Ready for a bounce?

20 AUGUST 2011

The Indian stockmarket has tested the 16,000 sensex (and the 4800 Nifty) mark and should be expected to bounce early next week. One qualifies with 'should' only because of the way the Government has mishandled the Anna Hazare protest, by arresting him thereby turning a protest into a movement. It will pay a heavy price for the mishandling. Should the heavy price be the resignation, under frustration, by the Prime Minister, the expected bounce would be instantly deflated. Perhaps the sliver of silver lining for the Congress is that the opposition BJP has not put forward its leader; were it to do so, things would get politically interesting.

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There is talk of a Lok Sabha MP, perhaps Varun Gandhi, introducing the Anna Hazare version of the Jan Lokpal bill, to give the lower house MPs a choice versus the Government version of it, which is toothless.

There are disconcerting provisions in both versions and one hopes that sense prevails and a fairly comprehensive version is passed, before things get politically out of control. If an MP introduces the AH version as a private bill, and the dust settles, the expected bounce would come.

It would be a short term bounce, though. There are still other global problems to contend with. The Eurozone area is still weak, and countries other than Greece are likely to be in need of a bailout.

Economic growth in the Eurozone is sclerotic, which can affect companies which have a high percentage of their turnover coming from it. Tata Steel, e.g. has 56% of its turnover coming from the Eurozone, Tech Mahindra 50%, Suzlon 43%, Dr. Reddy's 36 and TCS 27.

The impact of natural calamities and accidents on economies is also interesting. After the tsunami, bowing to public protests, the Japanese Government has ordered the shutting down of nuclear power plants. In order to supply electricity, TEPCO has re-started old conventional power plants, powered by coal. The resultant increase in carbon gas emissions means that, in the period 1990-2013, Japan would actually increase its carbon emissions by 16%, instead of decreasing it by 6%, as it has committed to, under the Kyoto protocol. The fresh demand for coal and oil from Japan is also pushing up global prices. Or take Cyprus. Thanks to an explosion caused by accident, thanks to seized Iranian munitions stored in a naval base, the power plant supplying half the nation's electricity has been destroyed. This means there will be no GDP growth. Now banks in Cyprus (a banking haven) have assets 7 times its GDP! They are heavily exposed to Greek assets so if Greece defaults, Cypriot banks will crumble. The Government obviously cannot support a sector which has assets over 7 times the GDP!

Coming back to India, the political class, which blithely turns a blind eye to corrupt practices of its own kith and kin, decided to make a show of seriously tackling corruption, by impeaching a former Calcutta High Court judge. He has been proven to have misappropriated Rs 3.3 m. a decade ago. Yet, the day Anna Hazare was arrested in an anti graft movement, came news of the likelihood of Hasan Ali getting bail. Hasan Ali has been charge with evading taxes of Rs 330 b. or 10,000 times the misappropriation by ex Justice Sen. The action taken against a corrupt judge is welcome and one hopes the same stringency is applied to corrupt politicians and babus.

If, under such public angst, the Government wants to show it is keen to tackle the scourge of corruption in high places, it should do two things.

One is to tax agricultural income, giving farmers a tax exempt limit say 3 times the limit of non farmers. Anything beyond that would be taxed at normal rates. Fake agricultural income is the way politicians and bureaucrats and industrialists whitewash black money. Stop this farce!

The second is to make it compulsory for all donations to any politician or party to be made against a receipt, with a proper verification of identity (passport, ration card, rent receipt, driver's licence etc). If any such identity is later proven to be fake, the recipient would be fined 1000 times the amount.

Simple solutions, if there is a real desire to tackle black money and corruption.

Warren Buffett has similarly proposed a simple solution to the fiscal deficit problem, one that can, and should, be applied in India as well. He has proposed that if, at any time, the US fiscal deficit goes above 3% of GDP, all sitting Congressmen would become ineligible to stand for the next election. Beautiful!

Doing things the proper way will also entail a cost, and lead to either a higher charge for services/products, or to a fall in margins, which the market has not fully factored in. For example, the competition commission last week slapped a fine on real estate leader DLF, for clauses it felt were unilaterally and unfairly imposed on buyers. Proper customer service, generally absent in India, will impose costs. Another builder in Pune was asked by the court to pay the current market price for a similar flat to the one he delayed giving possession of. Almost all service providers such as mobile phone companies, credit card companies, internet service providers etc have outsourced their customer care to agencies, without any scope to escalate a complaint to a company executive, if the customer is dissatisfied.

Last week the BSE-Sensex dropped 697 points to end at 16141 and the NSE-Nifty fell 227 to close at 4845. A bounce seems likely barring some adverse political developments.

Given the problems in the Eurozone and the slow growth in the US, it is the emerging markets which are driving global growth. As per the Economist by around 2018 the share of GDP of emerging markets will overtake that of developed markets. Given that, foreign investors would also increase their weightage for emerging markets.

Now if only we got our act together and seriously started tackling issues instead of skirting them!

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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12 Responses to "Ready for a bounce?"

K C Shah

Aug 22, 2011

Not only agriculture income is to be taxed but also gift received by politicians and Long Term capital gain in stocks should be taxed.



Aug 22, 2011

excellent instances and highly practical and implementable suggestions to avoid are root out corruption are provided by your article.
i only wish that these things do happen sooner than later and save the people and above all the future of our hardworking youth.



Aug 21, 2011

Sometimes I wonder why nobody ever talks of dismantling the entire tax regime and imposing just one tax-Expenditure Tax equal to the entire tax liability(direct & indirect) of an ordinary citizen at the point of end user on all goods and services consumed by him.Just imagine how simple & uncomplicated our lives would become! Won't it take care of all the issues crippling us today -corruption,black money,conspicuous consumption, fiscal deficit etc. Of course, an entire army of taxmen would be rendered unemployed.But then their ingenuity can be harnessed for some nobler cause. Is it not a non-invasive surgery-painless & fast healing?



Aug 21, 2011

Dear Sir,: To expect bounce back on the back of local conditions would be wrong. Mkts. have gone down because of global conditions and particularly Eurozone. Also there may be some bounce back due to August expiry. Short covering - possible. And still the FIIs figures are negative. There is going to be some more downside: 4760 ;4680;4565. Lets watch global conditions more.
Secondly speaking about Corruption, it is pathetic how the "intelligent" ministers have messed up the whole issue. The Govts. lokpal bill is definetly promoting corruption. The JanLokpal bill should be adopted immediately. Arguments put forward by intelligentia that this AH bill will not end corruption, forget that a begining has to be made. Amendments and rectifications can definelty brought in later on. BUT ONE THING IS CONFIRMED THAT THERE IS GOING TO BE A DRASTCI REDUCTION IN CORRUPTION, ONCE THE AH LOPAL BILL IS ACCEPTED. People who do not agree should visit our tierIII and tier IV cities (wherein yours faithfully resides) to see the effect of the Right to information Act. It is really working and govt. officials literaaly are afraid to hide any details.
Same effect will be there of the AH Lokpal Bill.
One word on PM: When the obitury of this PM is written historians should note " A great Economist AND A GREATEST PUPPET of Congress and Soniaji. The speech which he should have made from his heart, ex-tempore, rather than reading out a pathetic statement, and that too either from Red fort or the floor of the house. (Heard in entirity)
Foreign hand in AH movement is biggest blunder statement of this PM. Sincere regrets. Kya socha tha or kya paya from this PM. (No political affiliation)
jalgaon Maharashtra.


agarwal mukesh

Aug 21, 2011

Your proposal to tax agricultural income is correct but to propose to exempt agricultural income to the tune of three times the limit of non-farmers is a retrograde proposal.
Why to provide priviledges to anybody.If one wants to catch the bull by the horns;it has to be done in one swift action.It can't be in stages.Is the cost of living in villages higher than in cities ? If not then why higher tax exempt income should be given to farmers.


anupam garg

Aug 20, 2011

Surprisingly short article...the simple solution given by Mr. buffett defies all did he arrive at a figure of 3%?



Aug 20, 2011

"Ajab Hal Dekha Hindoostanka, Hasan Ali ko Milta hai Bail Our Anna Ko Jail".


suresh handiekar

Aug 20, 2011

Pl do not report your political comments /openion to the invstrors.



Aug 20, 2011

With all respect 2 ur Team,all analyst like to xpress my
views M deeply watching Stk Mkt Movement since last 35 yrs Here No master can predict any Bottom or Top from where when it bounce back or gets down.Now its no more
remained as it was 35 yrs back Yes knowledge revolution helps feedback but at the same time the mkt becomes Globlised effects any major event happening any where Globe So dont advise without precautions as it may mislead blind followers & can loose more,beyond capacities sometime leads to Suicide leaving family orphan behind So advise xautiousely



Aug 20, 2011

About donation to politicians/ parties.What should be the mechanism by which anyone can establish the identity of masses who donates substantial sums as being claimed by Ms. Mayawati?!! The receipient is ready to offer the same for taxation !!

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