Although general elections are due next year, it is generally expected that they would be announced later this year, either as a gambit or as an inevitability if the Left withdraws support should the Government go ahead and sign the nuclear agreement with the US, as, indeed, it should, to mitigate the energy crisis that is sure to befall us. In an election year political compulsions take precedence over everything else, especially over sensible economic policy. This spooks the stock market, which ended the week down 1028 points on the sensex. The BSE-Sensex closed at 15343 and the NSE-Nifty at 4647, down 295.
After an initial teeth jarring fall of 726 points on Monday, the sensex seemed to steady itself, but got another shock when an inflation figure of 7% was revealed on Friday, causing it to slide 489 points. Of the weekly 1028 point fall, L&T contributed 176, HDFC 118 and ICICI 115. Inflation would be countered with a hike in CRR, and a tightening of credit which has affected such heavy industry and financial sector companies.
A big part of the problems with our economy can be laid squarely at the doorstep of bad public governance. No, make that abysmal. Take the oil industry, where stupid Government policies have turned the scenario into a tragi comedy! Three PSU marketing companies, IOC, HPCL and BPCL have been converted from being 'navratnas' (nine jewels in the PSU crown) to seas of red ink. The losses on account of subsidies they are forced to bear are partially covered by giving them oil bonds (which defers liability of payment to a future Government).
Now the condition of the 3 companies has become impossible, and they have to borrow to continue paying wages. They could, of course, sell the bonds and continue operations, but for some reason the Government has capped sale of bonds to 25% in any quarter! Not only that, but it refuses to grant the bonds the SLR status that would allow banks to invest in them (banks are forced to set aside some of their funds into SLR securities, but oil bonds don't qualify for some inexplicable reason). So the market for the bonds becomes restricted, and the bonds have to be sold at a discount.
In essence, therefore, the Government subsidises prices of petroleum products which benefits the intended beneficiaries less but helps truckers lower their costs (by adulterating diesel with kerosene and causing environmental problems), helps restaurants cut costs and helps private sector financiers get bonds at a discount whilst bleeding PSU navratnas. If this cannot be called a Pavlovian tragi comedy, what can? Remember, the bill for all this is to be paid by a future Government.
It is the same in every sector the Government is preponderant in. Industry is hampered because of a shortage of power, some 40% of which is wasted through theft! Soft politics to favoured constituencies and corrupt administration doesn't allow this issue to be tackled firmly, as it should. In an election year, it would be even tougher. Result? The consumer is paying, and will continue to pay, higher charges than necessary. Wonder why inflation is high at 7%?
Where a large part of the industry is in the private sector, the Government is able to pressurise companies to reduce prices, which, in an election year, becomes of paramount importance. Steel companies had raised prices some 20% in March, partly as a result of rising input costs of power and coal, largely under Government control. They have acceded to the request to roll them back.
On top of this, we have had unseasonal rains in some parts of the country, which would impact agricultural output. Interest rates will rise, to combat inflation, which will add to the debt servicing cost of industry.
Expect, therefore, the stock market to have a bumpy ride this year. It would be advisable to get light on every rise. Foreign investors are not likely to come rushing in because the financial sector problems in the US have yet to be fully played out. UBS wrote down $ 19 b. of losses last week. Other worms will emerge from the woodwork.
In India, there would be problems with FX derivative contracts. Mid size companies have entered into these contracts and are now suing banks that advised them to. These losses may now be required to be shown in the accounts; hitherto they were not immediately required to. So maybe results for Q1 of 08-09 may start reflecting such losses, which would also impact the market.
All in all, prudence is the better part of valour and one should become lighter on rallies. In an election year, vote for caution.
Have you read the latest Honest Truth by Ajit Dayal?