Remember, you don't just buy Government, you earn it - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
Remember, you don't just buy Government, you earn it A  A  A

PRINTER FRIENDLY | ARCHIVES
30 MAY 2009

Much like the Cadbury Bournville chocolates, the new Government will have to earn the right to govern. The electorate has shown its mind; it rewards good governance. The new Government, with the largest cabinet in a decade, will have to perform. Fortunately, the Prime Minister has set performance targets and the initial averments by the ministers are encouraging.

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The Petroleum minister has stated that we would move away from regulated prices of, especially, petrol and diesel and that a hike of Rs 2/litre of petrol can be expected soon, although diesel prices may go down. During 2008-9 a whopping Rs 103,000 crores was incurred on oil subsidies, amounting to 2% of GDP. Of this, upstream companies such as ONGC, OIL and GAIL, bore Rs 32,000 crores, denting their balance sheets (and hurting their minority investors) in order to protect a slipped fisc. The balance, Rs 71,000 crores, was financed through issuance of oil bonds, which is accounting fraud. It is an off-balance sheet item that ostensibly reduces the fiscal deficit by simply postponing the payment of the liability to a future generation (and to another Finance Minister). So, an increase in prices of subsidised petrol would help reduce the subsidy and would, by sending proper pricing signals, hopefully curb consumption of fossil fuels which are fast vanishing from the earth. Funnily enough, it was the Left that was opposing a hike in petrol prices; perhaps car ownership had suddenly become bourgeoisie. Since they are no longer coalition partners (thank God) the Government has no excuses.

Political compulsions, however, resulted in the re-induction of Raja as Telecom minister, despite controversies surrounding his earlier tenure in that post. He is going to concentrate on a long overdue auction, by August, of spectrum for 3G Wimax, and on a long overdue disinvestment of BSNL, India's largest telco, wholly owned by the Government. Ironically, by virtue of full Government ownership, BSNL is subject to writ legislation, and suppliers of equipment who have failed in their bids, use writs to contest the auctions of it. This slows down BSNL's expansion plans and puts it at a disadvantage to private players who are not subject to writs. MVNOs (mobile virtual network operators) have been cleared for operation in India; these telecom operators do not own spectrum but can buy it.

In roads, Kamal Nath promises to alter the model for awarding contracts, so that it will lead to the highest number of road kilometres being added. This is welcome. Hopefully we will alter the 'lowest tender' offer, which leads to rampant corruption and continuous road repair. Hopefully, roads would be tendered on a long term, BOT basis where the contract includes maintenance, which makes it logical for the builder of it to construct it properly. This columnist had been unfairly critical of the lack of concentration on rural road connectivity in his last column and, as a reader pointed out, the Government has initiated a scheme called Pradhan Mantri Gram Sadhan Yojana which has done good work on it.

In anticipation of a fast track reform plan in the first 100 days, the Indian stockmarket had another good week. The BSE-Sensex was up 738 points, to end at 14625 whilst NSE-Nifty was up 210, to end at 6448. The main contributors to the 738 point rally were RIL, with 102, ONGC, with 77 and L&T with 76, whilst Bharti Airtel contributed -35.

Bharti Airtel, however, has ambitious global plans, and has lined up a $4 b. credit line for it. It is in renewed talks with MTN of South Africa, for a merger, in a deal worth some $ 23b. in which both companies would acquire stakes in the other. It had opened talks with MTN last year, which then went on to negotiate with R Comm. Those talks broke down on objections by RIL. Following collapse in stock prices thereafter, the delay thus caused has actually lowered the acquisition cost for Bharti. Another company with global ambitions is Religare Enterprises, which is in talks ith Swiss Re, the largest but one reinsurer in the world, for a health insurance company in India.

It seems that the market has been talked up enough for the moment, having risen a phenomenal 81% from its Mar 9 low of 8,110 to a high of 14,727 on Friday. The good noises the ministerial team is making has been well accepted and investors, both foreign and domestic retail, are pouring money in. The market is due for a corrective fall. Globally, too, the situation has improved thanks to a return of investor confidence after unprecedented intervention by the Governments of developed countries. These Governments have also bent accounting rules pertaining to 'mark to market' so that banks do not need to impair the balance sheets by marking toxic assets down. That has, apparently, not prevented some of them from marking liabilities to market! So if a company or financial institution has issued debt, whose market price has gone down, it takes credit for the write down in its P&L! If the stress tests on 19 banks were based on such financial jugglery, one suspects that those markets would fall as well.

It is advisable to await a fall instead of rushing in to buy. The Government may have started making the right noises. But it is by their actions, not by their words, that they would earn the right to govern. Or even to eat a Bournville.

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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