Problems galore, yet bounce likely

22 MAY 2010

The world is awash with huge problems, some of which caused nervous selling last week in global markets. The markets fell on worries that the Eurozone would split, to ring fence the threat of contagion from weaker countries like Greece, from spreading to stronger ones like Germany. Germans are furious at being asked to bail out Greece, which lowered its retirement age, allowing retirees to enjoy a monthly penion, even as Germany raised its retirement age, making their citizens work harder! They are loath to work harder to finance Greek retirees swimming on the beach. Germany banned naked short selling (i.e. selling without borrowing the shares to do so); the markets reacted sharply by falling.

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There are also concerns about China having a hard landing. Come to think of it, the world’s leading economies are all in some sort of mess or another. Japan’s official debt / GDP is around 200% and its population is aging. This is why Japanese companies are investing abroad; 4 of them are participating in the $ 90 b. (bn) DMIC project to set up smart cities along the Delhi-Mumbai Industrial corridor. The new Treasury Secretary of UK was told that the coffers were empty; surprisingly, there was a much more muted reaction to this announcement than there was to a similar one made by VP Singh for India. Rating agencies were quick to drop India’s rating and we ultimately had to send our gold as security for loans to bail out the economy.

Nor are investors concerned, as they ought to be, about the nasty behaviour of North Korea, which was proven to have torpeadoed a South Korean ship, or of Iran, which cocks a snoot at the global community and continues to develop a nuclear programme. If the world community is unable to do anything to make North Korea behave, what would happen, for example, if China were to cut water flow to Brahmaputra. It has been blamed for the drying up of the Mekong river which it denies. Our Foreign Minister is complacently accepting Chinese assertion that it will not stop flow of water to India, via Nepal, which has now turned hostile to India.

Should China stop the flow of water, would India be able to do anything, seeing it is unable to do much against Maoists, who blew up a bus at Dantewada, a month and a half after it killed 76 jawans?

India, too, has a high debt/GDP ratio and is fiscally incontinent. No Government has ever displayed any discipline on spending and on repaying debt, so that future generations do not have to live with a debt servicing burden that plagues us now. Interest is the largest single item of expenditure in our budget, surpassing the amount spent on defence (the last time we bought a proper gun was the Bofors; we do not have an aircraft carrier or a deep water fleet worth its name).

We are now gloating over the Rs 68,000 crores the Government made selling 3G spectrum (incidentally, vacated by the Defence establishment; they really ought to get a share of the amount raised through its sale to buy modern equipment). One hopes that the Finance Minister will use a large chunk of the amount obtained through spectrum sale to repay Government debt, and bring down the debt service burden. One fears though, that the political penchant for squandering it on welfare schemes that look marvellous on paper, but result in huge seepages by corrupt intermediaries, would be too great.

They ought, really, to look at what happens to countries that do not behave in an economically sensible manner. Greece has had to announce a 30% cut in Government employee wages; they are rioting on the streets, harming the only industry, tourism, that is capable of pulling Greece out of its fiscal hole. In Zimbabwe, Robert Mugabe has so mismanaged the country that inflation is hyper. They have printed a billion $ note! People have to carry a basketful of currency notes just to buy a loaf of bread. So spending the bounty of Rs 68,000 crores prudently is imperitive for the economy, hence for investors.

The Government is already showing largesse with this Rs 68,000 crore bounty; it is considering a waiver, or a deferment, of the amount payable by BSNL and MTNL towards 3G spectrum they had been preferentially given earlier but did not make money from the early bird lead they had. They would need to pay Rs 16,750 crores; if this is waived, the 3G bounty would drop to Rs 51,250 crores. This gives an unfair advantage to them, which should be legally challenged by other telcos. Despite such favours, both MTNL and BSNL continue making losses. They threaten to go the Air India way, with a benevolent Government pumping in money to bail them out, constantly, and collecting the money through newer taxes from those who do, indeed, perform.

IL & FS is to launch a 15 year bond, in a welcome attempt to develop a market for them, including retail investors. In order to impart a measure of liquidity, affording an exit, it will appoint market makers to give two way quotes, and list the bonds. Establishing a bond market is a dire necessity; infrastructure projects need to match their assets and liabilities and there is, yet, a thin market of investors for longer duration bonds. In corporate news, Ajay Piramal has struck another great deal, selling off the domestic formulation business of Piramal Healthcare, which accounted for 50% of the business, to Abbott Laboratories, for a whopping $ 3.7 b.

ONGC and OIL India were benefitted by a doubling of the price for gas they sold, to the now accepted EGOM determined price of $ 4.2/mmbtu. Since there is no free lunch, this would be borne by power consumers; electricity rates would go up by between Rs 1 to 1.50 per unit. Tata Power has gone to court against a Maharashtra Government order asking it to supply power to Reliance Energy at a lower rate than it is willing to. This would only mean that it would need to buy the power from others at a hgher price than that mandated to be sold to Reliance, essentially a transfer of wealth from its shareholders to the latters.

The BSE-Sensex fell 548 points last week to end at 16445 and the NSE-Nifty was down 162, to end at 4921. It looks like a technical bounce is possible from here, with 16K and 15K as good support levels. One could take advantage of that, whilst keeping in mind that global problems remain and are a long way from solution.

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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5 Responses to "Problems galore, yet bounce likely"


May 28, 2010

It was very heartening for me to read mr Mulraj after a long long gap. I was avid reader of his coloumns in Times of India, which appeared every Monday.

What magenetised me is
Unique and deep thoughts , plainspeak, clarity , due weightage on fundamental things; Far away from short term attractive and in-fashion views/thoughts.

I searched for his columns for long and got lost. At last, Today I found his contactthr equitymaster.
Pl keep up good work and keep up enlighting us.


Dilip Dalal

May 24, 2010

What I feel is Mr. piramal should share this Booty with the sharholders with substantial payout to them.



May 22, 2010

A nice article


Prem Singh Dhankar

May 22, 2010

Very well written, hope this reaches the decision makers and more and more subsidies are removed. It is high time the Indian wake up to the realities, start working harder, pay for what they consume and earn self esteem.Decision maker on the other hand should start targeting FUTURE OF THE COUNTRY and NOT NOT FUTURE OF PARTY VOTE BANK. WE have to start believing that"EVERYTHING IS COUNTER PRODUCTIVE". No one can escape from realities. India is at advantage, presently with majority Government, non politician as Prime Minister and President IN PLACE. Never such combination in past 63 years!? Infinity is the possibility for India. Jai India! Jai Bharat!!Cheers!!!


surajit som

May 22, 2010

increase in gas price may lead to increse in electricity bill in the short run. but it will encourage more electricity production ,more expenditure in gas exploration. it is better to pay a little more rather than having no electricity at all or having it for a few hours a day-even in a swanky suburb like gurgaon. same logic applies for water also.

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