Do UPA and SP have a kismet konnection? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Do UPA and SP have a kismet konnection? A  A  A

26 JULY 2008

The UPA Government finally, and convincingly, won the trust vote in Parliament, with the help of the Samajwadi Party (SP), after the Left parties had walked out of the alliance. It seems that there may have been a 'kismet konnection' between the two, for both were at daggers drawn earlier. The market had either sensed the victory or, if one is wont to be cynical, anticipated it, for it had started its climb on Thursday and Friday, continuing it on Monday and Tuesday, before the trust vote on Tuesday evening. It went ecstatic the day after the trust vote, before falling to digest some of the gains. One says cynical because the rise, in anticipation, would have provided some of the funding required for the operation.

None of the political parties covered themselves with glory. The Left, for causing the crisis with a blinkered and outdated view of the world, (and they lacked even a modicum of grace when they petulantly expelled the Speaker from the Party for not having resigned!), the BJP, for its cheap theatrics in displaying wads of notes on the floor of the house instead of, as would be proper, bringing it to the notice of authorities like the Speaker and the Congress, for having created the atmosphere under which the allegation looked plausible.

The BSE sensex went up a whopping 1306 points in the first 3 days, including a Tendulkar-in-form 806 points the day after the trust vote, only to correct by 667 points over the next two days. It ended the week at 14274, for a weekly gain of 639 points. The Nifty went up 119 points to end at 4311.

Though the market has fallen in digesting some of the huge gains made earlier, it is expecting the kismet konnection to now start working towards economic reforms at a fast pace. These were blocked by the Left parties, with their Jurassic mindsets. These could have a huge, and positive, impact on both the economy as well as on the market. There are huge pools of pension money earning pitiable returns, and not allowed to invest in growing assets such as equity. Should a pending bill be approved, to allow them to invest a part, 15%, in equities, the resultant funds flow into the market would be mind boggling.

Similarly, disinvestment of public sector companies has been pending for a long time, again stymied by the dog-in-the-manger attitude of the Left. (If we can't enjoy the bone, we will ensure you don't, either). Governments treat PSU companies like spare cows, to be milked whenever they feel like. IOC, BPCL and HPCL, once called navratnas, or nine jewels of the Government/s crown, have been stripped to death and have lost the ability to function. Before Governments strip and ruin other companies, it would be wonderful if they got out of political control. Not that these companies are badly managed; they have some of the best management teams in the country. Its just that the management is not allowed to take independent decisions. Think of the gains to the economy if returns on capital employed which are under 5%, are brought up, post divestment, to 15% or more!

There are some necessary reforms that would not be politically expedient to undertake nine, or fewer, months before a general election. The whole gamut of petro product subsidies, barely 10% of which reach the intended beneficiary, but which negatively impact PSU oil companies, the environment, the overuse of oil and the pollution impact on health of diesel adulterated with kerosene, needs to be urgently altered. Simply delivering the subsidies to intended beneficiaries in a better manner, using technology, can save the Government a pile of money. Similarly, the fertiliser subsidy needs to be made more efficient. If these two are tackled, the true fiscal deficit would be significantly brought down. It is officially under 5% of GDP but in reality closer to 8 if accounting tricks undertaken by the Finance Minister are corrected.

So, in domestic factors, things look good for an uptrend, at least until the UPA Government decides to call elections. There would be progress on the nuclear deal, there would, hopefully, be forward movement on economic reforms now that the nay sayers are out of the reckoning and, if crude oil prices remain down, inflation would be manageable.

Internationally, the credit crisis remains a cause for concern. Last week Freddie and Fannie got a Daddy and Nanny! Freddie Mac and Fannie Mae are the two gorillas in the US home mortgage business, with $5 trillion of outstanding mortgages. The falling real estate prices led to a collapse of their share prices and worries about their inability to borrow from the market, despite such borrowing being Government guaranteed, hence at a lower cost. In fact, it was because of such a guarantee with the consequent lower cost and higher spread, that both institutions had outstretched themselves and pumped excess liquidity into the system. When their stock prices crashed 40% US Treasury secretary Henry Paulson became their daddy and US Federal Reserve Chairman, Ben Bernanke, their nanny, opening up the Fed window for them to borrow from and park part of their mortgages into. This has averted the crisis for the moment.

The other global concern remains high oil prices. Part of this high price is speculative with lots of money driving up the price, and can be tackled if the US were, e.g. to release a portion of its strategic oil reserves. Over the medium term, the US could open up for exploration, vast areas now closed to it, in response to environmental lobbies. Brazil's oil reserves have grown nine times since it commenced deep sea drilling but US companies are debarred from looking for oil in either of the two oceans adjoining it. In the longer term, alternatives such as shale oil, of which US and Canada have huge quantities, would need to be exploited for oil finds.

The sensex would probably move in the range of 12,500 on the downside to 15,500 or so on the upside. A bottom seems to be under formation. Whether it will be or not would depend on whether we have better public governance and take sensible steps, or if we lose this opportunity to behave properly, and go back to our mindless ways. Politicians should realise that their longevity depends on taking proper steps to ensure long term solutions. The populist, short term measures can only make their term short lived. The electorate understands this; politicians still have their heads in the clouds of power where they lose their ability to think rationally.

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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