Economics always prevails over politics - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Economics always prevails over politics A  A  A

24 MAY 2008

Despite being at sea level, there is an air about Delhi that makes politicians living there become heady. They take actions that belie economic logic, and which ruin their own companies, the economy and thus impact the stock market.

The top five PSUs by market cap in the Nifty and their weightage in the index as on Friday are:

M. Cap (Rs 000 crs) % weightage
ONGC 192 6.47%
NTPC 145 4.40%
SBI 99 3.34%
SAIL 71 2.87%
Power Grid 42 2.39%
Total 549 19.47%

These are valuable assets of the Government. Any rational person would look after his assets but the rarefied atmosphere of political power affects rational thinking. ONGC is being severely damaged by the huge amounts it has to bear as subsidies to Oil Marketing Companies because the Government wishes to subsidise petrol, diesel in addition to LPG and kerosene.

NTPC is going to suffer as input costs continue soaring and a dispute over pricing of gas, the main hope for India's energy basket, remains caught in the tortoise pace of judicial resolution.

SBI announced suspension of farm tractor loans because NPAs, at 17%, were unsustainable, only to withdraw the suspension two days later, inferentially on Government pressure. The farm loan waiver package has, last week, been widened and now amounts to Rs 73000 crores, up from Rs 60000 crores in the Budget. If Government recompenses banks for this through issuance of agro bonds, as is likely, it will also not reflect on the fiscal deficit, which has run amok.

SAIL is affected by the Government having 'persuaded' steel companies not to raise prices, which would show up in inflation numbers and be bad for its image in an election year. Its wage bill in the last quarter of 08 has doubled, after the VIth pay commission.

These 5 PSUs account for just under a fifth of the weight in NIFTY and so if their profits are dragged down due to political decisions bereft of rationality, it would impact the index and investors. With no corresponding gain to the economy, or to the Government (other than fudging its books of accounts) or, indeed, to the political parties. In that respect, the UPA Government may perhaps like to rethink its name, for it is not quite united nor yet progressive. Add another 5 PSUs in the NIFTY and their weight goes to 24.1%

Ultimately economics always prevails over politics because it is based on rationality rather than upon whimsicality. Having converted IOC, BPCL and HPCL from crown jewels into silly putty, crunch time is now near. They have no funds to do business! New LPG connections have been stopped. There is a likelihood of petrol and diesel rationing. None of these is likely to get votes. Yet the Left parties continue to threaten the Government against a price hike for reasons best known to them. Unfortunately for the Left, King Abdullah does not cave in to their threats like the wimpish Government does, and oil prices have crossed $ 130/b. Economics does prevail over politics.

Governments treat public sector companies like their own backup treasuries, giving Finance Ministers the ability to dip their grubby fingers. This is why Governments are so reluctant to privatise them (NTPC was refused permission to have a follow on public offer). They would much rather run them to ground, as they are doing to the OMCs, than to enhance their value.

In corporate news, a few large private sector companies are going global. RIL is in discussion with hospitality majors such as Four Seasons and Accor, to enter this business in India, which faces a severe shortage of rooms. It has also entered into a $ 1 b. JV with NYSE listed Vornado to set up a realty fund in India.

ADAG controlled Reliance Big Entertainment has signed deals with 8 production houses promoted by famous Hollywood actors like George Clooney, Brad Pitt etc to make films.

Bharti Airtel is in discussion to acquire South African MTN.

Tata Motors, after developing the Nano, is now working on an electric hybrid small car that would be fuel efficient in providing a mileage of 100 miles per gallon! If they succeed in this, which would not surprise anyone after sceptics of Nano were proved wrong, it would again shake the global auto industry. Kudos to Mr Ratan Tata!

Last week the BSE sensex declined 785 points to end at 16649 with 29 of the 30 stocks (barring Tata Steel) ending down over the week. The Nifty ended down 211 at 4946.

For the nonce, politics will triumph over economics since General elections are due next year but may be announced sooner. Given that Government is government and that in an election year politics prevails, we are likely to witness more pain, before economics prevails. Which means we would see better buying opportunities.

Have you read the latest Honest Truth by Ajit Dayal?

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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