God gave India several advantages, including a huge land area to support a huge population that provides a huge market with huge natural resources converted into products by huge talent. To balance it all, He gave India politicians! Their shortsightedness and utter disregard for national good would negate all the advantages.
West Bengal is a classic case in point. Because of its labour policies, industry has fled the state. The Government of Buddhadeb Bhattarcharjee is trying very hard to usher in an industial revival. The state has a lot of advantages including perhaps the cheapest real estate in any metro, a fairly comfortable power position, excellent and cheap food due the alluvial soil, and alternative transport systems, affordable though chaotic. The project to set up a world beating small car, the Nano, by Tatas, would have helped the State refurbish its moribund image. Yet it is being opposed on political grounds by a myopic politician who doesn't appreciate the fact that even were she to succeed in winning an election, it would be a phyrric victory for industry would not venture again into a state that has driven away a unique project.
J&K is also on the brink of a disaster due to politicking and so is Orissa, with communal tension running high primarily over granting of ST status to a section of people to qualify for reservation in educational institutions. The fault is in our education policy which tries to parcel out slices of the pie instead of trying to enlarge the pie. It is easy to enlarge the pie by throwing open primary and secondary education, but then a few politicians will lose the enormous amounts garnered through 'donations' to secure seats in the institutions they control.
A lot of this loot finds its way into Swiss banks, or elsewhere where there are secrecy laws. As per an article on India's Black Money Indians have $ 1.5 trillion stashed away which is not only more than its GDP but also more than all other countries' illegal wealth combined! And it is to these wealth looters that the wealth creators have to kowtow! You can't use a sandpaper to shine anything!
Of course this has its costs on the economy. GDP growth for Q1 is 7.9%, the slowest in 3 years. KV Kamath of ICICI feels that it would get worse, as a lot of companies are postponing large projects because of rising interest rates. Interest rates are rising primarily because the Government is unable to control its spending and its fiscal deficit, inspite of buoyant tax collections. About 80% of Government expenditure goes for just two items viz. salaries (which have just been hiked more than as recommended by the Pay Commission, presumably to get their votes) and interest (which keeps rising as the Government keeps borrowing in order to service previous borrowing, thus entering into a debt trap).
Now India is more of a saving and investment economy, rather than a consumption led economy such as the US. In the US, the personal savings rate is very low, sometimes negative, and people are encouraged to consume. Consumption accounts for over 70% of US GDP. That is why the US Fed is trying to keep interest rates low, so as to encourage consumption. The US Government gave a special rebate to all, with the same idea.
In India, the Government is fiscally incontinent and, pardon the expression, doesn't need to be pampered! Though the Finance Minister may claim the fiscal deficit is within limits imposed by the FRBM Act, this is duplicitous. Had a private sector company adopted his accounting (mal)practices the Finance Minister would have put them in jail! Bonds issued to oil companies and to fertiliser companies ought to be, but aren't, used to calculate the fiscal deficit! In the first 4 months the fiscal deficit has already reached 87% of the full year's estimate. The legacy which will be left to the next finance minister would be a balance sheet with humungous liabilities to pay back these bonds.
There are several ways to deal with the ballooning fiscal deficit. One of which, viz. disinvestment, would now be easier after the Left parties no longer need to be mollycoddled. Public sector banks are a classic example; there is no need, and no threat to India's financial system, if Government holding in some 20 PSU banks is brought down below 51%.
It is because of Government control that valuations of these banks are appallingly low. The largest PSU (other than SBI) is PNB, whose market cap is some Rs 15,000 crores, after 114 years of existence. Compare this with Axis Bank, at Rs 24,000 crores in just 14 years! It is not that the management of these PSU banks are bad; on the contrary some of the CMDs are amongst the best in the business. It is simply majority ownership by a Government. If this, or a future, Government were to get the cojones to dilute their stakes to below 51% it would be doing both itself as well as the country, a favour, besides creating shareholder value. Holding on to 51% and destroying value is like trying to shine the PSU Banks with sandpaper.
In corporate news Infosys made a big acquisition, of Axon, for some $ 753m., twice sales and 20 times PAT. The kicker will be when it manages, as it will, to narrow the difference in operating profit margin. Axon's are 15%, around half those of Infosys
ONGC Videsh took over Russia's Imperial Oil, in competition with Sinopec of China, valuing the firm at $2.58 b. An Israeli court cleared the takeover of Taro by Sun Pharma.
The BSE sensex surged on Friday with an impressive 516 point gain, enabling it to end the week at 14564, up 163. The Nifty went up 32 to end at 4360.
For the rally to continue would require politicians, whether at State level or at the Centre, to start taking sensible steps in the national interest rather than in their own, misconceived and paranoic, interest. If one sees evidence, e.g. that it is passing the pension reform bill (the deficit in pension account has risen to Rs 25000 crores, so reform is imperitive) then one could start getting more conviction in the longevity of the rally. Or if, e.g., the PSU banks were allowed to reduce Government holding below 51%, one could pray that sense is returning. Would somebody take away the sandpaper and give it some velvet?