Seals swoop down on Osama, Subbarao on inflation

7 MAY 2011

In an audacious midnight attack, a contingent of US Seals swooped down to the abode in Abottabad, Pakistan, of Osama Bin Laden, killed him, and carried the body for a later sea burial. The next day, RBI Governor Duvvuri Subbarao swooped down with a 50 basis point (0.5%) hike in interest rates, in a bid to kill inflation.

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Pakistan has a lot to answer for, including the most obvious question about how it was that Osama, hunted by the world and especially the US, which has provided $ 20 b. in economic and security aid to Pakistan since the 9-11 attack which destroyed the World Trade Centre and killed over 3000 people, was living, for the past 6 years, in a town which is a military garrison town. To state that the authorities didn't know he was there is to stretch the listener's credulity. The US is threatening (as it has, in the past) to withdraw aid unless Pakistan shows greater accountability. For India this raises obvious concerns, as trouble within Pakistan has a habit of spilling over the border.

It is doubtful that Subbarao would be able to kill inflation as swiftly, even if the market gives him its seal of approval (pun intended). To the extent that inflation has been caused by excess demand due to easy money supply, prices would come down. But those examples are few. For the most part, inflation is caused by supply constraints, especially food inflation. Food inflation, as pointed out in this column last week, is caused by a growing population that is getting richer and eating better, combined with a supply constraint as agricultural productivity growth is lower than population growth. This cannot be tackled by interest rate hikes.

It would need several things. One of the swiftest and most obvious ways is to improve rural roads, because it is estimated that 30% of fruits and vegetables get destroyed in transporting them from the farms to the markets. It would have been far more sensible for the golden quadrilateral to have started with rural areas, connecting them to large towns, then, in a subsequent phase, connecting towns to large cities and finally the golden quad. connecting the cities. We did the reverse.

The other, most obvious way is to prevent the rotting and the consumption of foodgrain due to poor storage. One wonders if GDP is properly compiled. When grain is procured by the Government from farmers, the income of the farmers is added to GDP. But the grain is then stored in open fields, due to inadequate storage facilities, where it is eaten by rats. Surely, then, it ought not to be part of GDP? The Government is now joining hands with the private sector, as it ought to have, long ago, were it not for its dog-in-the-manger outlook, to set up storage facilities. It ought also, to get technology to preserve the stored grains from infestation and disease (its not only rats that destroy stored grain).

What the rate hike will, however, succeed in doing, is to drive up costs of buying stuff on credit, like autos, houses, white goods and other things. Demand for these could be temporarily hit. In the case of autos, it would not be too bad a thing if demand were to be hit, for, by higher interest costs. Politicians should look to the future. Visitors to stores in the US have fallen sharply after gas prices crossed $ 4/gallon; more of them have turned to shopping online.

Prices of diesel/petrol are set to go up another Rs 5/litre shortly and its doubtful that a rising price trend of petro products will ever be reversed. It is imperitive to set up alternate, public transport modes in all major towns and cities including buses (AC and non AC), trains, with perhaps subway trains and/or overhead mass transport systems. Alas, it takes years to even contemplate these and more years to build them, over protests from all and sundry why the route should not traverse their backyards. The cost of building the Bandra-Worli sealink, a boon to Mumbai, went up several times, because of several protests necessitating a change in design each time.

In corporate news the DGH (Director General of Hydrocarbons) is asking RIL to drill 11 new wells to boost its KG 6 output. RIL wishes to boost output in a slower, more calculated manner, so as not to damage the field.

The Vedanta group, which had earlier acquired a 10.4% stake in Cairn India from Petronas of Malaysia, has acquired a further 8.1% through an open offer made by Sesa Goa. So it has now agreed with Cairn plc to buy only 40% of its stake, which is pending clearance by a committee, established to sort out the dispute with ONGC over payment of royalty. The committee, meanwhile, has been asked by the PMO to probe the record of mining and power production of Vedanta.

Posco has finally, after six years, been given an environmental clearance for its steel project in Orissa, which will be the largest FDI in India, but with some conditions. This may augur well for future large projects, especially extractive ones, if it results in a modality that takes into account concerns of tribals and provides them with job security.

Sun Pharma is, inexplicably, thinking of going into an unrelated field of power, and setting up a Rs 5,000 crore project for power generation. One wonders where the synergies are.

Banks had to make provision under AS 15 for pension liability, which gave them a one time hit on their balance sheets. The results of most in Q 4 were fairly good. PNB has a mouth slurping net interest margin of 3.96% and an enviable return on assets of 1.34%. At least two banks, Bank of India and Indian Overseas, made preferential issues to the Government, which increased its stake.

Public sector banks are conservatively managed and have managed to grow and keep non performing assets in check. Their stocks do not get the P/E they deserve mainly because the Government wishes to retain a 51% holding in all of them. The Government could easily bring its holding down to 26% without risking the stability of the financial system, and allow banks to grow to an international size, both organically as well as through mergers. It could, if it felt the financial system was under threat, retain majority control in SBI plus one or two other banks, and let the others free to grow. It needs to.

Foreign investors hold more, e.g. of both ICICI Bank and HDFC Bank. There has been no risk to the financial system or to the banking sector.

In fact, with Government holding 100% of Air India, that is a greater risk to both the system (which was severely disrupted by a pilots striked) and the sector. Air India has been bled to death by unaffordable acquisition of aircraft, for reasons best known to the politicians who ordered them. The same have ordered the airline to give up lucrative routes, such as Sri Lanka-India, to competitive private airlines, without any benefit to Air India. The recent agitation by pilots was to protest the lack of parity after 4 airlines were merged; pilots doing the same work get different payments. It would be best if the Government were to settle all Air India's liabilities and sell the airline. Retaining it under political influence is, in fact, a larger risk to the safety of the aviation system.

Last week the BSE-Sensex declined 617 points to end at 18518 and the NSE-Nifty lost 198 to close at 5551. The market bounced on Friday, with the sensex adding 308, and perhaps, the may bounce some more early next week, before starting its downward drift again.

Results of the state elections will be announced next week. Perhaps, post result there could be some political turmoil and maybe some more action on the 2G telecom scam. That would spook markets. A reshuffle of the cabinet at the centre is also likely, post election results. All in all, not a time to enter the market.

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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3 Responses to "Seals swoop down on Osama, Subbarao on inflation"

Piyush Gupta

May 11, 2011

Sheer Brilliance !
Thx for the great write up.
~ Best Regards ~ Piyush



May 11, 2011

When the results of the population count was released,not even one person either in the media or the political establishment stood up and said that 120 crores is simply unsustainable population figure for a country of the size of India as it is politically improper even to raise the subject.
There are more than 1 crore children in Bihar alone who are less than 6 years old.Why?because the govt. pays 1500 rupees for every delivey and only 500 for a vasectomy!
This is what a woman said in a TV interview.So,120 Crore Indians(mosy of them illiterate and impoverished) have to be provided with food,clothing shelter,healthcare etc. -all free of cost of course due to vote bank politics.Is this sustainable?Where are the resources?All the GDP numbers and inflation indices do not reflect the ticking time bomb that India has become due to the uncontrolled expansion of the populaton.A bigger unskilled labour force is a bane on the economy and not a boon.


sudhir apte

May 8, 2011

I think you have overlooked the role of corruption in fueling nflation.Politicians,bureaucrats,industrialists
professionals and traders are creating a huge amount of black money in this country. The bigger fish may be stacking it in foreign bank accounts but the money remaining in the country is chasing land and property inflating their prices to astronomical levels making them unaffordable to the real needy ones. When your wallets or purses are full of black money,it generates pressure on you to buy goods It may be harmful to store black money in its purest form so you are forced to convert it into goods creating artificial pressure on prices. So corruption is a hydra headed monster hurting the country and its poor. But who really gives a damn ?

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