The Bombay High Court has lifted the stay on gas supplies from Reliance Industries Ltd (RIL) KG basin, pending its final decision in March, and has allowed RIL sale of gas, at the Government determined price of $ 4.2/mmbtu (versus the $2.34 price bid for NTPC and as per the gas supply agreement with the ADAG group), in accordance with gas usage priorities of the Government. After the final verdict of the Bombay High Court in March, the losing party would surely appeal to the Supreme Court.
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The improved realisation (79% higher) would boost RIL's profits from gas sale as also the Government's share of it. More importantly, it would dramatically improve Government finances. Fertiliser subsidy of around Rs 1 lac crores would vanish. Cost of power would come down, a much needed relief for law abiding consumers who are illegally made to pay the price for theft of power that goes on with official ostrich-like approval. The import bill would come down, improving India's current account deficit position. Once city gas supply through pipes resumes, the subsidy on LPG cylinders would also come down sharply. A lot of the subsidy is used in transporting the heavy steel of the cylinders instead of the weightless gas!
It may have been in anticipation of this decision that the BSE-Sensex rose 749 points last week, to end at 9414, with RIL contributing 188 of those points and ICICI bank 80. The NSE-Nifty rose 196 points, to end at 2874. The sensex faces resistance at the level of 10500.
The rally, should it come, would be rather shortlived, for end Feb we would have the vote on account (in lieu of the Union Budget). The state of Government finances is abysmal, with the fiscal deficit in the 9 months to Dec already hitting 3.6% of GDP, as against 2.5% in the corresponding period, last year. This would be even higher if the off balance sheet costs of subsidising petro products is included. The cost of subsidising petrol, diesel, kerosene and LPG are initially borne by Government companies and have ruined the balance sheets of oil marketing companies (IOC, HPCL and BPCL). These companies are later 'compensated' (sic) by issuing oil bonds, which do not figure in the budget and are thus not reflected in the fiscal deficit. In short, the present generation is encouraged to overuse petrol/diesel and the bill paid by the children! A most irresponsible and reprehensive form of governance!
The general elections, expected to be in mid April - mid May would need to be announced in February, which will add to uncertainty. Thus, any rally that may ensue, ought to be taken as an exit opportunity.
Corporate results for the quarter ended Dec are not encouraging. Tata Motors made a quarterly loss of Rs 263 crores (after a notional loss on forex of Rs 226 crores), the first time in 7 years. Maruti showed a 54% drop in net profits. Also declaring a quarterly loss was JSW Steel, of Rs 127 crores; other steel companies showed net profits, SAIL of Rs 843 crores and Tata Steel of Rs 466 crores, both down 56%. L&T's profits, up 25%, shone in comparision to others. Results for Q4 can be expected to be worse!
Tata Communications (erstwhile VSNL) plans to raise Rs 5100 crores through debt to fund expansion plans. It is being stymied, illogically, by the Government, which continues to hold a 26.1% stake in it, on the specious argument that as per the shareholder agreement when it divested its stake to the Tatas, they had agreed not to allow total debt to exceed net worth! That was then; this is now!! For the sake of argument, under the Fiscal Responsibility Act, the Government had agreed to contain its fiscal deficit and curtail its borrowings. Global circumstances have now compelled it to stimulate the economy through additional spending, financed by borrowing! Why should it then object to a private company, in which it holds a minority stake, seeking to borrow to finance growth? What's sauce for the goose is sauce for the gander!
Such a doublespeak also apparently seems to be evident in the decision of the NSE to debar the use of software of Financial Technologies India Ltd on grounds of technical hitches. The matter is in court. Both parties are to appoint mutually agreed parties to evaluate the software (never mind that customers have already evaluated it; reportedly 80% of users opt for FT), but each side is objecting to the names proposed by the other! Interestingly, NSE has invested, with a board seat, in a company promoting a rival software.
Globally the economic situation is even worse. Those with steely nerves could read the article 'Warning: Magabanks could fail despite Federal aid' by Martin Weiss. The two big banks, Bank of America and Citi have a combined exposure in the derivative market of $ 78 trillion! (more than 5 times US GDP) and in the risky credit default swap market, of $ 5.7 trillion! JP Morgan Chase is not far behind. Rescue of these through additional funding would be impossible. One idea is to identify the toxic assets, and sequester them in a 'bad bank', the funding for which would be a joint effort of both taxpayers and depositors. The financial industry has been irresponsible and profligate, and yet continues to be so! Obama has, rightly, criticised the payout of $18.4b in bonuses by Wall Street brokerages for 2008, at a time when their combined losses were $ 35b and at a time when there is economic hardship all around. Citi, which was given a bailout, has ordered a new $50m jet!
It is thus time for extreme caution, failing which a time for fervent prayer!