Indian stockmarkets have bounced with vigour. In the downturn, both India and China fell by more than markets of the developed countries, despite the fact that these two economies were still showing resilient economic growth whereas the developed world was in recession. When confidence returned, after the unprecedented fiscal and monetary booster doses given by the developed world, the Indian and Chinese have bounced back faster than those of the developed world. Indian markets and sentiment got a further boost because of the electorally clear mandate to the UPA, and the hopes for a stable Government, unhindered by coalition partners, able to make the necessary economic reforms.
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The rally continued last week, with the BSE-Sensex ending at 15107, up 482 points, and theNSE-Nifty at 4586, up 138. The main contributors to the sensex rally were L&T and HDFC, with 82 points each, and Infosys with 59, whilst RIL, which had been the main mover earlier, contributed - 71. The Supreme Court turned down its plea to stay Sn 4, which gives state Governments the power to acquire land for public purposes, and which would have extended the period for acquiring the 10,000 hectares of land required for the SEZ, thus putting a question mark on its fate.
Investors are enthused about the elbow room available with the Government, and about its mouthed intentions to use this elbow room to further economic reforms. Thus, President Prathibha Patil, in her speech, spoke of things like expansion of e-governance by setting up kiosks in rural areas to deliver services, stressed the need for greater accountability and promised strong action on terrorism. The Government also wishes to move forward on a lot of reforms that are pending.
Mouthing of good intentions has enthused investors, both domestic and international, and propelled the rally. But actions, as they say, speak louder than words. Let us take just a few examples of events during the week past.
A medical college in south India was found to have taken capitation fees for admission to its courses. Instead of investigating it and punishing the culprit/s who took the bribes, as good governance demands, the Government is seeking to derecognise the college. Which means it punishes the students who got in on merit whilst doing nothing to those who accepted the bribes; reportedly because of involvement of a minister.
In Maharashtra, a lottery scheme announced by MHADA to randomly allot low income housing was found to have been misused. Applicants with sequential numbers were given allotments, ostensibly on a random basis. Instead of investigating and punishing those who misused the system, (no prizes for guessing why), the action taken was to scrap the software used for random selection! This is not good governance.
Again, in Maharashtra, a politically connected co operative, Mula Pravara Co operative Society, has not paid dues of Rs 1600 crores for electricity supplied to it. Instead of acting to recover the dues, the Government seeks to hike power rates for honest users.
So when President Patil quotes Tagore and says we must not be stuck in the dreary desert sand of dead habit, would she, or Dr Manmohan Singh, take steps as required by good governance, or would they be stuck in the dead habit of political back scratch? If the latter, as the 3 incidents above indicate, then would not a continuation of the rally be a triumph of hope over experience?
The macro economic news were a mixed bag. On the positive side, direct tax collections are up 17% in May, and the growth in 6 core sector industries, which account for 26.7% weight in the IIP, was up 4.3% in April 09, compared to 2.3 % in April 08. This was thanks mainly to a 6% growth in electricity generation, compared to 1.4% in 4/08, with electricity having a weight of about a tenth in the IIP. Rewind to two paras above and wonder whether it is additional production per se, that is important, or profitable generation that is. If your system winks at enforcing collection from all consumers, then should we be glad about the core sector indicators or sad? Is the Prime Minister going to talk to the Maharashtra Chief Minister and enforce payment? Or will we be stuck in the dreary sand of dead habit?
On the negative side, exports fell 33% in April, to $ 10.7 b. and credit offtake has been sluggish.
Our banking industry needs consolidation. The Government has majority holding in public sector banks, which still account for over 70% of industry assets. It is unwilling to go below 51% holding, and unable to fund their expansion. It is a shame that, barring SBI, none of the others are in the top 200 banks in global size. Now banks have a rule not to lend more than 15% of their net worth to any group. Which is why a group like the Tatas, with global ambitions, needed to make a more expensive NCD issue, to partially repay loans for its JLR acquisition, as it had hit the 15% ceiling in PSU banks. If India is to grow to become the 4th largest global economy by 2050, its companies would need to be funded for growth, and its banks would need to grow commensurately.
Which means either that the Government should be willing to allow its stake to go below 51% in a few banks (it could keep majority control in SBI plus 2 or 3 other large banks, enough to ensure the safety of India's financial system), or it would mean impending mergers between banks to make them larger institutions. Given that the former may not be politically acceptable, because we still haven't been able to move out of the dreary desert of dead habit, Mr Deepak Parekh opines that the latter would be the course to speedily follow.
Globally, the financial crisis may not yet be over. General Motors, the largest auto maker, filed for bankruptcy. As per the Bank for International Settlements, the unreconciled position of all derivative contracts is at $ 33 trillion! The indices of several global markets are below their Jan 6, 2009 levels, from where they had fallen to lows in March, including DJ Composite, DJ Industrial, FTSE, Paris, S&P 100 and S&P 500.
One hopes that the Government does act as required by good governance and allow the economy to grow and the rally to take off.