Will a spurt of economic reforms drive stockmarkets?

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%. ----------------------------- A Good Time To Sell Bad Stocks -----------------------------

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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?"

Narayana

Jul 23, 2011

Is is very intresting to know about the facts that usually we can not find the same in any news letter. Thank you Straight from the hip for the information.

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