Global problems can hit us; why do we create our own?

23 AUGUST 2008

Ken Rogoff, former Chief Economist at the IMF, warned that 'the financial crisis is at the halfway stage. I would go further to state that the worst is yet to come'. His prediction that a large financial institution would collapse led to a fall in global markets. The influential business weekly, Barrons, warns that unless the two largest US mortgage banks, Freddie Mac and Fannie Mae, are recapitalised soon by investors, the Government would need to do so and would, in doing so, lead to its equity holders being wiped out and its preferred stock holders losing some $90b

These problems can spill over into Indian markets quite easily. Dwight Cass, writing in, mentions that foreclosures in the US are rising, and Freddie and Fannie have sent notices of foreclosure to 1 in every 464 households Even more alarming, the article says analysts peg the cost of maintaining these properties, which belong to Freddie and Fannie after foreclosure, at 2% per month! Little wonder they would need to be capitalised, for this expense of maintenance only means that they would, in turn, need to sell off the properties, exacerbating the downslide in home prices.

The downslide in home prices filters through to the slew of structured financial products held by financial institutions. Bear Sterns went under because of that and Ken Rogoff predicts another major failure. Lehman Brothers may face a $ 4b. write off. Strapped for cash, FIIs were net sellers each day of the week.

The US is caught between a rock and a hard place. Its producer price inflation hit a 27 year high of 9.8% last week and the Fed needs to increase interest rates to curb inflation. It can't do so, because that would worsen the housing problem as well as the problems in its financial sector. So it is damned if it does and damned if it does not!

India would have done okay if it was governed better. It is in the process of allowing EPFO (Employee Provident Fund Organisation) assets to be partly invested in equity markets using the expertise of select fund management companies. This would pump in large funds into equity markets. Add to that the increase in allocation for equities by individual households who notice that deposit interest rates do not cover inflation, besides being tax inefficient, and there is a case for optimism. The Indian economy will get a boost once gas starts flowing, following a resolution of a family dispute. By making cost of fuel input to fertiliser units cheaper, for example, it would, in one fell swoop, remove the fertiliser subsidy, of around Rs 100,000 crores.

But India has abysmal public governance, where all politicians consider self interest as priority and damn the nation. West Bengal, a state where industry has fled due to inflexible labour laws, has its best chance for industrial revival in the showcase auto plant set up by Tata Motors, to produce the revolutionary Nano. This would attract not only investment by Tata Motors but also by several ancilliary companies supplying to it, besides providing jobs. Land acquisition for this plant became a political hot potato for which the plant would be sacrificed, alongwith hopes for revival of a moribund economy.

A similar couldn't-care-less attitude pervades the Petroleum Ministry, which is singlehandedly destroying oil marketing companies IOC, HPCL and BPCL, once considered to be one of nine jewels in the PSU crown. It has foolishly clung to subsidising petrol and diesel prices, which, by no stretch of imagination, can be construed to be helping the underprivileged, hence, the duty of a responsible Government. Sensible recommendations of the Chaturvedi committee, to increase these in monthly steps, have been chucked out.

There is a total neglect of infrastructure, witness the criminally abysmal neglect of city roads in order simply to satiate the greed of corrupt officials and construction firms. New technologies, such as cold tarring of roads, used by South Africa, are not allowed to be adopted by vested interests, never mind the country.

Available technology of RFID to allow passthrough, without stopping, but permitting collection of road tax, is not adopted to circumvent the need to stop vehicles at octroi and toll booths. This can save enormous amounts of petrol consumption plus time and inconvenience. But vested corrupt interests prevent it.

Available technology of distance learning is not adopted. Mumbai University, as others, is facing an enormous shortage of teachers because of dismal pay scales. Distance learning can be done, at affordable costs, to spread literacy to remote areas. But there is a large vested interest in protecting the 'donations for admission' to a few educational institutions that have been 'permitted' to function.

After years one available technology has been adopted, viz. VOIP (voice over internet protocol). Using net telephony, people would be able to significantly cut costs. This would provide additional competition to telcos. Perhaps under pressure from telcos, DOT is dragging its feet on the introduction of mobile number portability (MNP) on the pretext that its introduction would cost too much to implement. However, MNP is about the only thing that can assure good service quality; witness the increasing number of call drops, for example.

The week ended with the sensex losing 322 points to end at 14401 and the Nifty dropping 122 to end at 4327. The monsoon session of Parliament has been delayed; the investment community was hopeful of reforms such as the pension bill, to provide cheer to the market.

Unless our governance improves, given the worsening global scenario, our markets would feel the heat. Its unlikely that governance will improve at least until the next general elections. So it would be better to sell on rallies.

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.