Words speak louder than actions - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Words speak louder than actions A  A  A

13 JULY 2013

Global stock markets rose after US Federal Reserve Chairman Ben Benrnanke talked them up with a statement that the Fed is not looking to take its foot off the QE pedal soon. QE, or quantitative easing, is the effort of the Government to step in, with monetary stimulus, when the private sector is not providing it, for economic growth. His foot would come off when employment rises at a faster clip. Sooner, or later, though, the foot will have to start coming off, and that's when the markets would smell the coffee.

The world's investors have become addicted to such stimulus, and the promise of a continuation of it led stockmarkets to rally globally. The BSE-Sensex added 381 and 282 points in the two days subsequent to Big Ben striking the monetary gong, and ended the week at 19,958, for a weekly gain of 462 points. The NSE-Nifty gained 141 points over the week, to end at 6,009.

US stockmarkets have been hitting new highs, as the US is closest to an economic recovery, thanks to its more flexible policies. The US market sentiment was aided by good results from top US banks, JP Morgan Chase, and Wells Fargo, but results of UPS, the largest package delivery company in the world, were disappointing. It is the banks that have benefitted most from QE programmes, making more money out of investing the money than from lending it to companies, for industrial projects, or to consumers, for consumption.

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In India, the earnings season was kicked off by a better than expected performance, for the June quarter, from Infosys. Its revenue grew 2.7% in $ terms and 7.8% in rupee terms, thanks to the falling rupee. However it, and other IT companies, face tough times ahead if a pending bill to hike visa fees in the US is passed.

In India the UPA Government continues its push with its effort to set up a huge welfare state, with no inkling on where the money will come from. The Food Security Bill has been brought through an ordinance, rather than having it debated, as it ought to be, in the monsoon session of Parliament.

The Food Security Bill promises to provide more cereal. But, as Swaminathan Aiyar points out, in his July 7, 2013 blog Swaminomics, the pattern of food consumption has changed, and people are consuming less cereal and more of other, superior food, including fruits and vegetables. He says "In 2004, only 2% of Indians said they were hungry any time of year. These are the people needing food security, not the middle-class. However, while hunger is limited, malnutrition is widespread. People need additional iron, vitamins and proteins. But the Food Security Bill targets only cereals. "

The Bill, if properly debated on the floor of the Parliament, would have brought out the fact that only 2% of Indians need food security, and not the 70% the Bill seeks to cover. It seems that this is another pre-election giveaway, with the Congress dipping into Government coffers to get political benefits for the party.

The Government is now embarking on similar bills for edible oil and for pulses.

It is only through collective pressure that foolish policies can be countered. The Government had recently sought to introduce preferential market access for the telecom sector, which would compel them to source a % of their requirement locally. Never mind if there weren't enough local suppliers in certain products. It was only the resultant furore from some 37 international trade organisations that made the Government shelve the idea. But why should it be so? Why should Government not think through the consequences of its policy pronouncements? It has enough brain power on tap to do so.

Similarly, in the case of transfer pricing, the IT Authorities had added some Rs 70,000 crores (up 57%) by virtue of disputes over transfer price computation. The Rangachary committee, set up by the Prime Minister, to look into the grievances of transfer pricing relating to Development Centres, has clarified the method and, hopefully, averted further disputes. Again, why should the Government not discuss vexatious issues and resolve them amicably and practically, instead of waiting for the problem to become unnecessarily bloated?

Trade unions, often politically backed, have raised disputes in Bajaj Auto's Pune plant and have struck work. The umbrella Union has 89 affiliates in the Chakan and Chinchri -Pimpwad region, and the fear is that the agitation may spread. The result is likely to be more automation and this would be harmful to employment generation.

This is to be, again, seen in the context of the inexorable rise in shareholder capitalism. Institutional investors now command more assets than the banking industry and the larger ones more than countries. Blackrock, the largest asset manager, has AUM (assets under management) of $ 3 trillion, one and a half times India's GDP. These investors exert pressure on corporate managers to continually improve quarterly performance. Automation would help them do that.

In corporate news of interest, the Finance Minister had suggested that the doubling of gas prices, to $ 8.4, wef April 2014, should not be applicable to the shortfall in gas after production from the KG6 basin declined in Reliance's field. However, Petroleum Minister, V Moily, said there was no such plan to make it applicable only after the shortfall had been made up.

The Indian stock markets, as others globally, was boosted by the continuation of monetary steroid by the US Fed. We are now running into headwinds. First will be the headwind of the monsoon session of Parliament, which would see some dark political storms, not least in the aborted debate over the Food Security bill. We will then see the unearthing of more scandals in the run up to the 2014 General elections.

Looking to all this, and to the fact that the money tap will ultimately need to be shut, caution is advocated.

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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3 Responses to "Words speak louder than actions"
Kulwant Raj
Jul 14, 2013
"Sooner, or later, though, the foot will have to start coming off, and that's when the markets would smell the coffee. "............ "Smell the coffee?" Do the markets appear to be asleep now? PLEASE improve the quality of your English. Like (1)
surajit som
Jul 13, 2013
let me add a few more words. ref Aiyers "superior food " . we have this song : dal roti khao ,prabhhu ke goon gao " . lets rewrite it as follows: "cola ,beef khao ,Aiyer ke goon gao!!!" Superior food !!! Like (1)
surajit som
Jul 13, 2013
what are the superior foods according to Aiyer? they are beverages, eggs, fish, meat, fruit and nuts. Eat as much Coca Cola ,beef hamburger , steaks, ham etc as you can !!! dont eat rice ,wheat ,pulse etc . they are all "inferior" foods !! Hmmm. then vegetarians -like Gandhi-ate "inferior" food all their life ? may be they were "inferior human" beings as well!! Cows, elephants inferior to Vultures ,Hyenas ,Lions etc !! our Sadhus are eating inferior food all the times(most of them are vegetarians).only those who are eating/drinking Coca Cola ,beef hamburger are eating "superior
" food" !!!

what about sects like Jains ? what about Vegans ? why not send them to concentration camp ? i am sure Aiyer can come up with an "economical model " to finish the job !!!

is it ecologically feasible ? just imagine seven billion people(and increasing) in this planet gorging on red meat,fish and various colas. where the extra money will come from to eat such expensive food ?

of course schemes like this is politically motivated. much of the money will end up in the pockets of the rich -the politicians ,babus,miidleman,contractor etc . but to use it to support meat eating ,cola drinking is too much .
Like (1)
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