The day of judgement

8 MAY 2010

Last week was a week of judgements. Kasab was found guilty of wagering war against India, and killing innocent people, and, rightly, sentenced to hang for his heinous crimes. The British voters then gave their judgement, bringing in a hung parliament after a long time, thus introducing the Brits to the delightful and sometimes infuriating vagaries of coalition politics. Then came the judgement in the Ambani v/s Ambani gas dispute, which went in favour of elder brother Mukesh's Reliance Industries Ltd and against younger brother Anil's RNRL. And finally, the investors' judgement on Greece is still awaited.

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The Ambani dispute has reached a closure a good 5 years after the MOU was signed between the brothers. It is a sad commentary that it takes so long for disputes which can have a significant impact on the economy to be resolved. It should never have been allowed to drag on for so long. Utilisation of gas for production of fertilisers, in replacement of expensive naptha can, for example, wipe out the fertiliser subsidy. Its use for city gas distribution can remove the subsidy paid for LPG, and the necessity of delivering the LPG in chunky, clunky, steel cylinders, the cost of transporting which would have exceeded the cost of transporting the gas which was stored in it.

We are seeing the effect on nations that have been unable to control spending and hence their deficits. Greece and Latvia are cases in point Greece got a bail out package from EU and IMF, but had to agree to cut its fiscal deficit by 11 percentage points over 5 years. Being a part of the European Union, it has a common currency and is unable to devalue, which is the normal medicine given by the IMF doctors. So, to cut its deficit, it has had to curtail expenditure. It tried to cut salaries of Government employees 30%, leading to street riots. Greece is still in a recession and its not certain when its economy would pick up to generate additional tax revenue to reduce fiscal deficit.

In India we are, similarly, on a spending splurge funded by buoyant tax revenue from a growing economy. Should the economic growth stall for any reason, the debt burden would be far too high; one can't imagine what would happen if our Government were forced to similarly cut Government salaries by 30%. Fortunately for us, the economy is growing strongly, thanks to the entrepreneurial spirit of Indians, to God given finds of natural gas in the KG basin and to the build up of infrastructure in a big way. But our babus have to learn to reduce profligate spending else, with a few bad years, we could end up like Greece, Latvia or other PIIGS.

Some sensible, and long overdue, steps, are being taken. The new PDS (public distribution system) is expected to restrict distribution of subsidised grain only to those who are needy. Why, currently, even the well off are getting it, is anybody's guess. Once a subsidy is introduced, our invertebrate politician is highly reluctant to have the courage to reverse it, however illogical it is. Witness the continuation of subsidised petrol and diesel. The discontinuation of subsidy to the well off is estimated to save Rs 8000 crores.

Similarly, the introduction of a GST (goods and services tax) is estimated to boost India's GDP by 1%. Whilst the European Union was formed so as to give the advantage of uninterrupted market access to member states, we, in India, who have a large market as a single entity, have imposed octroi barriers between states. This has resulted in a wastage of fuel (increasing the subsidy bill on diesel), a wastage of time and a heck of a lot of corruption.

The need to transport goods by the more expensive road network, rather than the more efficient train network, is, in itself, a result of the poor growth of the latter and the priority it obviously need give to passenger traffic versus rail traffic. This, too, is changing. There is a huge, $90 b. project, perhaps one of the largest infrastructure projects in the world, under way, called the Delhi Mumbai Industrial Corridor (DMIC). It would be a dedicated railway corridor for freight movement, passing through six states. Alongside the track, 7 new 'smart' cities will be set up. Four Japanese companies have signed up to help establish these cities.

The road network is being aggressively expanded, with an intended spend of some $ 600b. Alongside this network, it is expected that 300 new townships, with an average population of 1 m. each, would spring up, thus creating the largest ever rural to urban migration in mankind's history. Jaypee Infratech, which just completed its IPO, is a case in point. Alongside its 160 km Noida Agra expressway will come 5 new townships of some 1600 acres each, which would house around 2 m. people in each township.

India's high savings rate would help fund a lot of this infrastructure spend, though foreign capital would be needed to supplement it. The IPO market has again revived, and the next biggie would be Coal India, in which the Government hopes to raise some Rs 12,500 crores, through around a 10% stake sale. The management has brilliantly gifted 4 lac demat accounts to all employees, to enable them to participate, should they wish to, in the IPO, thus creating a potential investor base and a loyal one at that. With a coal reserve of 63 b. tonnes, the world's largest, investors would be looking forward to this IPO.

The higher the flow of domestic savings into capital markets, either directly or through mutual funds, the lesser would be the volatility. Last week, for example, the largest fall of 248 points on the sensex occurred on Wednesday, when nervous foreign investors, nervous about Greece not India, were net sellers of Rs 1389 crores. Domestic funds were net buyers of Rs 103 crores that day. Over the week the BSE-Sensex lost 789 points to end at 16769 whilst the NSE-Nifty ended at 5018, down 260.

Technically we are in oversold zone and a bounce can be expected. There should be a good bounce next week unless Greece implodes and the effect cascades to other countries. The India story is good, but foreign investors are prone to 'run to safety', which generally means US Treasury (though its quite unsafe) when they smell problems. As a wag said, 'I've finally figured out that II in FII stands for in India, but I've yet to figure out what the F stands for'.

It's not a bad time to buy.

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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6 Responses to "The day of judgement"

G Srikumar

May 11, 2010

The article is quite balanced and realistic. How many people or politicians feel for the country's overall development. With out social development & thought of only infrasture development the gap is getting widened between the rich and the poor. Unwarranted subsidy for political or popularity gains making the person not to work for his survival. Market may go up or down. The reality will be felt after about 10-15 years if the system is not corrected. The one who feels for the country becomes sentimental & emotional. Most of the other people who are in various positions are least bothered, filling tons of money in their pocket like Dr Ketan Desai.



May 10, 2010

Very scientific analysis indeed.



May 9, 2010

Something doesn't seem right about Jaypee's township math.To house 2 million people on 1600 acres,the development has to be vertical without doubt and the FAR(FSI)required works out to something like 10 on a rough reckoning.(Of corse,it'll be a concrete jungle!)
No indian city development plan is so generous.Will the laws be changed?Does Jaypee know something the rest of us don't?


Anupam Garg

May 8, 2010

i hope the 7 new cities and new township projects are undertaken after careful planning. they cannot end up like unsystematic gurgaons...a lot of things are happening in the infra sector. it amazes me how hurriedly projects are being undertaken.
the F with respect to foreigners would always imply the same old F word. its upto indians to get the right meaning.
judgement week as it was...lets hope the new week speaks less of twilights and more of accurate sunshines.


Nirav Sampat

May 8, 2010

IIT Kharagpur has a campus size of 1600 acres. Population on campus is approximately 10,000, including staff and students. How is JP Infractech planning a city of the same size, with 2 million people living there?



May 8, 2010

The meaning of letter "f" should be "finally" and hence FII could stand for "finally in India" as no other country could offer as much flight to safety in the long run.


Malchand Agrawal

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