Abhinav Bindra hits target, Chidambaram doesn't - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Abhinav Bindra hits target, Chidambaram doesn't A  A  A

16 AUGUST 2008

Shooter Abhinav Bindra got India, a nation of over 1 billion people, its first ever Olympic gold medal in an individual event, by consistently hitting a target 30 meters away. Finance Minister P Chidambaram is showing equal consistency in missing fiscal targets, even whilst claiming to be hitting them, as per the FRBM Act. He does this, whilst ostensibly remaining within the fiscal targets set under this Act, by off balance sheet payments for subsidies on fertilisers and petroleum products. This is something which he, as Finance Minister, would have come down heavily upon if companies were to do the same thing in order to evade taxes.

On Independence Day, the Government announced a further dollop, hiking pay of some 5 m. Government employees by 21%, more than what the Sixth Pay Commission had recommended, hoping, perhaps, to get those votes in the forthcoming elections. This makes it even harder for the Finance Minister to contain the fiscal deficit, despite his claims, and even likelier that S&P will downgrade India's rating. S&P, you see, does not need to be hoodwinked by off balance sheet issuances of bonds. The Finance Minister prefers off balance sheet bonds, as he doesn't need to face questions in Parliament about fiscal profligacy.

Issuances of such bonds only postpones, to future generations, a liability that belongs to ours. This is going to have disastrous consequences in several ways. The BK Chaturvedi committee on petroleum sector reforms has warned that the three oil marketing companies are in such dire straits that they would not be able to operate and to provide us with petrol and diesel, unless urgent steps are taken now. Of course, a severe shortage of diesel, used by trucks to ferry goods, would seriously impact GDP growth, which has already been scaled down to 7.7% for 2008-9.

The Chaturvedi committee has recommended that prices of petrol be hiked by Rs 2.5/litre every month, till March 2009 and of diesel by Rs 0.75/l every month, till 2010, in order to avert a crisis, as well as to prevent the over issuances of oil bonds. This recommendation has not been accepted, as it is perceived to be political folly in an election year. This is foolish, for Indian voters have learnt to reinstate State Governments that have shown themselves to be administratively efficient and which explain to the electorate the compulsions of taking tough decisions.

The petroleum pricing policy is also foolish because, by subsidising petrol (for which no rationale of helping the poor exists) India is acting in a globally irresponsible fashion. Given the fact that the world, which consumes 1000 barrels of oil every second, is running out of the easy-to-find variety of sweet light crude, encouraging its overuse through subsidies is not acting in a globally responsible manner. It is only postponing the inevitable. America is facing the reality now; after petrol prices were raised, sales of SUVs have plummeted and its large automakers, GM and Ford, are in big trouble (Chrysler already was). The inventory of on road SUVs, and the plants to make them, would start to waste.

It is also foolish because the oil marketing companies, being asked to bear the brunt of the subsidy, are 'compensated' by issuing them illiquid oil bonds and banks are being arm twisted to buy the bonds, in order that they continue operations. This impacts availability of cash for other borrowers, and increases costs. SBI has raised its PLR (prime lending rate) by 1% last week and its deposit rate by 0.5- 0.75% (thereby widening spreads).

Interest rates are likely to go up further, as inflation figures for the week ended Aug 2 show it at a 16 year high of 12.44%. This would negatively impact the stock market.

It is interesting to see how Government reacts to recommendations of the different committees they set up. It did not see merit in a commonsensical suggestion of increasing in measured steps, prices of petrol and diesel that have no justification for being subsidised, but did see merit in going far beyond recommendations of the Sixth Pay Commission in hiking pay for its employees. Its nice to spend other people's money.

The foolishness of petroleum product pricing also manifests itself in the current account deficit which at 3.2% of GDP, is at its highest level and more than twice the 1.5% of (a lower) GDP last year. This weakens our currency and also impacts our rating.

Forces of globalisation impact all countries, and it is increasingly difficult for Governments to control. In capital markets, e.g., regulators banned short selling, and the home grown 'badla' system which permitted it for retail investors, on the grounds that it would be dangerous for their financial health. However, by so banning it, all that has happened is that the market for it has gone overseas. Using PNs (participatory notes) issued by FIIs, large players are enabled to borrow stock in overseas markets, mainly Hong Kong, and short sell here. The pain of the consequent fall is equally felt by the retail investors; so they are in no way protected by its ban. In fact, derivative markets have created larger problems through more complex products, as the subprime crisis has shown. Why not think of allowing short selling to retail investors in India too, in a practical way. The current stock lending set up is clearly not working. Nor is the options market, which misprices the option to leave little on the table for buyers.

This is because the weight of global money is far too great. The stock of financial assets is probably 8-10 times the combined GDP of the G7 countries. The top 8 asset management companies manage more than $1 trillion each, which is the size of India's GDP.

Several sovereign wealth funds are knocking on SEBI's door for allowing access to Indian markets, including China, Korea and some Middle Eastern countries. These are funds owned by Governments of countries who wish to invest them outside for purposes of both safety as well as financial sanitation. This would be a bullish factor for the Indian market.

Another bullish factor would be a passing of pension reform bill in the monsoon session, which would allow transfer of large funds from fixed income market, where they are unable to earn a return enough to meet rising liabilities, to the equity market where, hopefully, they would.

The Government is taking steps to make it easier for foreign companies to tap Indian savings by issuing IDRs (Indian Depository receipts). Companies wishing to establish operations in India and needing Indian rupees would do so. This, however, would increase supply of new paper and would tend to be initially bearish.

Another bearish news would be a continuation of the situation in J&K, including for its impact on tourism. India's GDP in 2008-9 is now estimated at 7.7%, lower than 9.1% in 07-08. Its agriculture growth at 2% is less than 4.5% last year and its industrial growth at 7.5% is also lower than 8.5% last year. The good news is growth in invisibles, including tourism and repatriation, which is now at 7.2% of GDP versus 6.2. It is this that allows the foolishness of petro pricing to continue. Anything that slows down tourism, such as escalation in internal tensions, would damage this silver lining.

The BSE sensex, which climbed 336 points on opening day, declined continuously thereafter, on news that the index of industrial production grew at 5.4% in July, lower than 8.9% a year ago. What next?

If the Government starts, in the monsoon session, to fast track economic reform, it is likely that the market will rally. Were the sensex to go above 15,500 level with good volume, we could see a very sharp upmove. If, on top of that, the Government were to see that it cannot continue forever to foolishly party with other people's money, and were to take steps to correct the lunacy of its petroleum product pricing policy, the rally would be sustainable. Else, the price of folly would have to be paid, as it always is, and the market would subside. Will Mr Chidambaram take some lessons on hitting targets from Abhinav Bindra?

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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