Up, UPA and away.... - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Up, UPA and away.... A  A  A

16 MAY 2009

The UPA has been given an unequivocal mandate by the electorate, just short of a majority. For the stockmarket this is good news; even better is the fact that it will not have to rely for support on the Left parties with their antediluvian economic policies. Which means that it would be able to move ahead at a faster pace with necessary economic reforms. Or, should we say, that it will not have an excuse not to so move ahead!

The market should thus rally on opening and may go up near, or slightly higher than the 13K mark on the sensex. Last week the BSE-Sensex closed up 296, at 12173, and the NSE-Nifty closed at 3671, up 50. It would then have climbed nearly 5000 points above the 8110 low in early March, and be poised to correct as investors cash in.

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Whilst the fact that the next Government will not have its feet shackled with a Left anchor is very encouraging, it is also necessary to take in economic realities. The fiscal deficit has ballooned to unsustainably high levels, and, alongwith it, the national debt. There would thus need to be a slightly bitter budget. Be prepared for some higher taxes and some cutbacks in Government spend.

This is what has happened in Britain's budget, recently presented (See Economist, April 23) There, the Government borrowed 12.4% of GDP to provide the economic boost, despite which the IMF forecasts a 4.1% fall in GDP.

In fact, globally, the attempts by Governments of the developed world to stimulate economies through fiscal and monetary means, has been phenomenal. The combined fiscal and monetary stimulus in the US since Dec 07 has been 29.9% of GDP, which has, thus far, resulted in a 1.8% fall in US GDP in the 15 months thereafter. In contrast, during the Great Depression, the combined fiscal and monetary stimulus during the 43 month period was just 8.3% of GDP and, over that period, the GDP declined by 27%. Thus the action taken by the US Government in this crisis has been huge and has, perhaps, staved off, so far, a severe depression. The hope, of course, is that the economy recovers and some economists are seeing the green shoots of economic recovery. But if it should not, there would be little elbow room for further stimulus.

The toxic assets still reside on the books of financial institutions; the PPIP programme has simply tackled the tip of the iceberg and has temporarily restored confidence. The US Government conducted a stress test on the capital needs of 19 top banks and financial institutions, and determined that 10 of them needed an infusion of $75b.

In corporate news of interest is the foolish way in which 'navratnas' (jewels in the public sector crown) are being destroyed. HPCL is likely to report a huge loss, of Rs 450-500 crores! ONGC is likely to be asked to share a higher burden of subsidy on petro products, which would bring down its net profits at a time when global firms are showing a good performance (Chevron 2008 profits up 28%, Exxon Mobil up 11%)

A more responsible Government would need to unwind these subsidies; basically ONGC/OIL and GAIL are paying for me to drive my car cheaply. It needs to do this for all the right reasons; curtailing expenditure by reducing a wasteful subsidy, protecting valuations of Government companies which the Government would need to sell bits of, to further reduce the fiscal deficit, and to dissuade car ownership for environmental reasons. The subsidy should be used to provide the viability gap funding for public transport, instead.

The two large corporate results announced last week were encouraging. Hindustan Unilever's Q1 profits were up 20%, on a 5% increase in total income, on lower costs. State Bank's Q4 profits were up 45%; its deposit base has increased as savers fled to safety.

The Indian economy has not been as badly affected by the global slowdown, largely because its banks did not do foolish investing in assets whose risks they understood nothing about, as US banks did, and because India has a large domestic economy not overly dependent on exports. That does provide comfort. There must, however, be good economic policy to translate that comfort into happiness. In order to have a sustainable growth rate of close to 8% the growth rate of agriculture must improve. It is untenable that agriculture, which supports two thirds of the population, should get only 18% of the national income. The new Government would need to spend heavily to develop rural roads, so that the wastage in transit of agro produce is minimal. It ought, in fact, to have done this as the first stage and the golden quadrilateral, linking the metros, as the second. But, though all political parties pay lip service to the kisan, they do little for him.

There should be an initial euphoria as the UPA has got a near majority and would be able to easily form a Government without giving away too much. This should also make it easier to move ahead, if it wishes, with sensible economic reforms. However, a budget would soon need to be presented, and that would be a bitter pill for the market to swallow. Perhaps post budget may be a good time to enter.

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 "Up, UPA and away...."
J Mulraj
May 30, 2009
hi Umang,

Yes, you are reading it correct. I was, perhaps still am, worried about the global financial crisis. I think we may still have some shocks. It is a matter of perception and of confidence. However, the situation in India has changed, with a stable government not dependent on coalition partners. Let us see if the Government uses this freedom to move ahead with reforms.
Umang Shah
May 21, 2009
Hi Jawahir,

I see your firm conviction of "sell at rallies" has changed to "Perhaps post budget may be a good time to enter". - thus from conviction to "perhaps" and from sell to "enter". Am I reading it correctly?

I have been following your column on regular basis for over one year now and would want to know clearly if you are changing your outlook now.
M Malhotra
May 20, 2009
We hv a chance for reforms of babudum, less govt, PPP partnerships & growth.Left philosophy as espoused by OUR left - not followed in china - is dead & gone in the world, it died with USSR, a complete failure - No w e would not be in a mess as the west as we hv many c hecks & balances in our markets but it is GOVT waste t hat needs to be curtailed, dead & defunct plants need t o be privatised to salvage as best possible, govt s hould be in regulatory role only, not in production, h otels, services & the like﷯ Like 
May 16, 2009
Read yr articleinteresting read. In my opinion,it''s too early to celebrate. let''s us not forget that Manmohan Singh,ChidamabaramMontek Singh Ahluwalia are all groomed in the "World Bank school" which believes in displacing the farmers by handing over agriculture to the Corporates. So though the clear mandate to the UPA might be good for the economy in the short term ,the goverment''s stand on the following issues will decide the fate of the Indian economy - a) proximity to US, hope we don''t end up sending t roops to Afghanistanearn the wrath of our Arab f rineds. b)More reforms should not result in our f armers being reduced to labourers toiling on their own p iece of land, earning a pittance while the corporates e njoy all the gains. All saiddone, though I am not a fan of the Left, can you deny that but for the Left w e may have ended up in the same sorry economic mess as t he US? Checksbalances are a must, I feel. regards﷯ Like 
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