Destroying the family silver - first the OMC and now Banks - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Destroying the family silver - first the OMC and now Banks A  A  A


If anyone could be called an expert at snatching defeat from the jaws of victory it would be our Government! Despite having succeeded in whatever economic reforms that have been undertaken so far by liberalising the economy, the mindset of our politicians remains one of control and of dominance by the public sector. This is sad. Several of the public sector units (PSUs) have very capable managers but are hampered by policy constraints. They, therefore, act as a drag on the economy. Returns on capital employed by the Government in PSUs is in the low single digits. Imagine the saving that would result if these, after privatisation, could multiply the returns five times or more.

The three oil marketing companies, viz. IOCL, BPCL and HPCL, are well on the road to bankruptcy, which would lead to an eventual sell off to the private sector at a fraction of their worth. They are being systematically destroyed by being forced to bear a burden of subsidy on petroleum products. In order to reduce a bit of the subsidy on diesel, which, besides being used for cooking by the poor, is largely finding its way to generate power by industry or in diesel automobiles, neither class of consumers qualifyies for subsidy, the Government is now foolishly contemplating a dual pricing of it! A subsidised price for the poor and a higher price for industry and automobiles. Thats fine on paper, but in practise it would be an open invitation to loot and corruption, given the absence of enforcement by corrupt watchdogs.

Now it would be the turn of the public sector banks. Banks would need to raise some Rs 100,000 crores a year for the next 5 years, in order to meet more stringent capital norms under Basel II. Will public sector banks be able to raise it? Either the Government, which insists on keeping 51% or more in the 18 PSU banks, pumps in money to maintain its share or it must be willing to dilute it. It is not willing to dilute below majority, even though by just retaining majority control over SBI plus one or two large banks there would be no threat to India's financial system, the alleged justification it puts forth to maintain majority in all.

As a result, PSU banks will not be able to raise enough capital resources, and would see their combined market share fall from the current level of 70%. This, in turn, would hamper the growth of the Indian economy and of those who wish to tap large resources for acquisitions, such as ONGC Videsh Ltd which is, after acquiring Imperial Oil, now looking at a Canadian company for $ 1.5 b.

Similarly, the Government has killed the fertiliser companies manufacturing urea. It subsidises this to domestic farmers, but has freed the other, potassic and phosphatic, fertilisers, resulting in an overuse of urea. The bill for fertiliser subsidy has ballooned to some Rs 1 lac crore and the Government is constantly finding ways to postpone or wrongly reduce, its payment. Manufacturers have significantly reduced production of it and Government has had to import it at a far higher cost, thus increasing the subsidy burden! This makes absolutely no sense perhaps even to Franz Kafka!

Not content with idiotic policy framework for petroleum product pricing, or for banking or for fertiliser pricing, politicians love playing dog in the manger. Unable to create wealth, they excel at destroying it. Witness the likely departure from West Bengal, of the Tata group. This group is one of the most ethical groups and would have taken care to ensure the livelihood of farmers who were displaced when their land was acquired. Already there has been a sad suicide of a farmer who, having sold his land and looking to a livelihood from a promised job at the plant, was fearful of it moving out of the state. Which other group would now wish to enter West Bengal? What sort of victory, if any, can Mamta claim?

The Government is also worried about convening Parliament and is delaying the monsoon session. It is concerned about the fallout of a letter written by George Bush to the Congress, in which he states that fuel supplies would be halted, and the 123 Agreement nullified, if India were to test a nuclear device. The Government would be under fire if Parliament were to convene.

As a result, the hopes of the market about further economic reforms taking place once Parliament convenes without the nyet saying Left parties, are belied. Reforms are sought to be introduced through administrative fiat rather than the more enduring legislative approval. The pension regulator is reportedly trying to ease the norms for investment of pension funds in stockmarkets, as well as allow private sector money management firms permission to manage them. Both would be bullish for the market. Whether such steps can be taken administratively without Parliamentary approval is a moot point.

There is also a new Governor at the RBI, whose views on growth versus inflation are yet to be seen and these would impact the market.

Looking to the legislative uncertainty (will there be a no confidence vote as and when Parliament convenes and if there is, will the Government survive?), the environmental uncertainty (will oil settle at $ 110 or lower or will it start rising again), the administrative uncertainty (how would the new RBI Governor deal with monetary policy), it is not surprising that the market lost all of its whopping 551 point sensex gain it made on Tuesday, when oil prices fell below $ 110. It ended the week at a sensex level of 14483, down 80, and a NIFTY level of 4352, down 7.

Predicting the market movement next week is dicey as a consequence. With oil prices falling, inflation can be brought under some control (thereby easing interest rate hike chances); Montek Ahluwalia expects it to be single digit by March. Also, if pension reforms are possible to be brought administratively, it would sent a positive signal for markets. A settlement of the gas pricing dispute would also be viewed very positively. All these would make the markets go wild.

On the other hand, a reconvening of Parliament would probably see the opposition move a no confidence vote. Predicting oil price movements is more slippery than the product. And continuing destruction by Government of family silver bodes ill.

Technically the sensex level of 15,600 is crucial and should the market pass that with good volume, there ought to be a good rally. Better to be in stocks only if comfortable holding them for 2 or 3 years.

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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