IAEA clears 1-2-3, will Manmohan go 4-5-6 on stalled economic reforms? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
IAEA clears 1-2-3, will Manmohan go 4-5-6 on stalled economic reforms? A  A  A

2 AUGUST 2008

The BSE sensex crashed 557 points the day RBI Governor, YV Reddy decided, in a bid to tame inflation, to hike CRR 25 basis points (quarter %) and by increasing repo rate, at which it lends to banks, by 50 basis points (twice what everyone expected). It didn't want Reddy to become a CRRpati; the hike in CRR sucked some Rs 9000 crores out of the system. The hike in the repo rate has led to banks like ICICI and HDFC hiking home loan rates by 75 basis points.

The market, however, quickly recovered and, by end of week had climbed after the IAEA unanimously cleared the 1-2-3 nuclear agreement, which will allow India to have civilian nuclear energy as an option plus pave the way for transfer of a lot of hitherto denied technologies. The market is hoping that, bereft of the millstone of Left parties whose heads shook laterally rather than vertically whenever sensible and necessary economics were proposed, the newly found vertebrae of Prime Minister Manmohan Singh would result in faster economic liberalisation.

The BSE sensex thus added 381 points over last week, to close at 14656. The main contributors to the 381 point rise were RIL, with 158 and Infosys and HDFC with 62 each. The NIFTY gained 101 points to end at 4413.

The RBI Governor, as the monetary authority, is trying to control inflation by tightening money supply. He hopes to bring down inflation to 7 % (it is just a tad under 12% now). In this there may be a clue to the next elections. The ruling Government would obviously wish to have it when it feels inflation would be most benign, as this is a decisive factor.

It is the Governments own spectacularly foolish pricing of petro products that is to blame for much of our current economic malaise. Prices of most products, including petrol and diesel which are not used by those below poverty lines, are subsidised. As Subir Raha, former Chairman of ONGC, says, 'we as a nation do not respect the value of energy because the costs are drowned in subsidies' Thus far it was the PSU energy companies that were bearing the brunt of these subsidies; there are now demands that private sector companies should also share the burden through a tax on windfall gains.

The PSU energy companies are compensated by the Government through an issuance of oil bonds, thereby bequeathing to future generations the costs of profligacy in usage by us. The PSU companies need to sell the bonds to generate cash to continue in business, but there are few buyers and at a steep discount.

The pilferage of power (euphemistically called transmission and distribution losses) has resulted in a huge power shortage and industry/commerce use (subsidised) diesel to counter it, causing severe shortage of diesel. Mr Raha makes some sensible suggestions, including mandating EU specifications for diesel engines, re-engineering of all barriers for tax collection (toll booths) for electronic collection, using steam locomotion for long haul by railways etc.

In short our political leaders need to tackle problems at the root and take steps to eliminate wastage instead of symbolic and meaningless gestures such as papering over the crisis through issue of bonds or by penalising efficiency. Can politicians look beyond partisan politics to the welfare of the nation? Therein lies the answer to the continuation of the bull run.

Corporate results for the second quarter ended Jun are not too bad. ONGC showed a 44% jump in net profit to Rs 6636 crores; HDFC Bank a similar % hike to Rs 464 crores, L&T up 33% to Rs 502 crores and real estate company DLF showed a 22% jump to Rs 1863 crores, despite falling realty prices.

Investors must take care to factor in costs which are as yet not fully accounted for, when analysing results. Customer care and after sales servicing is still pathetic in India where manufacturers very rarely accept costs associated with faulty product or service. This is going to change, as we globalise and as consumers start to demand what is their right. For example, in the telecom space, a long talked about MNP (mobile number portability) system is being partially put into place. Under MNP, a telecom customer owns the number instead of the company. So, if he is disgruntled with poor service, he can switch the operator without losing the number, after paying a cost for such transfer. It is only under MNP that we will see true competition for customer retention; hitherto there is competition only for customer acquisition.

For telcos this will mean higher outlays to keep customers satisfied and this would impact profits. The experience of different countries varies in a post MNP regime. In some, such as Netherlands, there was a high degree of migration with over half the consumers opting to switch network providers. In others, like Japan, the migration was in low single digits. This could be due to different reasons. Japanese company NTT DeCoMo had given free email space as a hook to its subscribers which could, perhaps, explain the low migration. None of the Indian telcos have shown this marketing savvy.

The telecom gorilla, BSNL, is set to enter the market after its Board has cleared a $ 10 b IPO. This would happen whenever management considers the conditions to be right.

So what can investors expect from here? The Government looks set to push for stalled banking, insurance, pension and other reforms when Parliament convenes in mid August. Pension reform would provide a spur to the market as it would see huge money flowing into equity to give the funds a better return. If the Government also manages to push through banking reforms allowing it to hold less than 51% in a public sector bank, that would be another bullish factor. There is absolutely no reason for the Government to hold majority control in more than 2 or 3 banks, including SBI; there would be no danger to the financial system if it were to dilute its holdings, or even get completely out of, others. Stocks of PSU banks should be watched were the Government to allow dilution below 51%.

So the market may rally in anticipation of 4-5-6 economic reforms. Thereafter the corporate results for the Sep quarter would start coming out in mid October and these should be impacted by the interest rate hikes. Also, if the Government were to target elections in Q1 of calendar 2009, the announcement would be made early Oct. So the market could dip then. The behaviour of oil prices would also play a role. The US has slipped into recession and that would be a worrying factor later.

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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