Will a spurt of economic reforms drive stockmarkets? - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
Will a spurt of economic reforms drive stockmarkets? A  A  A

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23 JULY 2011


The two leading national political parties, Congress and BJP, are engaging in a you-stab-my-back-I'll-stab-yours contest. After the disconcerting revelations on the CWG scam, the Adarsh Housing scam, the 2G telecom spectrum scam, comes the Karnataka corruption scam. The Lokayukta (Ombudsman) in Karnataka, retired Justice Hegde, has charged Chief Minister Yeddyurappa of this BJP state of corruption in land dealings. Both parties are busy pushing the dirt under the carpet which, with so much dirt under it, is touching the ceiling! This leaves little time for economic policy making, thus resulting in a slowdown and in the Finance Minister admitting that GDP growth would be under 8.5%.

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Perhaps the Government may, in the coming weeks, push the accelerator pedal on economic reforms as a way to divert the public gaze from the sordid scams. It has, for example, speedily cleared the $ 7.2b. investment by BP, to buy a 30% stake in some of RIL's KG6 gas blocks. RIL says that the technical expertise of BP would enable it to restore production in the gas blocks, which had dipped. This can be expected. It will drive the stock, a heavyweight in the sensex, and thus the market.

The group of secretaries has also cleared allowing more FDI in multi brand retail. Investors would cheer this. Another, brilliant, move by Finance Minister Pranab Mukherjee is to induct BJP's Sushil Modi to head the panel to introduce the GST (goods and services tax), a long overdue and necessary reform that, by simplifying indirect tax structure, is expected to add 1-2% to GDP growth! Similarly, there is talk of allowing power consumers to be permitted to freely switch suppliers of power, similar to mobile number portability in telecom. This would ensure that power companies do not unjustifiably hike power rates, with scant regard to customer service.

There are bills which are pending, e.g. on pension reforms and on framing rules under which insurance companies can be listed; a passage of these would similarly enthuse investors. So would the introduction and passage of a Lokpal Bill, unless it is horribly watered down by the Government. This would be a test of the honesty of Prime Minister Manmohan Singh. If one cuts down to the bone, the sole sticking point is whether investigating agencies like CBI and CVC should come under the purview and direction of an independent Lokpal, or whether, as now, they should be answerable to politicians in Government. When used as an instrument for meeting political ends, or to protect the well-connected, investigating agencies fail, and get a bad reputation. If brought under an independent authority such as the Lokpal, the agencies can truly investigate, without fear or favour. This is the crux. But it is highly unlikely that politicians will give up this power to direct investigations; if only the Prime Minister showed as much backbone in this as he did in the nuclear deal with the US, it may happen. A big IF!

The market is moving in a sideways range. This is because whenever there is a global crisis (and there are several like Greece, perhaps the US if they fail to strike a deal before Aug 2, and others yet to erupt), investors flee stock markets, bringing them crashing down like Humpty Dumpties. Whenever the crisis get resolved, as in the case of the Euro 109 b. bailout for Greece last week, the money flows back in. When it does, markets rally. The sensex rallied on Tuesday, up 146 points; backed by net FII buying of Rs 418 crores even as domestic funds were net sellers of Rs 109 crores. The BSE-Sensex ended the week up 160 points, at 18722, whilst the NSE-Nifty gained 52, to end at 5633.

So if there is a flurry of economic reforms, investors, especially foreign investors, will get enthused and cause a rally. After which the next crisis, which could be Spain, or Italy or perhaps even the US, if hard boiled Republicans and Democrats decide to bang their heads instead of meet their minds, and fail to strike a deal. The Economist has a well argued article on the theory of the inevitable compromise and why it is wrong.

One rating agency in the US has already downgraded US from AAA to AA plus, and Greece has been termed in technical default by another.

Yet another policy change, which ought to have come in long ago and may have avoided the telecom scam, is to allow spectrum sharing and trading of spectrum. The whole 2G spectrum controversy has arisen because a certain amount of spectrum has been given at a low rate, for start up operations. The decision to price it low was a correct one, in order to cut the cost of telephony thus ensuring its spread. It has succeeded because there are now over 750 m. mobile phone users. There used to be a time when having a land line telephone was a privilege obtained after a long wait or a friendly connection in Delhi. No longer.

Yet the lower price of spectrum made it possible for successful allottees of it to become squatters. By merely selling the rights to spectrum (or the company that owned it) several persons became rather well off. What if there was no need to sell spectrum, because technology now allows companies to share it?

This is similar to ATM machines in banks or to telecom towers. Initially all banks boasted of a large network of their own ATMs, as a means to attract customers to open accounts with them. Over time they realised the wastage of duplication and began a process of integrating ATMs so that it is now possible for any bank card holder to use any other bank's ATM, on payment of a nominal fee. The same thing happened with telecom towers.

Telecom companies similarly acquire more spectrum than they need, in order to cater to peak traffic. During non peak hours, there is low usage of spectrum, called white spaces. If companies were granted the right to use spectrum (not own it) and were also allowed to trade excess spectrum, the tussle for ownership of spectrum would be obviated. This column has long been advocating exploring the possibility of trading spectrum. This would work like power trading in which a temporary shortage of power in one state can be fulfilled by a temporary excess in another. The Government is only now thinking of allowing spectrum sharing and trading.

The US Government had done this in 1996, when it passed the Telecommunications Act of 1996. Why does it take our Government 15 years to make the same mistakes, instead of studying those others have made before it?

The Government can also take an easy decision to show its commitment to economic reform - announce the privatisation of Air India. There is absolutely no reason why it should need to own an airline. None! Except free travel for VIPs whenever they have the urge to. The airline has too much debt which it can never repay. Yet the Government is thinking of infusing Rs 1200 crores as additional equity into it.

This impacts its competitors. Kingfisher Airline does not get the benefit of equity infusion using taxpayer's money; as a result it is unable to pay its fuel bills and, last week, HPCL refused to supply it fuel. Flights must have been cancelled due to this and passengers inconvenienced. Jet Airways has announced a quarterly loss of Rs 123 crores.

Corporate results were a mixed bag. It is interesting to contrast some bank results. Union Bank showed a 22 per cent dip in net profits for the June quarter, due to higher provisioning for non performing assets. However, Axis Bank showed a 27% increase in net profits due to lower provisioning for NPAs, Yes Banks profits were up 38% for the same reason and Kotak Banks were also up 27%.

So, watch out for signs of activity by Government on economic reforms. If they do press the accelerator on this, the rally can continue, for at least another 1000 points on the sensex. If they continue dithering and playing the you-stab-by-back-I'll-stab-your game, the markets will slide. That's the long and short of it.

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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11 Responses to "Will a spurt of economic reforms drive stockmarkets?"
S.K.DAMANI
Jul 23, 2011
Sir, the babus and the minister raja had actually studied the US Act properly, found the ways and means to find how huze monies can be made. And they went about it. It is a different thing that they may ahve to face some difficulties for a year or two, but thereafter enjoy the more than 400crs. of monies.Two years as ministers and provisions for the next Seven genrations. Not Bad.
Thanks
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V.Radhakrishnan
Jul 23, 2011
A good write up on the need to tone up or speed up the economic reforms.If there is an indication of good economic reforms and improvement in infrastructure activities it will spur up industrial and agriculture production which will in turn drive the stock markets to greater heights.At the same time the ugly problem of corruption in high places and in Government offices should be addressed and stern law enacted to root out the menace expeditiously. Kindly inform me by email whether Equity master endorse my views. Regards Like 
praveen Bhargava
Jul 23, 2011
This is a time for economic recovery after the recession period of 2008-2009 in India.The process to speedup the economic reforms will further boost the process of economic recovery in the times to come.This eco-recovery will cover all the factors of economic parameters including infrastructure,Manufacturing,banking as also stock markets.It will increase demand in all the sectors and will result in growth every where soon.
We should not over look the fact that the present coalition government has only limited power to act and make economic changes for the betterment and has no free hand to act fast and go for economic reforms swiftly.We have to make economic reforms in this light only.
The DTC and GST will further give a boost in economic reforms and give somewhat a steady growth for stock market.The government will generate revenue in the form of taxes with very little chance of malpractices in all the economic activities.
The economic reforms process around the world after 2008 depression is still persist in parts of Europe as well as in USA.If the situation in these areas will further deteriorate then it will have bad effect in our economy and in that situation the spurt of economic reforms will not help the stock market to drive upward.
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anupam garg
Jul 23, 2011
Amazing article as xpected of Mr. Ajit

Though i cldnt interpret anythin outta link to the theory of inevitable compromise...d decision taken by aug. 2 doesn't matter...its gonna b a sad endin of a gr8 economic tale

d idea of tradin of spectrum is highly sensible...but sensibility can't b understood by senseless, can it?

Like 
Sundaravaradan
Jul 23, 2011
Hi,
In my opinion, if two criminals adopt the method of 'You-stab-my-back-and-I-stab-your-back', I think it is very good for the common people, in the long run!
(If any member of ANY party, violates law, they should be punished, in the interest of the citizens.
It is Good!)
Like 
PM Menon
Jul 23, 2011
Air India is a fit case for euthanasia. Govt cannot and should not run commercial enterprises. It should govern and ENABLE A ENVIRONMENT FOR HEALTHY COMMERCE.

Similarly spectrun should be a slab rated service provided by the Govt. Telcom Cos can use any spectrum on pay as you use basis. cos that dont use the spectrum should be charged more. This way the spectrum ownership remains with the Govt. Competition will be keen and consumer will benefit.

Development as so far is a bit of a farce. For whom is this development? There has to be inclusive development with focus on agriculture, food security, energy efficiency, basic education, basic health etc. The hyped corporate development will automatically follow, albiet at a much lower cost.We need more basic health centres and health care than multi-speciality units. If the former is good the latter wont be needed.

Loppal?? Policing the police?? Then a super Lokpal?? Why all this. get a Lokpal sitting in each high court and in supreme courts who will do the background work for the Court on corruption and related cases. They will have the agencies not doing their job like police/CBI etc on notice and individual officials not doing their job held responsible and punished by the courts.Remove the fog cover of anonymity that babus/police etc hide under and hold individuals named and punished. the system will automatically work.
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R.THIRUMURTHY
Jul 23, 2011
Comments in Equitymaster on 23rd July 11.


(1) “Perhaps the government may, in the coming weeks, push the accelerator pedal on economic reforms as a way to divert the public gaze from the sordid scams”.

No way the public gaze can be diverted. The highest court is monitoring the scams. That should do. Economic reforms, or, better still, the second tranche of economic reforms, could be a win-win for India and the rest of the world.

(2) As for scams and scamsters, this is the season of massive cleanups in several parts of the world. Details are redundant. The TV tells it all graphically. There is going to be a global synergistic sloughing of our collective skin that just won't do as we keep growing, as we have to keep growing. There's no looking back.

(3) As regards the Lok Pal Bill, I am with you when you say the PM should stake his job on it as he did for the Nuclear Bill. He may do just that. Plenty other decent guys may join him and critical mass may be reached, if not immediately at least in the near future.

Who knows? The PM may out-Anna Anna and present a draft for due process that may stun us all. The logic could be 'this is the best draft bill against voluntary submission by all the three pillars of our democracy to scrutiny and investigation; if you have something more to offer, you are welcome”.

Actually, I think we are like Columbus or Magellan. The voyage is about to begin. The voyage of self-propelled cleanliness. Let's hope we'll make it.
Like 
H.Ganguly.
Jul 23, 2011
After quite sometime, got a thought provking article to read. It is likely to act as an eye-opener towards 'where are we going' and 'how it can be corrected'.
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sushil banthia
Jul 23, 2011
Just a wild thought

The Govt. alongside its corrupt servants should also come heavily on the Businessman giving the bribes ( DB realty / Unitech/ Reliance promoters behind the bars ). If the Govt.is able to create enough fear amongst the citizens against bribery, I guess the monster can be more effectively
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Sthithapragnjawo years ago, the gr
Jul 23, 2011
Jawahar Mulraj(J M) Ji,

I read your erudite article brimming with brilliant futuristic vision indeed !

I wholeheartedly concurr(In fact I was also in the past few years having more or less similar thoughts as to why the constantly loss-making PSUs are given generous bailout financial packages merely for the sake of VVIPs to have free sumptuous lunches and fortified with a first class cabin flight to choicest foreign locales
on board the State-owned carrier ??) on one pretext or the other?

If only Your artcile had appeared a couple of years ago, the great spec.scam would have been obviated ??'
I hasten to conclude J M Ji !!
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