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Where will your money be safe?

Aug 3, 2001

‘Everything in India has become dysfunctional’, read the headline of an interview with Mr. Arun Shourie (on an internet site) the Union Minister of State for Divestment. He said that divestment is at the mercy of procedural delays. That’s bad news for the stock markets. However, the minister did not give any figure to the amount of divestment that would be achieved by the end of this fiscal and described the figure of Rs 120 bn as indicative. Very closely linked to this figure is the fiscal deficit. Therefore, it is quite doubtful if the fiscal deficit will be down to the targeted 5.1% of the GDP in FY02. The figure might close at 5.4% of the GDP. The fiscal deficit could be even higher due to the slowdown in the global as well as the Indian economy. This would result into lower exports and lower corporate earnings. Consequently, the tax collections could be lower than expected. However, the impact of the exports would be marginal as compared to the impact of dip in corporate earnings. And of course the expenditure is on the rise as the government keeps on bailing out efficient institutions like IFCI with Rs 10 bn packages.

Therefore, government will fall short of spending (as usual) its money where it should for development of resources that will benefit the economy in the future.

To quote John Maynard Keynes, “ The important things for government is not to do things which individuals are doing already, and to do them a little better or a little worse but to do those things which at present are not done at all”. And that is what the central and state governments have been doing; wasting in such proportions that we cannot dare to imagine. To quote Mr. Shouire again “In the 9th Plan, the states were to contribute only Rs 38 billion out of an outlay of 1,350 billion. We are in the final year of the 9th Plan. They have contributed minus Rs 1,150 billion!”

But the fundamental question is where will the growth come from; if the government can’t do it can the private sector? No it can’t. Unfortunately the Indian industrial sector is heavily reliant on the government spending for its growth. Thus, the government needs to spend on critical areas like infrastructure. And the only place it can get money from is divestment. This has become a vicious circle.

The private sector can do its bit too. We need more of Naryan Murthy’s to start with organisations that have sales of a small Rs 1.2 m in their first year of operation and then grow to earning Rs 19 bn two decades later. And where do you come in? Dreams like these will require money to be a reality, which of course is with you. Investing has to be looked on as becoming a part owner of these dreams that come from warm hearts but cold heads.

The cover of an investment related magazine screamed middle class India’s worry where do I invest my money safely? The government after the UTI’s ‘dazzling’ performance is no longer a safe option. The answer is quite simple: in clean managements that know what they want to do and where they want to go. US slowdown will come and go, stock market scams will come and go, but there will always be some managements that work very hard to create share holders value. There lies your top pick for the day, the month and the year. But the word of caution here is that when you enter into such investments keep an eye on the valuation.

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