People vote against statism and corruption

14 MAY 2011

The results of 4 State Government elections and 1 Union territory were declared on Friday 13th, which proved unlucky for the Left, statist, Government of West Bengal which was swept out by the Trinamool tsunami after 34 years in power, and for the DMK in Tamil Nadu, perceived by people to be corrupt and swept out by the AIADMK tsunami.

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The voting public seems to have become a discerning lot. It focussed on economic performance and rewarded Governments like Gujarat and Bihar by re electing them to second terms. They want economic growth and jobs, not the sermons of the Left preaching a philosophy that is long past its shelf life, in a globalised world. Let's see if the parties they have voted into power perform and deliver clean governance and economic policies that encourage growth.

The loss of government in Tamil Nadu would probably spur more action against Kanimozhi, daughter of the erstwhile Chief Minister, in the 2 G spectrum case. Perhaps some action may also be taken against corporate heads, in a bid by the Congress to clean its image and, were this to happen, especially against big names, the market would get nervous.

It is, however, time that action is taken against wrongdoings, and the electorate has sent its message (the only message politicians take notice of). The US, for example, has found billionaire hedge fund manager Raj Rajaratnam guilty of insider trading and he faces a sentence of upto 19 years in prison. We have not had, in India, yet, a serious conviction in insider trading offences.

The new Chairman of SEBI, U K Sinha, plans to make changes in the IPO process, which are needed. He rightly points out that there is excessive information – the red herring prospectii given out to brokers and analysts are far too big and not even 1/100 would be reading them. This is not only a colossal waste of paper, very avoidable, but also gives an opportunity to hide some unwanted fact in the mass of paper whilst claiming to have disclosed.

This column has been advocating dissemination of a far slimmer prospectus with a few details such as risk factors and financial information, with an option to anyone who wants the full prospectus, to pay for it and get it either in print or electronically. Perhaps Mr Sinha could consider this from both an investor perspective as well as an environmental one.

He is also considering another suggestion these columns had made years ago viz. to give, in the red herring prospectus, the track record, for, say, the past 5 years, of the lead manager to the issue. This would include basic information such as the name of the company, the date of the issue, the issue price and index on the day the issue closed and as of now. And the % change in stock price versus the index since the issue closed. Investors would then have an additional bit of information to decide, based on the track record, whether or not to go with the lead manager.

Both the issuer and the lead manager have convergent interests, viz. to obtain the highest possible issue price. So if the track record were to be given, there would be a semblance of counter pressure from the lead manager, to leave something on the table for investors. Recently, the stock of SKS Microfinance dropped significantly from its issue price, on both poor financial performance and a report by a brokerage house.

Why good governance and proper policy prescription, oversight and review matter can be easily judged by what's happening in China. The Economist of May 5, 2011 carries an article China's population: The Most Surprising Demographic Crisis, Because of the one child per family policy adopted by China years ago, to contain the population growth, the fertility rate amongst Chinese women has fallen to 1.4, much below the replacement rate of 2.1 required for population stability. As in India, the preference for a male child has led to female infanticide and a skewed population skewed in favour of boys. By 2030 there would be about 4 times as many 65 or older persons than between 20-24 year olds.

India almost embarked on a policy of forced sterilisation to control population, at the time of the Emergency but was thankfully saved from its consequences. Using other methods of birth control, it has somewhat controlled its population (more could admittedly be done) but without the dropping of fertility rates to below sustainable levels.

This suggests that the India story is more sustainable than the China story, so far as the demographic dividend is concerned. Foreign investors would no doubt take notice of this and allocate their portfolios accordingly. One study estimates that some $ 10 trillion will flow from the developed markets, whose economic growth is tepid, to emerging markets, which have stronger, and sustainable, economic growth and India is in a position to receive a good chunk of it. So, with good governance and sensible policies, together with planning for the long term, we have a long bull run ahead of us.

The sad thing is that our policies are also often badly myopic. Fertilisers have been subsidised for several years, in order to benefit farmers and incentivise them to produce enough to feed the growing population. A decade or so ago, the subsidy was removed from 2 types of fertilisers, phosphatic and pottassic, but, strangely, left untouched for nitrogenous fertiliser, or urea. The three have to be mixed in a certain proportion to provide the required nutrients for the soil but, because N (nitrogenous) fertiliser was subsidised, and P (phosphatic) and K (pottassic) not, farmers overused N, thus degrading soil quality. This comes at a time when consistent economic growth and programmes such as NREGA have increased the foodgrain input of Indians; a shortage of fertiliser is going to be a big challenge to meet the increased demand.

Our form of multi parliamentary democracy makes it almost impossible to affect any change in a bad policy, once it is formulated. In a bid to correct the underpricing of urea, Yashwant Sinha as Finance Minister, sought to modestly raise its price but was shouted down by the Congress opposition. Actually, even in China, which is not a democracy, the shift in policy from one child to two is running against dogged vested interests.

In macro economic news, the index of industrial production was up, yoy, by 7.3% in March, encouraging, after the previous 4 months when it grew at between 2.5 to 3.9%.

However, interest rates are rising, in a bid to curb inflation. SBI raised its PLR and base rate by 0.75%, which will impact sale of real estate, consumer durables, white goods and the like.

The BSE-Sensex ended the week at 18531, up 13 points, whilst the NSE-Nifty closed at 5544, down 7.

The coming week is likely to see more action in the 2G scam, which could make the markets nervous if it involves big names, though the action against corruption would be show a welcome seriousness of resolve. There is also likely to be a cabinet reshuffle (one wonders why its called a reshuffle, makes it sound like a deck of cards with 2 jokers in it). Then there would be a petrol price hike of between Rs 3 to Rs 6/litre.

The long term story is good but in the short term it may be better to fasten seat belts as there could be turbulent weather.

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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4 Responses to "People vote against statism and corruption"


May 16, 2011

Realistic overview by the writer on the change voting public has brought in with a HOPE in mind.

However, the power of it in TN was earlier observed. May be not in WB. So, WB will be observed more closely.

About population demography and control i would like to evaluate on other attributes/ parameters. Mechanism and tools on population count in india can be challenged if one wants to rely on data in terms of quality (income, age, rur-urban popln dynamics) and quantity. However, in terms of effort gap to previous decade, a lot better has been done with intense involvement by the commission.

About RBIs PLR and the inflation: As a an investor these market conditions are welcomed once in a while. Hyperopia over Myopia:
An opportunity to CHECK THE PULSE of the company he has invested in during this period when his capable representative running the biz is tested on the OPERATIONS front to perform with least impact on the bottom line. Just a small blip of self study and practise time than being wandering around with the some urge to find a new Vision in some unimpacting conference.


Abhay Shrivastava

May 15, 2011

Very very informative, linking current relevant facts under global reference frame and visualising / deducing emerging trend in simple and lucid style. I am yet to see such type of newsletter.


Tarun Surana

May 15, 2011

Regarding fertiliser subsidies, just want to correct you, Phosphatic and Potassic fertilisers are decontrolled fertilisers, but still subsidized heavily. For example, DAP has subsidy of over Rs 19000 per tonne while MRP is Rs 12000. Decontrol only means partial freedom to set MRP by companies. As a matter of fact, out of total fertiliser subsidy, subsidy on urea is much lower compared to subsidy on decontrolled fertilisers.


Ganesh K

May 14, 2011

People want to change arrogant and corrupt politicians. Is it? What way Mamta didi better than Red brigade she defeated? She may be simple and non corrupt but what about her partners- Congress, they are corrupt to the hilt. Amma replaced corruption kings of DMK, but there are corruption cases pending in courts against Amma from her previous regime. Poor Indians have no choice and good party like BJP has no presence in many states. Congress at center is hounding good chief ministers like Narendra Modi. No hope for Indians

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