Business

India advised to bite the bullet over its huge bill for handouts

Subsidies and price-fixing remain common features of economies from India to the US.

Tom Arnold

June 19, 2011

The Middle East is not the only place where government subsidies are an integral part of economic life.

Subsidies are commonplace from India to the US, and the cost of maintaining them is coming under increasing scrutiny as surging commodity prices squeeze public budgets.

India, which has one of the world's biggest subsidy bills, was urged last week to take "hard decisions" to pass on rising energy prices to consumers. The government had to convince itself it could still lead in an economy with high energy prices, Montek Singh Ahluwalia, the deputy chairman of India's planning commission, said after the release of an Organisation for Economic Co-operation and Development report about the country's economy.

"Energy subsidies encourage wasteful consumption, fuel adulteration and smuggling and create a system that is overwhelmed by corruption," the report said.

"Globally, by blurring market signals, they push up the level and volatility of energy prices, since when world prices rise, India's consumption does not fall commensurately."

India's energy subsidies - estimated at US$5.3 billion (Dh19.47bn) a year - provide cheap fuel to poor households for lighting and safeguard consumers from volatility in global prices.

The problem is that up to half of subsidised kerosene is sold outside the public distribution system at higher prices.

Indian oil companies hit by higher prices still sell at a loss despite receiving government compensation.

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”