The Big Fat Greek Herring - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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16 JUNE 2012


Indian politicians, especially the Congress party, which has ruled the longest, have picked up quite a few tricks.

One is to blame others. The favourite blame game these days is Greece! That's a red herring! So if our current account deficit is too high, its because of Greece's problems spilling over into the rest of Europe, thus affecting our exports! Weak rupee - its because of Greece! High fiscal deficit?

Greece again! Don't ask how, just accept it! The big fat greek red herring! So far, the delayed monsoons have not been blamed on Greece. Not yet.

Another trick is that the Congress has mastered the British art of divide and rule. Mamata Banerjee was a victim of it last week. She had teamed up with Mulayam to upset the apple cart of the Presidential race, proposing, amongst others, the name of Manmohan Singh as a Presidential candidate. Without M & M (no, not the candy, but Mulayam and Mamata), it would have been difficult, though not impossible, for Congress to push its nominee through. But they divided M & M, and got Finance Minister Pranab Mukherjee's candidature approved as President elect. (A wag says the misunderstanding between Mulayam and Mamata was due to overuse of abbreviations. When he said let's back PM for President, he actually meant Pranab Mukherjee but she took it to mean Prime Minister! But that's another story).

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Another skill picked up by the Congress is cultivating a deaf ear and a blind eye, to criticism. The economy has come to such a standstill (the index of industrial production grew a mere 0.1% in April), and largely due to policy paralysis and an unfriendly investment environment, that several stalwarts of industry have been openly critical of the Government. The proper thing to do would be to accept the criticism and to correct things, but, instead, the UPA behaves like an ostrich, burying its head in the sand, to it.

Yet the market rallied sharply on the last day of the week, when the M & M partnership was asundered and PM who is the FM became the Presidential nominee. This was on several investor expectations.

The first was that a Mamata exit and a Mulayam entry into the UPA would pave the way for stuck reforms. Railway fares may be increased. The pension bill may get passed. FDI in retail may go through. That is, if Mulayam lives up to his name. He may turn out to be not so soft, though.

Another expectation was that a new Finance Minister may not pursue the retrospective tax amendment brought in to recover money from Vodafone, after the Supreme Court had held in the latter's favour. The retrospective amendment has been the biggest shaker of foreign investor confidence.

Investors are also expecting that the Reserve Bank of India (RBI) would cut interest rates by 25 basis points, looking to the abysmal 0.1% growth in IIP and the drop in exports by 4.2% in May. On the other hand, the latest inflation figure is 7.55%, higher than 7.23% last month.

Last week the BSE-Sensex gained 230 points to end at 16942 and the NSE-Nifty added 70 to close at 5138. What was most interesting is that Foreign Institutional Investors (FIIs) were net buyers throughout the week. This indicates what was written in my previous column, 'For a Few $s More' that there is enough global liquidity, which is waiting to flood a market that makes it feel welcome. To do that, there must be sensible and stable economic policies. Perhaps this may yet happen. Politically the Congress has got a wake up call in Andhra Pradesh, where it has been thrashed by Jagan Reddy, currently lodged in jail for a tax investigation.

The pity is that none of the investigations against politicians ever lead to a conviction; they end up enjoying ill gotten wealth. The electoral code now requires the filing of tax returns by all candidates, and one has seen inexplicable increases in wealth of several of the candidates. This is often disguised as 'agricultural income' which is tax free. A step that would go a long way in curtailing generation of black money, and also in curbing corruption, would be to make agricultural income taxable. The exemption limit for lower brackets could be twice, or thrice, as high as for other assesses, but after that, the income should be taxable like any other.

Contrast this with the punishment likely to be meted out to Rajat Gupta, found guilty of one charge of conspiracy and four of insider trading, largely on circumstantial evidence. He faces upto 20 years in prison! It has not been proved that he gained financially from the insider trading. Yet several politicians and bureaucrats who have assets disproportionate to income contine to freely enjoy them.

The money thus salted away does not end up benefitting the economy. As a result, credit rating agency S&P has threatened a downgrade of India's rating from investment grade (the lowest rung) to junk grade.

The ironically strange thing is that all these concerns are self inflicted. Ah yes, that's yet another skill the Congress has picked up, that of shooting itself in the foot. Just when things seem to be going well, they come up with a harebrained idea, or a scam, that causes the foot injury. It may be a good idea to take lessons from Abhinav Bindra.

But its something that can be fixed!

The Government does not have the political courage to reduce diesel subsidy. Instead, it wants to hike excise duties on diesel cars (which it should do anyway, but not as a substitute for the former).

Technology can provide answers. When OPEC gave the world its first oil shock, forty years ago, the US immediately mandated fuel efficiency norms for its vehicles, requiring, by law, auto makers to constantly improve it. Forty years later our wimpish Government does not have the ability to do so! It should.

A lot of the diesel is used in diesel pumps for agriculture and as back up power in cities where supply is prone to disruptions. Now Sun Edison will bring solar power to 30 villages in India. The cost of diesel generated power ranges from 30-65 cents/KwH, whilst that of solar power could be brought down to 12-25 cents.

Yet things can improve dramatically. India is to allow QFIs (Qualified Financial Investors) from 34 countries and, within the next two years, can get inflow upto $ 90 b. through this route (see this ).

Despite all the negativism, FIIs have invested $ 12.3 b. this year, till June 7. Compared to $ 8.3b. in 2011, and much lower than the peak of $ 39.47 b in 2010. So if, with TMC out and a hopefully more reform minded Mulayam in, the UPA sees the writing on the wall (psst...it reads 'reform, or perish') and acts, one could see a rally.

But life is never that simple on stockmarkets. On the flip side is the result of the Greek elections, to be held on Sunday 17th June. It looks like Syriza would get a majority, and they have asserted their intention to leave the Eurozone unless the aid package is further modified. A Grexit would cause financial uncertainty in all of Europe, and pressures on other countries. European countries have lent Spanish banks $ 125 b. but that may not be enough. The resultant chaos can also affect Indian markets.

So we are caught between a rock and a hard place.

Domestic factors can become bullish, especially if UPA puts on its bifocals and sees the writing on the wall. On the other hand, a Syriza victory in Greece could cause financial panic and a sharp drop. Should that happen it would not be a big fat greek herring, but would be something far more fishy.

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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2 Responses to "The Big Fat Greek Herring"
C K Vaidya
Jun 17, 2012
Although agricultural income is tax-free, there are limits to agricultural land holdings and hence all the rise in wealth can not be explained by agricultural income.
The wily polititians have a found a way out. Theri kin float privatr companies which issue shares to some individuals at huge premia. These very shares are bought back at face value or lower after a gap of a couple of years. Who woud buy the shares at huge premia and later allowed these to be bought back at substantially lower value? Obviously, those who benefitted from use of discretionery power by the polititians concerned. And off course, tere are those who give hundreds of crores as loans to companies floated by kins of polititians without any security and interest free too. These are the new ways of the corrupt!
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Mithun
Jun 16, 2012
The Americans have a saying:- "Washington is a former swamp that traded mosquitoes for politicians… and malaria for public debt"

New Delhi is no different!!
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