Tag: ITC | Vivek Kaul

10 May, 2016

Why Are We Not Talking About Bad Loans of LIC?

On April 21, I wrote a column titled, Why It’s Best to Stay Away from Buying LIC Policies. One feedback I got on the social media, primarily from insurance agents trying to sound intelligent, was that, if we don’t have the Life Insurance Corporation(LIC) of India, who will carry out socially responsible investing.

None of these agents bothered to define socially responsible investing. But assuming that they know what it means, let me give you a very good example of what is definitely not socially responsible investing.

Let’s take the case of ITC, a company which still makes a bulk of its money from selling cigarettes. As of March 31, 2016, the LIC owned 14.39% stake in the company. As of yesterday i.e. May 9, 2016, this stake was worth Rs 37,510 crore.

What is a socially responsible insurance company doing by staying invested in a cigarette maker? In fact, in the recent past, this cigarette maker opposed the decision of the government for a larger pictorial warning on the cigarette packets.

Can these insurance agents who believe that LIC is into socially responsible investing tell the world at large what is India’s largest insurance and investment company, hoping to achieve by staying invested in a company which sells the stick of death?

Also, it is worth remembering here that the money that LIC manages and invests, are the hard earned savings of millions of Indians. And given the situation it should be managing this money in the best possible way.

But is it doing that? Take a look at the following table.

Date	Gross non-performing assets ratio
December 31, 2015	4.23%
December 31, 2014	3.98%
December 31, 2013	4.09%
December 31, 2012	2.97%
December 31, 2011	1.34%

What the above table clearly shows us is that the gross non-performing assets of LIC or bad loans, have gone up dramatically over the last five years. As on December 31, 2011, the bad loans had stood at 1.34% of the total debt portfolio of LIC.

Since then the bad loans have jumped to 4.23% of the debt portfolio of LIC. LIC buys corporate bonds and lends to the central government as well as state governments, municipalities, state electricity boards, state road transportation companies and so on.

The latest loan portfolio of LIC is not available. What is available is the loan portfolio as on March 31, 2015. This data is available in the 2014-2015 annual report of the firm. As the annual report points out: “The non-performing assets as at 31st March, 2015 are Rs12,213.37 crores out of a total debt of Rs 3,70,625.89 crores…The percentage of gross non-performing assets is 3.30%.”

The bad loans of LIC as on March 31, 2015, had stood at 3.30%. Nine months later as on December 31, 2015, they had jumped by 93 basis points to 4.23% of the total debt portfolio. One basis point is one-hundredth of a percentage.

This is a huge jump over a period of just nine months. Now compare this to the bad loans of public sector banks, which have been in the news for a while now. The State Bank of India, the biggest public sector bank reported a bad loan ratio of 5.1% of its loans, as on December 31, 2015. Syndicate Bank and Vijaya Bank reported bad loan ratios of 4.6% and 4.32%. The private sector ICICI Bank reported a bad loan ratio of 4.7%.

While the bad loans of banks have been much discussed, no such discussion seems to be happening around the bad loans of LIC. Other than an analytical piece in the Mint by Ravi Krishnan, and one newsreport in The Hindu Business Line, nothing much seems to have been written around the issue.

To put things in perspective, the loan book of LIC is pretty big. As The Hindu Business Line puts it: “LIC’s total debt” of about Rs 3,70,625 crore as of March 2015, is actually higher than HDFC Bank’s loan book of about Rs 3,65,495 crore in the FY15 fiscal.” The newspaper goes on to report that LIC has filed cases against around seventy defaulters.

While the Reserve Bank of India, the regulator of banks, seems to be taking an active interest in helping banks clean up its act, the insurance regulator, the Insurance Regulatory and Development Authority of India(IRDAI) hasn’t said anything on this front in the public domain. This is not surprising given that a former chairman of LIC is the current chairman of the insurance regulator IRDAI.

It needs to be mentioned here that LIC has the backing of the government, like the public sector banks, and hence, there is nothing to worry about. But ultimately, like has been happening with the public sector banks, the tax payers are there to pick up the tab, if the situation does spiral out of control.

The column originally appeared in the Vivek Kaul Diary on May 10, 2016

22 March, 2016

The Rs 90,000 crore Consumer Spending Kicker That the Govt Missed Out On

The Narendra Modi government has increased the excise duty on petrol and diesel nine times since November 2014.

This has ensured that the benefit of falling oil prices has not been totally passed on to end consumers in the form of lower petrol and diesel prices. What has not helped is that the state governments have also increased their share of taxes on petrol and diesel and ensured that the benefits of lower oil prices have not been totally passed on to the citizens of this country.

A press release put out by the Bhartiya Janata Party in February 2016 said that all state governments except Mizoram, Assam, Tamil Nadu, Chhattisgarh and Gujarat, had increased the value added tax on petrol and diesel.

Hence, the increase in excise duty on petrol and diesel, is not the only reason for an increase in the price of petrol and diesel.

Having said that, what would have happened if the benefit of lower oil prices had been totally passed on to the end consumers in the form of lower petrol and diesel prices? Dr Soumya Kanti Ghosh, the chief economic adviser of State Bank of India, has done an in-teresting calculation on this.

As he writes in a recent research note titled If Wishes Were Horses: “Even though international oil prices are at a decade low, yet Government has increased excise duty both in petrol and diesel. So, we made an attempt to calculate total savings of the consumers if Government would not have hiked the excise duty on petrol and diesel products.”

So what does Ghosh’s calculation tell us? As he writes: “By removing only additional central excise duty from petrol and diesel retail selling prices, the hypothetical petrol price per litre would be Rs 47.63 (Actual: Rs 59.63), and diesel would be Rs 38.96 a litre (Actual: Rs 44.96)…If we assume that the consumption of petrol and diesel in FY16 of 95.28 MMT (Apr-Jan: 79.4 MMT), this would have translated into Rs 90,000 crore of savings for the consumers, which could have provided additional demand in the economy to the extent of 1% of GDP….In effect, this means that if wishes were horses, the decline in oil prices in itself may have provided the much needed impetus to demand and we may not have to wait for the pay hikes!” (MMT = million metric tonnes).

This means that if the central government wouldn’t have increased the excise duty on petrol and diesel, consumers would have benefitted to the tune of Rs 90,000 crore. This money would have been spent and pushed up consumer demand to the extent of 1% of GDP. And that would have been a huge thing. As is well known the multiplier effect of consumer spending is significantly better than that of government spending, where leakages are huge.

Of course, if the government did do things along these lines, it would have meant that the fiscal deficit of the government would have gone up. The fiscal deficit is the difference between what a government earns and what it spends. If the government gave up taxes to the tune of Rs 90,000 crore (actually lesser than this, but I will come to it), it’s earnings would have fallen, leading to an increase in its fiscal deficit.

Actually, the increase in fiscal deficit would be lower than Rs 90,000 crore. This is because the increase in consumer demand due to excise duty on petrol and diesel not being raised, would also bring in some money to the government in the form of both direct and indirect taxes.

Further, there were other ways through which the government could look at bringing down its fiscal deficit. For starters, it owns 11.19% stake in the cigarette maker ITC. This stake as on March 21, 2016, was worth a little over Rs 29,600 crore. Why does the government, which runs anti-tobacco advertisements, continue to own a cigarette maker? (I know I keep repeating this point like a broken record).

This stake could have been sold and a significant portion of the increase in fiscal deficit could have been covered. Those who like to support the government on all issues like to point out that ownership of shares of ITC brings in a dividend for the government. Hence, why let go of this regular income?

The question to ask here is what is the dividend yield of ITC? The dividend of ITC is 1.7%. Dividend yield is the total dividend the company has paid out during the year divided by its current market price. The dividend yield of ITC is less than half of the return of 4% available on a savings bank account. Given this, the dividend argument clearly does not work.

Also, the government continues to run many loss making companies. The Economic Survey for 2015-2016 released before the budget points out that public sector enterprises have accumulated losses of Rs 1.04 lakh crore. The government keeps bearing these losses. And the funny thing is that some of these losses are not even a part of the budget.

As economist Jaimini Bhagwati recently wrote in the Business Standard: “Funds will be provided to support continued losses in public sector undertakings including Indian Railways, some of which are not part of the Budget.”

If these loss making companies are shut down and their assets (primarily land) gradually monetised, it will tremendously benefit the government. The government has made some noises along these lines.

As the finance minister Arun Jaitley said in his budget speech: “A new policy for management of Government investment in Public Sector Enterprises, including disinvestment and strategic sale, has been approved. We have to leverage the assets of central public sector enterprises(CPSEs) for generation of resources for investment in new projects. We will encourage CPSEs to divest individual assets like land, manufacturing units, etc. to release their asset value for making investment in new projects.” Let’s hope this doesn’t just end up as a paragraph in a finance minister’s speech.

The disinvestment target at the beginning of the year was set at Rs 69,500 crore. Only Rs 25,312.60 crore was achieved. Hence, if the government had made an effort to earn money through these routes, it wouldn’t have had to increase the excise duty on petrol and diesel, nine times since November 2014.

Also, it needs to be pointed out here is that not all the savings on account of lower petrol and diesel prices, on account of government not raising the excise duty, would have translated into consumer spending.

Some of it is bound to have found its way into bank accounts and other financial savings instruments. Even that is a good thing given that household financial savings have been falling over the years. In 2007-2008, the household financial savings had stood at 11.2% of the gross domestic product (GDP). By 2011-2012, they had fallen to 7.4% of GDP. Since then they have risen marginally. In 2014-2015, the household financial savings stood at 7.7% of GDP.

A higher household financial savings ratio would have worked towards lower interest rates over the long term. Further, the government may not have been able to fund the entire shortfall of Rs 90,000 crore through these ways. Nevertheless, a good portion could have been filled in through the methods highlighted above.

This means that the government would not have had to increase the excise duty nine times. Possibly, four or five times would have been enough. Nevertheless, making money by simply raising excise duty on petrol and diesel was the easy way out, and who doesn’t like to take the easy way out.

The column appeared in Vivek Kaul’s Diary on March 22, 2016

9 February, 2016

What the GDP numbers tell us about the fiscal deficit

The Central Statistics Office(CSO) has published the economic growth numbers for the period October to December 2015. It has also put out the economic growth projection for the current financial year i.e. 2015-2016 (April 1, 2015 to March 31, 2016).

The Indian economy grew by 7.3% during the period October to December 2015. It is projected to grow at 7.6% during 2015-2016. Economic growth is measured by the growth in the gross domestic product(GDP). But GDP is a theoretical construct. There are many high frequency economic data indicators which tell us very clearly that there is no way that the country is growing at the rate at which the government wants us to believe it is.

Much has been written about the fact that India’s economic growth numbers can’t be possibly right and given that I wanted to discuss something else, but equally important in this column.

The GDP growth is declared in several forms. When CSO talks about the Indian economy growing by 7.6%, during the course of the year, it is talking about real GDP growth. Real GDP growth is essentially adjusted for inflation. The economic growth which is not adjusted for inflation is known as the nominal GDP growth. The nominal GDP growth for the current financial year is expected to be at 8.6%. Typically, the difference between nominal and real GDP growth is greater than this.

When calculating the fiscal deficit, the government uses the nominal GDP. This is because the revenue as well as the expenditure of the government are not adjusted for the prevailing inflation. Fiscal deficit is the difference between what a government earns and what it spends during the course of the year.

When the finance minister Arun Jaitley presented the budget in last February, he had set a fiscal deficit target of 3.9% of the GDP. The GDP here is the nominal GDP. There are essentially two numbers in the fiscal deficit calculation—the absolute fiscal deficit number and the nominal GDP number.

The absolute fiscal deficit number for this year was set at Rs 5,55,649 crore. The nominal GDP number in the budget was assumed to be at Rs 14,108,945 crore. It was assumed that the nominal GDP would grow by 11.5% in comparison to the nominal GDP in 2014-2015, which was at Rs 12,653,762 crore.

The growth of 11.5% in nominal GDP has not materialised and now close to the end of this financial year, the government thinks that the nominal GDP growth will be at a much lower 8.6%. And this is precisely what has upset the fiscal deficit calculations of the government. A growth of 8.6% means that the nominal GDP for 2015-2016 will come in at Rs 13,741,986 crore.

If the government maintains an absolute fiscal deficit of Rs 5,55,649 crore, then the fiscal deficit as a proportion of the nominal GDP will come in at 4.04% of the GDP. In order to maintain the fiscal deficit at 3.9% of the GDP, the government will have to cut down the fiscal deficit by around Rs 20,000 crore, assuming all other projections remain the same.

A fiscal deficit of 4.04% of the GDP is higher than 3.90% of the GDP, but not significantly higher. But that is not what has got the government worrying. In fact, the finance minister Arun Jaitley had talked about fiscal consolidation in the two budget speeches he has made till date in July 2014 and February 2015. Fiscal consolidation is the reduction of the fiscal deficit.

In July 2014 Jaitley had said: “We need to introduce fiscal prudence that will lead to fiscal consolidation and discipline. Fiscal prudence to me is of paramount importance because of considerations of inter-generational equity. We cannot leave behind a legacy of debt for our future generations. We cannot go on spending today which would be financed by taxation at a future date.”

He had further said: “One fails only when one stops trying. My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent [of the GDP] for 2015-16 and 3 per cent for 2016-17.”

In the speech he made in February 2015, he postponed this target by a year and said that the government will achieve a fiscal deficit of 3.5% of GDP in 2016-17; and 3% of GDP in 2017-18.

The point being that the government had originally envisaged achieving a fiscal deficit of 3.6% of GDP during this financial year. This target was postponed by a year and the government set itself a much easier target of 3.9% of GDP. And given this, it is very important that the government achieve this much easier target, if it wants people to take it seriously in the future on the fiscal deficit front.

Further, it is worth pointing out here that typically if the government were to follow the international norms of declaring the fiscal deficit and not include disinvestment proceeds as a revenue item but a financing item, the fiscal deficit for 2015-2016 would be at 4.4% of the GDP. Also, the 3.9% of GDP fiscal deficit target does not include subsidy payments of more than Rs 1,00,000 crore that need to be made for fertilizer and food subsidies.

The government can achieve a 3.9% of GDP fiscal deficit target, by increasing its revenue and cutting down on its expenditure. The government has been trying to increase its revenue by increasing the excise duty on petrol and diesel. Three such hikes have been made since January 2016. This has led to a situation where oil prices have fallen dramatically but petrol and diesel prices in India have actually risen over the last one year.

The petrol price in Mumbai as of now is Rs 66.05 per litre. The price as of last February was at Rs 63.9 per litre. The price of the Indian basket of crude oil during the same period has fallen by more than 44%.

While the government continues to raise the excise duty on petrol and diesel, it continues to own a 11.2% stake in cigarette maker ITC. This stake as of yesterday’s closing price was worth Rs 28,256 crore. What is so strategic about owning a stake in a cigarette company and at the same time run advertisements trying to tell the country at large that it consumption of tobacco is injurious to health? Why can’t this stake be sold and the money used for better purposes?

This is something that the government needs to explain.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on February 9, 2016.

4 January, 2016

Happy new year folks: The govt has increased excise duty on petrol and diesel again!

Dear Reader,

While you, me and everybody else was busy celebrating the new year, the government quietly increased the excise duty on petrol and diesel, again. This increase was announced on January 1, 2016 and came into effect from the next day.

This is the seventh increase in the excise duty on petrol and diesel since November 2014. Also, the government has increased the excise duty thrice in quick succession over the last two months (between November 6, 2015 and now). Since November 2014, the excise duty on unbranded petrol has gone up by Rs 6.53 per litre, with latest increase being of 37 paisa per litre. This is a massive jump of 544%.

During the same period the excise duty on unbranded diesel has gone up by Rs 6.37 per litre or 436%, with the latest increase of Rs 2 per litre. In the process, the government has captured a major part of the fall in oil prices.

On November 11, 2014, when the excise duty on petrol and diesel was increased by the Narendra Modi government for the first time, the price of the Indian basket of crude oil was at $79.11 per barrel. As on December 31, 2015, the price of the Indian basket of crude oil stood at $32.9 per barrel, a massive fall of 58.4% since November 2014.

In the same period the price of petrol and diesel in Mumbai has fallen by only 3.6% and 9.9% respectively. What this tells us loud and clear is that the government has captured most of the fall in oil prices, without passing on the benefit to end consumers. The surprising thing here is that there has been no protest on this, either from the opposition parties or the citizens.

There are a number of issues that crop up here. First comes the question, why is the government doing this? In fact, there is a clear trend in the government increases of the excise duty on petrol and diesel. In 2014-2015, the last financial year, the increases came on November 11, 2014, December 2, 2014 and January 1, 2015. These increases were in the period close to the annual budget which is presented in end February.

The same trend is playing out this time as well. The three recent increases have come on November 6, 2015, December 16, 2015 and January 1, 2016. In the run up to the budget which will be presented in end February 2016, the government is sprucing up its finances. Estimates suggest that the three recent increases will bring in an extra Rs 10,000 crore into the coffers of the government.

In the budget presented in February 2015, the government had targeted a fiscal deficit of Rs 5,55,649 crore or 3.9% of the gross domestic product(GDP). Fiscal deficit is the difference between what a government earns and what it spends.

It is important to figure out how this calculation was carried out. In 2014-2015, the nominal GDP was at Rs 12,653,762 crore. Nominal GDP is essentially GDP which hasn’t been adjusted for inflation. It was assumed that during 2015-2016, the nominal GDP would increase by 11.5% to Rs 14,108,945 crore. A fiscal deficit of Rs 5,55,649 crore amounts to 3.9% of this projected GDP of Rs 14,108,945 crore.

So there are two things that the government needs to keep track of here. The absolute fiscal deficit as well as the nominal GDP. The trouble is that the nominal GDP hasn’t grown at the projected rate. The nominal GDP for the first six months of the financial year (April to September 2015) has grown by only 8.2% instead of the projected 11.5%. And this has thrown the fiscal deficit calculations of the government for a toss.

As the Mid-Year Economic Analysis released in December 2015 points out: “It is true that the decline in nominal GDP growth relative to the budget assumption will pose a challenge for meeting the fiscal deficit target of 3.9 per cent of GDP. Slower-than-anticipated nominal GDP growth (8.2 percent versus budget estimate of 11.5) will itself raise the deficit target by 0.2 percent of GDP.”

In order to ensure that it meets the fiscal deficit target, the government has increased the excise duty on petrol and diesel thrice in the last three months. On November 6, 2015, when the first of the three increases came in, the price of the Indian basket of crude oil was at $45.07 per barrel. Since then it has fallen to $32.9 per barrel, a fall of 27%. Hence, every time there has been a fall in oil prices, the government has moved in and increased the excise duty.

What this tells us is that on the finance front, the government has essentially turned out to be a one-trick pony. The easy money that the government has managed to raise from falling oil prices has led to a situation where it has totally given up on all other measures to spruce up its revenues as well as cut its expenditure.

The loss making public sector units continue to operate as they had in the past. The government continues to own stakes in companies like ITC, Axis Bank and L&T, worth thousands of crore.

The irony is that the government spends a lot of money in telling people that consumption of tobacco is injurious to health and at the same owns a 11.17% stake in ITC through the Specified Undertaking of the Unit Trust of India. How do the finance minister Arun Jaitley and prime minister Narendra Modi explain this dichotomy? (Like P Chidambaram and Manmohan Singh before them).

Jaitley has also talked about a stable tax regime in the past to woo foreign investors to invest in India. How about offering the same stable tax regime to the Indian consumer as well?

The Indian economy as well as the government finances have benefitted a lot during the course of this year due to falling oil prices. Sajjid Chinoy, chief economist at JP Morgan India, has estimated that lower oil prices gave a 1.3 percentage points boost to growth in the last four quarters.

The question is will this continue? If it doesn’t, does the government have a Plan B in place?

What will happen once oil prices start to rise? How will the government finance its expenditure? Will the government be able to maintain the excise duty that it is currently charging on petrol and diesel and allow their respective prices to rise? If the government raised excise duty in an era of falling oil prices, it is only fair that it cuts excise duty when oil prices are going up?

To conclude, falling oil prices have made the Modi government lazy on the revenue raising front. And that is clearly not a good sign as we enter 2016.

The column originally appeared on The Daily Reckoning on January 4, 2016.

15 December, 2014

How ITC can help fix the fiscal deficit

Vivek Kaul

So this column should complete my trilogy on the fiscal position of the government (You can read the previous two pieces here and here).
Late last week, the ministry of finance declared the total amount of indirect taxes collected during the period April to November 2014. The collections have been shown in the following table, which makes for a very interesting reading.
The indirect tax collections during the month of November 2014 grew by 19.4%, in comparison to November 2013. But between April and November 2014 the number grew by only 7.1%, in comparison to the same period last year.

Tax Head	(Rs. in crores)		% Growth	April to November		% Growth
	Nov 2013	Nov 2014	% Growth	2013-14	2014-15	% Growth
Customs	13137	17185	30.8	111844	123308	10.2
Central Excise*	13544	14952	10.4	102988	102762	(-) 0.2
Service Tax	10224	11923	16.6	91982	102592	11.5
Total	36905	44060	19.4	306814	328662	7.1

Source: Press Information Bureau

The indirect tax collection target for this financial year is at Rs 6,24,902 crore. The total amount collected last year stood at Rs 5,19,520 crore. Hence, it was assumed that the indirect tax collection would grow by 20.3% from what was achieved last year.
This assumed growth in indirect tax collections is turning out to be extremely optimistic. The growth in collections for the first eight months of the year, as can be seen from the above table, has been only 7.1%. In fact, the collection of excise duty has fallen by 0.2%.
There are several reasons why assuming a more than 20% growth in indirect taxes was unrealistic to start with. The annual budget had assumed that the nominal gross domestic product (GDP) for this financial year would grow by 13.4% to Rs 12,876,653 crore.
Ultimately, the indirect taxes that can be collected are also a function of the economic growth. If the economy is expected to grow 13.4% (nominal), how can indirect taxes can be assumed to grow by more than 20%?
There was this basic disconnect to start with. A similar mistake was made in the 2013-2014 as well. It was initially assumed that indirect taxes of Rs 5,65,003 crore would be collected. The final number came in at Rs 5,19,520 crore, which was 8% lower.
In fact, the indirect tax collected in 2013-2014 grew by 9.5% in comparison to 2012-2013, when the number had stood at Rs 4,74,483 crore. So, if the growth in indirect taxes last year was 9.5%, assuming a growth of 20.3% in this year’s number was being highly optimistic to start with.
And all that optimism seems to be going against the government now. The growth in indirect taxes in the first eight months of the year has been at 7.1%. If the same growth continues through the remaining four months of the financial year, the government will end up with a total collection of Rs 5,56,406 crore, or around Rs 68,496 crore lower (Rs 6,24,902 crore minus Rs 5,56,406 crore) lower than what had been estimated at the time the budget was presented.
Even if the government manages to increase the collections in the remaining part of the year by 10% in comparison to last year’s target, it will manage to reach only Rs 5,71,472 crore or Rs 53,430 crore (Rs 6,24,902 crore minus Rs 5,71,472 crore) lower than this year’s target.
While this mistake can’t be corrected, it is important to ensure that the same mistake is not made in the next budget, which will be presented in February 2015.It is important to look at the assumptions that have been used by bureaucrats that were used to make these overtly optimistic projections. As an editorial in The Financial Express points out: “One of the first things Jaitley needs to do is to get the chief economic advisor to relook the tax model the ministry uses.”
Further, this is clearly not a good sign for the government. It will make it even more difficult to control the burgeoning fiscal deficit, which for the first seven months of the financial year (April to October 2014) stood at 89.6% of the annual target.
So, what can the government do to meet its fiscal deficit target of Rs 5,31,177 crore or 4.1% of the GDP? As I had explained in the column that appeared on December 12, 2014, the government will start slashing its “asset creating” capital expenditure. This is obviously not good for the economy.
But there is something else that the government can do. Through the Specified Undertaking of the Unit Trust of India(SUUTI), the government owns shares in ITC and L&T worth Rs 46,970 crore (Using the closing prices as on December 12, 2014, and the shareholding pattern valid as on September 30, 2014).
The shares in ITC are worth Rs 35,479 crore. There is no real reason that the government should be owning shares in ITC. (To read the complete argument click here). There is nothing strategic about the cigarettes, hotels, paper and retail businesses, in which ITC operates. But the government continues to hold on to stake.
Economist Surjit Bhalla offered a reason in a recent column when he wrote: “A suggested explanation for the Indian government (read that as politicians and IAS bureaucrats, plus others) not selling Ashoka or ITC is that they gain enormously from “kickbacks” in the form of discounted or free rooms, or discounted or free dinners, or discounted or free marriage parties.”
In fact, the government can even get a premium to the current market price by selling its SUUTI stake in ITC to the United Kingdom based BAT, which had been trying to raise its stake in ITC for many years. Nevertheless, what the previous government did in April 2010 was to ban all foreign direct investment(FDI) in cigarette industry, citing health reasons. If FDI was banned in the cigarette industry because cigarettes are bad for health, why is the government holding on to its stake in ITC then?
The current government has an opportunity in setting this right and sell the stake that it owns in ITC through SUUTI to whoever is willing to pay the highest price. For the period of three months ending September 30, 2014, ITC made a total operating profit of Rs 3583.26 crore. Of this the cigarettes business contributed Rs 2882.06 crore.
Why should a government own stake in a company which still makes a little more than 80% of its operating profit from selling cigarettes is a question worth asking, even though we may not get an answer for it.

The article originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on Dec 15, 2014