Is the worst over for the Indian economy?

18 JULY 2009

India and China seem to be having economic growth that is the envy of the world, and it is this that is attracting global money into our stockmarket. Last week foreign investors were net buyers on all days and so were domestic mutual funds, barring Monday. Now, the Government is providing huge spending support to keep GDP growth running at a fast clip, and has a plan to borrow over Rs 4 lac crores in order to keep the spending pump primed. In essence, the Government is hoping that this pump priming will get the economic engine revved up and it will then collect enough revenue to be able to pare down its debt and reduce its fiscal deficit, which has gone to 6.8% (after fudging). So is everything hunky dory?------------------ Don't Miss! ----------------------
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Corporate results for the June quarter would seem to suggest things are improving. TCS's net profits were up 22%, Bajaj Auto's by 67%, HDFC Bank's were up 38% and Axis Bank's by 70%.

What the fiscal and monetary stimulus also does, besides stimulating economic growth, is to go into assets. So the danger is that if the economies of both India and China do not revive, asset bubbles can be formed, including in stockmarkets. That is the danger, albeit not an immediate one, that investors must keep one eye on.

Another eye would need to be kept on the monsoon, which is doing very poorly in the granary states of Punjab and Haryana. Should it not pick up soon, it would affect sowing and hence agricultural growth. It would also mean that the Government would have to borrow more than already planned for, which would further crowd out private sector borrowing that would emerge with an economic pick up.

So the stimulus provided by the Government, combined with the enthusiasm by foreign and domestic investors, would propel stock prices upwards. This can sustain, however, only if there is good governance. Recent events have shown that public governance is very poor.

This is evidenced by two accidents at the Delhi Metro Rail project, for which the CAG has pulled up the Corporation for lowering quality check standards in order to speed up the project for completion before the Commonwealth Games, or by the likelihood of the Chandrayaan mission to fail to reach the moon because of a defective sensor, or by the asinine design of the Bandra Worli Sealink which terminates at right angles to the road, necessitating a traffic signal. All these indicate the sort of 'chalta hai' (its okay) attitude to planning and disasters which ensure their recurrence. Not signs of a mature democratic government planning for the future of its people, rather than the future prosperity of its ministers.

The Government's policy of accepting the lowest tender, unmindful of quality of work, would need a serious rethink after the Delhi Metro accidents. Contracts for roads in India are also allotted on the same basis and, if the lowest bidder gets the job, he is sure to cut corners. Witness the abysmal conditions of Indian roads, the cost of which is borne by the users. Several countries award contracts to build roads alongwith the obligation to maintain them for a certain number of years. When the obligation to maintain is imposed on the successful bidder, he would ensure its quality. Why can't we do this?

India is embarking on a Rs 1 lac crores road building project. It would need foreign investment. There are huge pools of global money looking for such projects, which provide an annuity stream of income from tolls. The returns are lower, but are steady. In order to attract such long term money, it would be necessary to develop a proper debt market and to ensure stability and consistency in policy making and in taxation. With good governance on the part of Government, nothing is unachievable! There is such a shortage of almost anything that we can sustain double digit economic growth, obtain the funds to allow it, and enter a virtuous cycle of growth. The question is of good governance. At a time when the main opposition party, the BJP, is in utter disarray, the Government can, if it wishes, go ahead with reforms at a much faster pace.

Of the borrowing planned by the Government, a large chunk (Rs 2.99 lac crores) would be done in the first half of the year. The Government is separating the function of its debt management from RBI, so that RBI is not in a position of conflict to reduce interest rates (as manager of Government debt) and to increase them (to control borrowing and inflation). As long as RBI's authority as monetary controller remains independent and unfettered, this would be a good move. If such segregation is the first step towards undermining RBI authority over money supply, it would be yet another signal of awful governance.

In corporate news of interest, the Government has stated to the Supreme Court that gas is its property, and not that of Reliance Industries, who is the operator, and who, not owning the gas, has no right to all ot it, or to price it, without Government approval. The fact that it took the Government 4 years after the MOU between the Ambani brothers, is another example of poor public governance. The Supreme Court is to hear the case between RIL and RNRL on Monday.

Sterlite Industries successfully did a $ 1.5 b. ADS issue, and Suzlon is also planning a big one. There is appetite for Indian paper. In the IPO market, Mahindra Holidays debuted at a significant premium over its offer price of Rs 300, thus whetting investor appetite. The next one, in August, would be the NHPC IPO which, if sensibly priced, as is expected (the issue of Power Grid was sensibly priced to leave money on the table for investors), would be well received. That would be followed by a more attractive issue from Oil India.

The BSE-Sensex rose 1240 points, to 14744 last week, making the Budget a forgotten issue. Significantly all 30 sensex stocks rose! The main contributors to the 1240 point rise were ICICI Bank (173), RIL (167) and HDFC (111). The NSE-Nifty rose 371 points to 4374.

The rally should continue in the coming week. Pray to the God of rain and buy!

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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6 Responses to "Is the worst over for the Indian economy?"

Rajesh Patel, Ahmedabad

Jul 25, 2009

What about Indian Stock Market for short-term.


Somnath Kumar

Jul 22, 2009

Hi Mulraj,

I am an avid reader of your articles, but your recent article left a bad taste in my mouth. You made a comment "Recent events have shown that public governance is very poor. This is evidenced by ..... the likelihood of the Chandrayaan mission to fail to reach the moon because of a defective sensor.......... All these indicate the sort of ‘chalta hai’ (its okay) attitude to planning and disasters which ensure their recurrence. Not signs of a mature democratic government planning for the future of its people, rather than the future prosperity of its ministers.

Pray tell how does the failure of a sensor in Chandrayaan reflect the 'poort governance' in the country? The sensor failed because of excessive radiation from the sun probably due to a bigger than normal solar flare which can never predicted. And for your information Chandrayaan has reached the moon and orbited it several times too and send more that 70,000 images back to ISRO. This itself is a record among all moon missions. The Moon Impact Probe (a part of Chandrayaan) has landed on the moon too with a picture of India's flag on it.

In a mission as critical as Chandrayaan, the internal systems work with a 99.98% reliability. There are backups for all major systems and workarounds planned should anything not work. The work of the sensors are being done by 'gyroscopes' and they will suffice. ISRO chief has already said that they have got all the information they wanted and the mission is a success. The extra fuel still in spacecraft will be used to repeat many of the experiments or retake many of the photographs.

Please get your facts right before giving such generalised comments. A person such as you must not fall prey to the tabloid style newspapers and their recent trend of sensationalising events to increase their business.



Jul 20, 2009

Mr.Mulraj has got a very lucid style of writing.very informative article indeed.


Amol Sheogaonkar

Jul 20, 2009

Nice article again. I believe the governance is going to be an issue for ever till the nexus of politicians, decision makers, law enforcement agencies and business exists. How can we expect a good governance when the people possessing power, are friends and families of the vendors for govt orders?



Jul 19, 2009

good article,but... if not for the lowest bidder what should be the guideline for awarding projects, how is it done in the other parts of the world?


suresh mendaa

Jul 18, 2009

it requires at least one more year.

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