Why the coming elections are crucial

21 MARCH 2009

Next month India goes to the polls to elect a new Government, at a time when the world is reeling under the worst recession ever seen. It comes at a time when the the toxic effects of the crisis are trickling down to the poorest countries (Economist, Mar 14, 2009) as protectionist policies lead to a downturn in trade. This impacts the poorest nations. Witness the fall in US imports in Nov 08. These declined 3% overall, 6% from emerging markets and 12% from sub Saharan Africa! A World Bank economist thinks that as many as 65m people will fall below the $2 a day poverty line in 2009! Many of these would be in India and would need a strong Government to deal with the social unrest that would ensue. We are unlikely to have a strong Government at a time when we need it the most.

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Unemployment is another huge concern. In the US, 4.4 m. jobs have been lost since the recession began and the jobless rate is now 8.1%. It is 8.2% in EU and as much as 14.8% in Spain. Our Government had a magnificent opportunity to build up funds for a social net, in the past 5 years' boom. It squandered the opportunity in frittering money. Our national priorities are all wrong!

We now spend over Rs 2 lac crores subsidising petro products, including petrol and diesel, for those who do not need any subsidy. We spend something like Rs 1 lac crores subsidising urea, to the extent that its usage has now gone beyond the optimal mix with pottassic and phosphatic fertilisers, degrading soil quality forever. A measure that was intended to help farmers actually ends up hurting them, and no politician of any stature has the courage to stand up, explain, and deal with it! How can we then expect self serving and thick skinned political leaders to deal with increased unemployment as the global crisis continues to unfold?

For entrepreneurs to be able to provide new jobs, a more flexible labour policy is needed, which would allow them to close, after paying compensation, any unit that becomes unviable due to changing circumstances. Inflexible labour policies only serve to protect those with existing jobs, which is a very small part of the population, whilst denying jobs to those waiting for them. But will the Left parties ever agree to flexible policies? Are not our priorities inverted? We protect those who already have jobs, but are a tiny portion of the population and deny those that don't. As a consequence, 65% of our population engage in agriculture, but earn 18% of national income.

Look at our inverted priorities in capital markets. It is amazing that, after this global crisis, a SEBI appointed Derivatives Market Review Committee is recommending introduction of sophisticated derivative products for transaction both in the OTC (over the counter) market as well as exchange traded markets. One of the main problems with credit default swaps was that they were not exchange traded and hence ballooned way out of any prudential limits. The outstanding is now estimated at some $ 56 trillion, 4 times US GDP! And now here we are, thinking of introducing them in an OTC market, between any two parties!

SEBI, on the other hand, has been awfully slow in permitting an introduction of an 'inverse' exchange traded fund, which behaves in a diametrically opposite way to the underlying index. Imagine if an investor had sold his investment in January and put his money in an ETF! As the sensex fell 57% from 21000 to 9000, the inverse ETF would have earned him an appreciation of 57%! SEBI apparently considers this to be speculative, but the committee appointed by it is willing to allow sophisticated derivative products to be traded on the OTC! Talk about inverted priorities!

Or talk about the inexplicable delay by the Government in finding a buyer for oil found in Rajasthan by Cairn India, which is slated for production in 10 days time. Yes, it is waxy and unusable by many refineries. But the Government, who has retained the right to find buyers for it and to determine the price of it, has not done so! Yet oil is the largest component of our imports and the main reason for our trade deficit.

Good leadership matters, whether in corporate or in Government. Sun Microsystems Ltd is a case in point. Once this was at the cutting edge of innovation and had developed chips like Sparc. During the dotcom boom it had reached a peak market cap of $ 145b. It is being bought by IBM for $6.5b. In the heady years it made a series of acquisitions that proved to be its Achilles heel. Banks like Citi also invested in derivative products now turned toxic, and have been brought down.

Will we see good leadership after the coming general elections? Extremely unlikely! Voters will be, as always, swayed by inconsequential issues of caste, religion and creed, instead of important economic issues, social issues, education and health. The fractured polity will squabble over gains of office instead of dealing with the crises that are coming, including increased unemployment, which will cause social tensions.

Last week the BSE-Sensex gained 109 points to end at 8966 and the NSE-Nifty added 87 to end at 2807. Election spending may help boost demand. In this context it is quite interesting to observe that over 100 new FIIs have been registered, in the past 6 months, with SEBI. This comes at a time when Swiss Banks have offered Governments access, upon request, to bank accounts with them! Since India's Government has not so asked, it probably believes that Indians are the most honest peoples around. Why, then, the spurt in FII registration? And does this spurt point to a continuation of this rally?

If this rally continues, which may not be surprising, investors should take it as an exit opportunity. The elections are unlikely to throw up a strong Government, and bad times loom ahead, needing a strong hand. Politicians will be too busy fiddling, whilst India burns.

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.

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1 Responses to "Why the coming elections are crucial"

ritwik banerjee

Apr 1, 2009

election crucial

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