Gandhi, Gavaskar and Gates - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Gandhi, Gavaskar and Gates A  A  A

30 JUNE 2008

When asked, as leader of the largest constituent of the UPA Government, to become the Prime Minister, Sonia Gandhi refused, displaying statesmanship and sagacity. Better yet, she astutely nominated Manmohan Singh, a man known for his erudition and honesty, as Prime Minister. Had she ring fenced him and Harvard educated Finance Minister Chidambaram from the Left and their Jurassic ideologies, and allowed both to do their jobs, we would not be where we are today.

Had she also not given in to the propensity to continue in power as long as possible, but had, instead, taken a cue from both Gavaskar and Gates, who retired at the peak of their careers, and been bold enough to call elections last year, when things were good and inflation under control, it would have ensured another innings.

The going was 'seemingly' good, one could add. The fiscal deficit was apparently falling within the limits of the FRBM Act but was, in reality, shooting well past it due to creative accounting; the sort that, in the corporate world, brought down Kenneth Lay of Enron. Expenditure which ought to be shown in the Budget, such as subsidies on petro products, or on fertilisers, were not, thereby fictitiously bringing down the fiscal deficit and partly compensating PSU oil companies and fertiliser companies through issuance of bonds. These bonds become a liability for a future finance minister; hence a tax burden on a future generation.

This was accompanied by a loosish monetary policy, albeit not anywhere as loosish as what the US Federal Reserve is doing. Result: inflation, which is close to 12%.

Of the petro product subsidies of around Rs 230,000 crores an insignificant portion goes to the truly deserving, for their cooking needs. A chunk of it goes to support an oil mafia that adulterates diesel with cheaper kerosene, causing environmental and health problems. There are several other pernicious effects.

The cheaper petrol encourages overusage as people buy gas guzzlers. The resultant crude oil imports weaken the rupee. Now, instead of encouraging new oil, which NELP VII seeks to do, the Finance Ministry, starved of resources despite having got the biggest ever increases in tax revenue ever, is trying to restrict tax concessions under Sn 80(1B)(9) only for oil and not for gas. Those who take the risk of bidding for blocks do not know whether they will find oil, or gas, or both, or neither. But such has been the utter wastage of tax revenue, that the Finance Ministry is looking more to its own interest than that of the country.

The US has increase petrol prices which are now over $4/gallon, resulting in a decline in consumption for the first time in 17 years. Governments of emerging economies like Indonesia, Thailand and Malaysia have increased theirs by 30-40%, causing a drop in consumption. We do not have the courage to do so because of resistance from the Left parties. Interesting, communist China has done so!

Such servility to the Left, which has not accepted the responsibility to be a part of Government but lends outside support to it (withdrawable any time) is now leading to the stand-off that is causing nervousness in the stock market. Had the UPA Government found its backbone last year, and called the bluff, it would have had a far better chance of re-election than it has now, with inflation and the fiscal deficit running amok. The Congress should have done a Gavaskar.

Now that inflation is running high and elections may be nigh (needing inflation to be tamed fast), the RBI has gone aggressive with interest rate hikes. It hiked the repo rate (at which it lends to banks) by 0.50%, and CRR (which banks have to deposit with RBI) by 0.25%. In turn, commercial banks like SBI and Union have raised PLR by 0.5%. Deposit rates would also be raised soon; net of inflation they are hugely negative. When deposit rates rise, equity markets fall since debt becomes relatively that much more attractive than riskier equity.

This also sucks money out of the system, and farmers are finding it impossible to get loans for planting in the kharif season from co operative banks and difficult from commercial banks. So the debt waiver of Rs 70,000 crores will come to naught if farmers do not get credit and thus cannot plant crops, in the coming season. Given that there is also a huge shortage of fertilisers (despite the Rs 90,000 crores subsidy for them) this can affect agricultural growth; and hence GDP numbers.

The corporate sector is tightening its belt, cutting down costs such as travel costs and vehicle costs, and giving notice to non performers. In contrast, a recent VVIP visit to Mumbai witnessed hold up in traffic for a cavalcade of 40 cars to pass through! The pay commission has awarded steep pay increases for Government employees, none of whom are ever sacked, and the Parliament has hiked fees for MPs to witness their walk outs.

Oil prices have now hit $ 142/barrel. A lot of it is speculative demand; there are fully loaded oil tankers awaiting demand for the oil! So, it is quite likely that the speculative demand for oil would come down, bringing with it a much needed relief. This is likely when the US Fed increases interest rates; it hasn't, unlike most other countries, including the EU and India.

Last week the sensex fell 769 points, to 13802, including a teeth shattering 619 point drop on Friday. Of the 769 points, ICICI Bank contributed 132, L&T 113 and Infosys 85. Reliance Industries (RIL) was positive at 90, followed by TCS with 1. RIL's gas from the KG Basin is to start flowing from Sep and, as directed by the Government's priorities, will flow first to fertiliser, then to LPG and then to existing power plants.

What is interesting is that for the four days to Thursday (Fri information not available), domestic mutual funds were net buyers on all days whilst FIIs were net buyers only on Tuesday. This indicates availability of domestic money at attractive levels..

Tata Steel produced consolidated results (with Corus) with sales at Rs 132,110 crores (second to RIL) and PAT at Rs 12,350 crores. ONGC, with a PAT of Rs 19,872 crores, has the highest profit of an Indian company even after being eaten away by Government, its majority owner. It is doing much to assure energy security for the country but its capex plans are bound to be hampered because its profits are eaten away so that you and I can get cheaper petrol today, and probably have to cycle to work tomorrow! Myopia, thy name is Government!

The fundamentals that created the India story remain. Our demographic profile, with over 40 m. people going to be added to the 19-25 years (most productive) workforce in the next 5 years, the huge domestic market for almost anything that can be produced, the entrepreneurs that pop up now they have been given freedom to be so, the growth of the service sector etc. What defeats all these advantages is poor governance. With an election coming soon one hopes that governance will also improve. After all, we have seen how good administration helped a reelection in Gujarat and how poor governance led to a defeat in Karnataka.

The sensex, having broken the 14,500 support, could now find support at around 12,250 levels. Given the political drama that will be played in the next week over the nuclear deal, the market could swing either way depending on whether the Government survives (in which case a sharp rally will ensue) or falls. It could survive either with the Left backing down (unlikely) or Mulayam lending support (more likely, given the right incentives).

The next few weeks should be spent deciding what to bottom fish for and buy. As mentioned earlier, the underlying fundamentals are good and hopefully governance will improve. And yes, spend the time also watching Wimbledon!

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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