Modi's Biggest Supporter Could Become His Worst Enemy - The 5 Minute WrapUp by Equitymaster
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Modi's Biggest Supporter Could Become His Worst Enemy

Jun 4, 2016
In this issue:
» A Terrible Year for Indian Banks
» Are good monsoons already priced in stocks?
» ...and more!
00:00
Radhika Pandit, Managing Editor of ValuePro

When Narendra Modi became Prime Minister in May 2014, he received overwhelming support not only from the Indian people but also from the stock markets.

So disgusted was India by the UPA government's reign, that Modi's rise was heralded as the beginning of big bang reforms, economic development, and strong GDP growth.

But you see, aside from the people and the markets, Modi's victory and subsequent reign had another major backer: oil.

When Modi took office, Brent oil prices were hovering near US$105 per barrel. Then, in the first 18 months of his tenure, crude oil prices plunged to 13-year lows of US$27.1 a barrel. Currently, they are at US$50 a barrel.

The plunge in oil prices could not have come at a better time for Modi. Government finances were a mess. There was danger of missing fiscal deficit targets. Disinvestment in public sector companies hadn't picked up because of volatility in the stock markets.

So the Modi government pounced on the opportunity.

The Modi administration hiked the excise duty on petroleum products five times in FY16 and by 140% on diesel...and raked in a windfall.

The government may have raked in as much as US$70 billion through this phase of low crude oil prices. Of this, 64% went into the government coffers.

Of course, the government took credit for keeping the fiscal deficit in check. But it hasn't used the opportunity to undertake big bang reforms or accelerate productive capital expenditures that would support growth and development.

The problem is that oil prices are volatile. Just as quickly as they hit their lows and languished the last couple of years, they could rise and stay high for some time.

What will the Modi government do then? How will it tackle a scenario of rising crude prices? Because you see crude prices have been rising in recent months.

Vivek Kaul, editor of Vivek Kaul's Diary, has discussed this at length. Here's Vivek:

  • In a scenario of falling oil prices, the government did not pass on the entire fall in oil prices to the end consumer. Hence, in a scenario of rising oil prices it shouldn't pass on the entire increase to the end consumer as well by cutting down the excise duty on petrol and diesel. That will be a fair thing to do.

    In an ideal world, the Modi government should have freed up the price of petrol and diesel totally and let the international price of oil decide the market price of petrol and diesel. If they had done that, people would have adjusted to the idea of high oil prices, given that they would have seen low oil prices as well.

So what does the government plan to do if oil prices continue to rise? Will it keep hiking the excise duty on petrol and diesel?

Here's Vivek again:

  • If the government continues to raise petrol and diesel prices, there is going to be a public outcry.

    This will happen simply because last time around when oil prices really went up, the end consumer did not have to pay for higher petrol and diesel prices. The oil marketing companies, the oil producing companies, and the Manmohan Singh government bore the brunt of high oil prices. The consumer did not. This screwed up the finances of the government.

    It had a tremendous opportunity to move towards a market driven price of petrol and diesel. But if it did that, it would have had to look for alternative sources of revenue.

    It would no longer be possible for it to continue financing loss-making public sector enterprises. This would mean that some ministers would have become totally jobless.

Indeed, Vivek strongly believes that the government refrained from taking tough decisions and instead latched on to the low-hanging fruit of benign crude prices. And they missed a huge opportunity in the process.

Clearly, when oil prices start to rise again, government finances will come under pressure. This will only add on to India's growing debt bubble.

The finance minister and the government will continue to rationalise whatever decisions they take. But they will never tell you the whole story.

You deserve to know what's really going on. And Vivek wants to reveal all. Trust me, you will not want to miss a single word...

Watch this space.

Do you think the Modi government will be in trouble if oil prices continue to rise? Share your views in the Club or share your comments here.

02:31 Chart of the day

The government's disinvestment target has become all the more difficult to achieve. The dismal financials of public sector banks, laden with bad loans, has pulled down the overall performance of the public sector enterprises in the country. The aggregate profits of 66 listed public sector firms, having sales turnover of at least Rs 500 million, eroded by 44% in FY16. Among them banks were the worst performers with 13 of them reporting losses and seven clocking fall in profits during the year. Only one state-run bank has managed to post higher profits in FY16. With Reserve Bank of India cracking the whip through mandatory Asset Quality Review, the bad loans recognised and provided for by the banks surged, severely denting their profitability.

Even the industrial sector that includes mining, manufacturing and utility companies witnessed pain with seven out of the total of 30 firms slipping in to the red in FY16. These include the likes of large companies such as BHEL and Steel Authority of India. The profits of most of the remaining industrial companies were hit by sluggish investment climate and commodity meltdown. The only saving grace was the services sector that saw a majority 12 of the 15 companies recording profits during the year. Notable is the performance of oil marketing companies that grew earnings by a robust 50% in FY16 backed by weak crude prices.

A Terrible Year for Indian Banks


03:32

Come next week and stocks markets will have to find a new reason to go up. This is because if a leading daily it to be believed, the positive sentiments around good monsoons were the key drivers of stock prices in recent days. However, with the Nifty trading at its fair valuation levels, good monsoons alone may not support stock prices anymore. To put it differently, the news of good monsoons is already reflected in the current stock market valuations.

Do we agree with this? Well, may be. But we don't know how this insight will help us make money in the long run. You see, things like monsoons, interest rates, inflation, currency movements or commodity price movements do end up showing high correlation with stock prices in the near term. But do these cause the stock prices to move in the long term? Absolutely not. Long term, it is things like business fundamentals and the quality of the management that drive stock prices. And therefore, it is these factors that investors need to rely on if they need to succeed doing long term investing.

4:14

Global markets witnessed mixed trends this week. The US markets ended marginally lower on rising concerns that the US Fed may hike interest rates in this month's meeting. However, the Chinese markets bounced back this week and were the top gainer.

The Indian markets also closed the week in positive territory. Investor sentiment was buoyed by strong results posted by some index heavyweights. Markets have put the tightening of P-note norms behind them. The BSE-Sensex was up 0.7% for the week. Expectations of a good monsoon and signs of improvement for some companies in the March quarter results, have kept sentiment positive in recent weeks.

European markets ended in the red in the week gone by on concerns of a Brexit i.e. Britain leaving the Eurozone. The British FTSE, the German DAX and the French CAC indices ended the week lower by 1%, 1.8% and 2% respectively.

Meanwhile, crude oil prices fell 1.5% this week as OPEC members agreed to continue their policy of record production.

Performance During the Week Ended 03rd June, 2016

Talking about the positive sentiments, most of you would have read about Rahul Shah's prediction of a 70% upside in the Sensex. We did not pull that number out of a hat. It comes from constantly tracking the performance of hundreds of listed companies versus their long-term track record. Our research has revealed some key reasons the 70% earnings upside in stocks can be for real.

Very soon, we will release a report exclusively for our StockSelect subscribers called Sensex 40,000: 4 Stocks to Profit from the Coming Stock Market Wave. Keep an eye out for it.

04:55 Weekend investment mantra

"The best investment against inflation is to improve your own earning power, your own talent. Very few people maximise their talent. If you increase your talent, they can't tax it or they can't take it away from you." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst).

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7 Responses to "Modi's Biggest Supporter Could Become His Worst Enemy"

Zulfiquar Singaporewala

Jun 7, 2016

Increase in oil price or decrease is totally depend upon international oil pool countries. Best we can do is to pass uptrend and down trend to public religiously which Modi govt. didn't.
The best way to utilize this fund to upgrade technology to drill new wells so that our output can be increased the way USA had supported to extract crude from Shell rock to get petrol within controllable cost or say economically which has reduce the burden of Oil basket of USA , as cost is around 60 - 70 $ / barrel which is just equivalent to international market and if goes above 60 $ than it is again worth to reduce burden to USA.
we have to think innovative and above all political propaganda to make feel that it is truly MAKE IN INDIA, rather than just increasing / decreasing Ex-cise duty and passing the buck.

Regards
zulfi

Like 

iqbal singh cheema

Jun 5, 2016

sir ; to my mind greatest blunder of Modi's Are is cussing the opposition @ Congress Mukt Bharat..! Secondly suppressing the people's attitude at eating , wearing , loving and using Army in civil matters , Pakistan Polity ..not calling joint session of Parliament to Pass the GST bill, dousing the Judicial system of the country , en-coursing deep the division in unity & diversity by verbal vocabulary...in short chair is not making the man / man making the chair...iron curtain on crony capitalism is hanging all over.. mood depends upon monsoon and next President of USA....

Like 

Eutropio Peris

Jun 4, 2016

I am not confident the govt. is in a position to handle high oil prices. There is a continuous attempt to impose additional taxes for some reason or the other.which shows the govt is not governing or has a handle on the economy.
Governing such a large country like India with such diversity requires delegation of authority instead of having all the controls vested in the P.M. With such a large support in the Lok Sabha reforms should have been accelerated.
2 years have gone with very slow progress

Like 

S.R.MITTAL

Jun 4, 2016

Dear Sirs/Madam,

With reference to your womderful thoughtprovoking article on OIL, I fully appreciate and agree to your views expressed and suggest that MODI GOVT. Should start aerious thinking on this issue and provide to public VERY REASONABLE market linked purjchase prices of Petrol and Diesel as also other related products by
Reducing Excise duty to old levels, may be in stages for gradual public comfort to bring Excise duty to pre decreae level. to make up this loss, GOVt. May increase Divestment efforts for gradual imflow to avoid public ire..

As for Banking industry current scenario, already major decrease in Bank profits has been effected in 15-16 results of practically all PS Banks! But now Govt. Should concentrate on increasing efforts for RECOVERY of all BAD Loans and ensure NO further increase of NPAs. I, being M.COM. Topper of DU 1960, and an Ex Senior Management Cadre Retired Banker , can offer my services for improving Banking policies for improving Indian Economy.

Like 

Sundaravaradan S

Jun 4, 2016

Vivek & Modi Govt.

Who is Modi governing? Himself or Indians? Who will suffer due to increase in Oil prices? Govt.? or We?

I am waiting for Vivek to write some POSITIVE Views about India.....YES; I will keep waiting....!!!!

Like 

Muthuswamy N

Jun 4, 2016

But Vivek and you have missed one point: This Govt. is not stuck with one strategy and is flexible to use the opposite of what it has used in the past. If oil prices rise again this Govt. has the vision and guts to ensure the rise does not get passed on to the people. This is not a stuck Manmohan Singh Govt. Let us wait and watch!

Like 

Ravi S

Jun 4, 2016

The increase in petrol and diesel prices, inspite of falling crude prices, has been the SINGLE LARGEST FAILURE of the Modi Govt. Imagine, Petrol was at Rs 80 when crude was USD 100 and is still at a high of Rs 68, when the crude is at USD 50... If the duties and taxes on petrol were not to levied at such a high rate, the consumer would have been charged much less, may be Rs 50 per ltr for petrol.. This has not been addressed either by the media or by the opposition in a vehement manner - the Govt, continues to rip the consumer apart without rhyme or reason..

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