors are worried whether the proposed sale of a stake to Vedanta will be cleared by the government.
So much for free markets.
Strip a few layers off the onion, and it gets messier: the Karnataka government imposed a ban on the export of iron ore because it had discovered that a great deal of mining in the state was illegal. Rather than do the hard work of figuring out which mines were legit and which not, it used the hammer of the state and shut down all exports. Never mind that an estimated 100,000 jobs were put into question. The underlying conflict was much more critical than jobs or investments; critical to the politics of theKarnataka legislature that is, where the threatened Chief Minister, B.S.Yeddyurappa needed to find a heavy stick to beat away his rivals, many of whom were supported by the mining lobby. Shut their mines down, and their patrons will weaken. The good, straight logic of a Machiavelli.
Straight-forward is what the Cairn deal should have been, too. Cairn Energy is a British company, which has majority ownership of an Indian company, Cairn India, which has successfully drilled for oil in Rajasthan. The British company has entered into a deal with Vedanta, run by Anil Agarwal, to sell 51% of Cairn India's shares.
The reason a seemingly simple transaction has gotten complicated is that the government wants to use this opportunity to change the terms of an arrangement it had put into place. The issue of contention is the role of the second large stake-holder in Cairn India, the state-owned Oil and Natural Gas Commission (ONGC). Under an arrangement common to petroleum exploration and production efforts in India, ONGC received a 30% stake in Cairn India's Rajasthan oilfields, and in exchange was to be responsible for paying the entire royalty on the output to the Indian government. The government wants ONGC relieved of the royalty burden before allowing the stake sale.
Why ONGC was brought in to play such a lop-sided role in the first place beats me. But since several smart bureaucratic and political minds crafted such a non-obvious arrangement, they must have thought it to be extremely shrewd. Having put it in place, why change it? If it suited ONGC to pay royalty yesterday, why should that arrangement be unsuitable tomorrow? To the outsider, it seems like the government is behaving like an opportunistic gatekeeper; every time someone wishes to pass through, it creates an opportunity to collect, just like those nonsensical octroi posts that clog our so-called highways. And of course, the more convoluted the underlying arrangements, the greater the number of gates you have to pass through, the higher their nuisance value, and the more the opportunities to collect.
To be charitable to our bureaucrats, they may create complicated arrangements for the pure intellectual satisfaction of their drafting. But for entrepreneurs and business people, they create huge barriers to decision-making and execution. The winner is the politician, who can use the nuisance value to score political points, trump rivals, collect cash, or all three of the above.
In the case of iron ore exports, the Supreme Court rode to the rescue. This is not always possible, or even desirable. Regulation governing the functioning of industry needs to be more transparent, the goal-posts firmly cemented, if we are to harness economic and technological progress for the good of our nation.
Keep it Simple is not stupid; it is of the essence.
NOTE: Amit Varma is on a break today -- his column resumes next Thursday.
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