Chickens coming home to roost

1 JANUARY 2011

As a vegetarian I am hesitant to comment on chickens, but do feel that the chickens hatched by incompetent governance would be coming home to roost in early 2011, and would have their impact on stock market performance.

---------- FREE Webinar with Ajit Dayal ----------
Find out what 2011 has in store for the Indian stock market... Register Now for our FREE Webinar with Ajit Dayal as Chief Guest. The Webinar airs on 10th January, 2011 at 5.30 pm. Register NOW!

Political chickens: There are several states in which there is potential trouble brewing. The most imminent is Andhra Pradesh, where the Srikrishna Committee report over the carving up of the State and creating Telangana, has been handed over to the Government and would be unveiled on Jan 6. The Government is preparing for violent agitation. In Rajasthan the Gujjar community is renewing its agitation to be declared 'backward' in order to qualify for a 5% job quota. Trouble is also brewing in West Bengal, and can escalate in the run up to the May state elections. These are the result of the divide and rule policies introduced by the British, perfected by the Congress and emulated by the opposition, dividing society on the basis of caste, creed, religion and economic criteria.

Democracy chickens: A functioning democracy requires institutions of democracy to function. The BJP opposition has filibustered the winter session of Parliament, insisting on the establishment of a joint parliamentary committee (JPC) to probe into the telecom 2G scam. Previous JPCs have not resulted in any significant action to punish wrongdoers because the Indian polity have perfected the art of public back stabbing to conceal private back scratching! The Prime Minister who, as Finance Minister in the 90s, was given political protection by then Prime Minister, Narasimha Rao, does not seem to have the political sagacity and courage to do the same as Prime Minister, and to put his foot down firmly to bring scamsters to task. The political deadlock will freeze any attempt at further economic reforms, badly needed. These are outlined in the economic chickens, below.

Economic chickens: With Parliament not working several important economic pieces of legislation will not move forward, for which there is a crying need. The oft delayed GST will be postponed; this has the potential to add 1 - 2 % to India's GDP. Governments ruled by the opposition are opposing this sensible legislation purely on political grounds, never mind the interest of the country. Changes in labour laws are absolutely essential; current laws favour a small minority of organised labour at the cost of the vast majority of those outside its purview. Flexible labour policies are needed in order to provide jobs to the growing population; India will overtake China in population by 2025. For lack of jobs there is too much strain on agriculture leading to inequities; 60% of population depends on agriculture for their livelihood, and earn 14% of national income. This can't last. It will have huge social implications.

The policy of subsidising petro products is crazy even by Kafkaesque standards and needs to be urgently changed but cannot, with Parliament in a state of suspended animation. In the current year, the Government will pay for no more than a third of the subsidy bill created by its own policies, with upstream companies (ONGC, OIL, GAIL) bearing a third and downstream oil marketing companies (IOC, HPCL, BPCL) bearing a third. This third share is expected to be Rs 23,333 crores in fiscal 2011, which will drive the OMCs into the red. This will hamper their ability to make a follow on public offer, thus hurting the disinvestment effort (to hit the target of Rs 40,000 crores, the FPOs of PFC and RINL will be fast tracked).

Now this subsidised fuel policy is giving a false picture of India's economic health. Subsidised diesel is falsely bringing down transport costs of companies; when the subsidy goes, as it must, they will become that much less competitive. Subsidised petrol is driving up demand for cars (sales up 25% in December) and creating a problem for the future when private transport will need to be curtailed in the wake of disappearing fossil fuels. China, for example, is better governed - Beijing has introduced an upper limit on sale of cars this year. Our political leadership is too busy hurling abuses and chairs at each other rather than think of the future and plan massive public network of transport (trains, underground and/or overhead, buses and trams). Instead, it encourages, through petrol subsidy, the creation of an infrastructure to manufacture cars, since this boosts its revenues and avoids its responsibility to spend on public transport infrastructure. These chickens will come to roost one day.

Compare the Rs 23,333 crores subsidy burden for petro products (whose use ought to be discouraged rather than encouraged) with the paltry figure of Rs 46 crores provided as subsidy for solar power, which really ought to be encouraged. Blessed as India is with ample sunlight, our leaders ought to be looking to the policies of the German Government to encourage the use of solar energy. Germany, thanks to the late Dr Hermann Sheer who campaigned for solar energy, introduced a feed in tariff for solar power which was double the feed out tariff and guaranteed for 20 years. This meant that those who invest in solar power units on their rooftops and supply any surplus power thus generated and not used by them to the grid, would be paid twice the amount they would pay as consumers of grid power. This has not only resulted in a significant growth in solar power in Germany but has also provided employment to an army of 'solar roof investors' who look for empty rooftops and sign deals with the home owners. Such investors now number more than those employed in Germany's auto industry! Surely, if we spend Rs 23,333 crores under a similar feed in tariff for solar power, instead of to subsidise petrol and diesel, we would be better prepared for the future. If only the politicians stopped looting the country and started thinking about the future!

Partly thanks to increased consumption of petro products, oil imports are rising and India's current account deficit is, therefore, also rising. RBI Governor Dr Subba Rao cautions against the rising deficit and the way it is increasingly financed, by portfolio flows (which are short term in nature and whose exit can disrupt the economy). Dr Subba Rao also warns about uncontrolled fiscal deficit. For the 8 months to Nov, this appears under control thanks to buoyancy in tax collections and realisation from sale of telecom spectrum. Had the sale been fairly conducted, the fiscal deficit may have been lower.

Another cause of worry is rising food inflation. Excessive monsoons in parts of India will lead to higher prices with social consequences.

The sensex gained 435 points to end the week, and the year, at 20509, and the Nifty added 122 to end the week at 6134.

There does not seem to be much by way of a bullish trigger to propel the rally further. Come Jan 6 the Srikrishna report would be made public and can have a negative fallout. Caution is advised and better opportunities to buy would present themselves later. A happy new year to all readers.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

Equitymaster requests your view! Post a comment on "Chickens coming home to roost". Click here!

12 Responses to "Chickens coming home to roost"

S.R. Jagganmohan

Jan 1, 2011

Excellent incisive insight into our state of economy intertwined with politics. Timely warning.


girish shah

Jan 1, 2011


Equitymaster requests your view! Post a comment on "Chickens coming home to roost". Click here!