Now that the election dates are out, most people are busy trying to figure out which party will win
the elections and then extrapolating that prediction into where the election results will take the BSE
Index over the next few months. While not trying to dilute the importance of politics on the direction
of the Indian economy, or the amount of money (foreign or domestic) sloshing around on the trading
screens, one should remember that there is something else which drives stock prices: Corporate
And a disappointment in the rate of growth of earnings could dampen sentiment on Dalal Street and
depress share prices. We have all heard the mandarins in Delhi telling us how well the economy is
doing and how corporate sales, profits, and earnings per shares have seen delirious levels of growth.
But that is the past and stock markets are forward-looking animals which move on what is going to
happen tomorrow, not what happened yesterday. But tomorrow does not look so good largely
because the economy, strapped for cash and faced with infrastructural bottlenecks, could slow
down. But a bigger danger lies from a government which, in its rush to increase revenues, could
"amend" a few policies that would hurt overall profit growth and pooh-pooh this notion that reforms
are an "irreversible" process.
The tax man cometh..
A study of 200 companies in The Quantum Stock Market Yearbook indicates that 56 companies
pay ZERO corporate tax. Now, any Finance Minister, faced with gaping holes in his accounts is
going to find these corporates a tempting target. Although the total tax collected from these
corporates increased by 63% from Rs 19 billion in FY93 to Rs 30 billion (Rs 3,000 crores) in
FY95, the effective tax rate of the companies declined from 23% to 16%. Call it tax on book
profits, minimum tax, or whatever you want but Big Brother is not going to keep quiet. Especially
when he's broke! Finance managers of zero-tax companies must be praying for miracles to be
The ration mentality on forex..
Another danger is the ration mentality on foreign exchange. In 1991, the government gave
corporates major incentives to boost exports, liberalised trade and got everybody revved up on
turning India into an Asian Tiger. The impression of most people (helped by all those full-page ads
that tom-tom star trading house status) is that large corporates did export and earn dollars for India
but, here again, the facts are a little different. The 200 companies in the Quantum study actually used
more foreign exchange than they earned! The net foreign exchange used doubled from Rs 44 billion
in FY93 to Rs 88 billion (Rs 8,800 crores) in FY95. A government concerned about depleting
foreign exchange reserves and large debt repayments may regain the ration mentality for
non-performers and net users of foreign exchange and punish the guilty by imposing an "fx tax" on
The scarcity of money..
Continued government deficits will limit the amount of money that corporate India can borrow
compared to its needs to complete expansion programmes. Although balance sheets look healthy,
that could change fairly quickly if the equity markets remain dead and corporates are forced to turn
to debt instruments paying over 20% per annum interest charges. Higher debt levels and increased
interest charges would also hurt profit margins. Between FY93 and FY95 overall debt declined by
Rs 360 billion (Rs 36,000 crores) because of the large number of equity shares sold to domestic and
international investors. With the domestic investor still shell shocked at the handling of his money by
trusted institutions, his return to the equity markets will be subdued.
While most people are trying to figure out which doctor will be elected to take charge of a spluttering
economy, it may be wise to predict what the prescription could be and try to stay one step ahead of
the investment game. My vote is to stay in debt and keep away from the equity markets. Atleast until
someone begins to give you the protection that you deserve for making all those risky equity
investments. Until then let the punters do what they want on the NSE and let the analysts waste their
time on figuring out why the market rose to 3,600 only to fall back to January levels.