The political pot is churning - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
The political pot is churning A  A  A

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10 SEPTEMBER 2011


Perhaps due to the prolonged absence of Sonia Gandhi, now back from the US for medical treatment, there is a lot of political noise and confusion created by the babel of multiple voices and the inability of Manmohan Singh, as Prime Minister, to quell them. The political pot is churning, and this could affect stockmarkets.

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Sadly, this comes at a time when India, given its strong economic performance and the likelihood, with good governance, of it growing even stronger, would have seen a surge in foreign investment had the political class behaved itself. Instead, what we are witnessing, are more allegations of wrong doing, more arrests of high profile leaders and more churn ahead, all of which would deter foreign investors.

Last week saw the arrest of Amar Singh, on allegations of his role in bribing MPs to vote in favour of the ruling Congress party, when it was facing a vote of confidence in the nuclear deal. He shares a cell with Raja, former telecom Minister, accused of taking bribes; ironic, as Amar Singh is in there for allegedly giving them!

It saw the arrest, by CBI, of Janardhan Reddy, former minister in the Karnataka Government, on charges of illegal mining. This could pose political problems for the BJP and a possible counter.

The week saw the CAG (Comptroller & Auditor General) flexing its muscle and filing two reports. One against the Ministry of Petroleum, for laxity in taking action against Reliance Industries, including, amongst other things, failure to take back a part of the KG basin block where oil/gas discoveries had not been made. Two against the Ministry of Civil Aviation, for allowing Air India to buy $ 9 b. worth of aircraft it was in no position to afford and which has led to its becoming an unviable and irredeemable entity.

The week also saw the challenge, in a PIL, of the appointment of the SEBI chief, on the ground that the composition of the committee approving the appointment was tweaked.

Adding to the woes was the terrorist attack outside the Delhi High Court in which CCTV cameras were not working for 5 years. This indicates a total lack of apathy and accountability, which are symptomatic of the root of all our problems.

Corporate managers have to contend with all these vicissitudes of political currents, in addition to various other issues. For example, the agitation by workers at the Manesar, Haryana, plant of Maruti, protesting disciplinary action taken by management against some of them. The strike has seen a drop in production of its popular Swift car to 200 vehicles/day, at a time when bookings for it are over 90,000 vehicles. The management of Maruti has been in talks with Gujarat, where they met the Chief Minister, who is allotting them Government owned land to set up an auto plant there. The state has already attracted Tata Motors, Peugeot and Ford. The Japanese management of Maruti Suzuki will simply not allow any indiscipline which is simply not tolerated in Japan.

Gujarat can attract industry because its Government has, over the years, acquired, through public advertisements, large and contiguous tracts of land. The issue of land acquisition for industry became contentious in West Bengal. Acquiring contiguous tracts of land from thousands of small landholders poses a challenge as the process can be held up by even one of them. But when the process was left to the State to acquire the land, it ran into political opposition and a change in Government.

The Government is now introducing a legislation that would make it tougher, and more expensive, for companies to acquire land, which they would have to do on their own. This can also be a problem for India's continuing growth story.

India's GDP is expected to grow at around 7.5% this year and it is hoped that it can be 8-9% in the next 5 year plan. This is predicated on the premise of a demographic dividend - as more young people enter the working population, they start earning and spending, driving the GDP growth. The key here is ‘earning'. The demographic dividend ensues if there are jobs. Today about 60% of India's population depends on agriculture, which provides some 14% of income. There is thus too much pressure on land. Job growth from the services sector would be there, but upto a limit. It would need to come from industry. So acquisition of land for industrial growth would become a major issue and a challenge for Governments of States.

In corporate news of interest, RIL has challenged the CAG to prove allegations of wrongdoing or of inflating costs, and claims that independent and reputed agencies have validated its claim to have set up, cost effectively, the deep water offshore oil and gas exploration business. This business is a highly risky one, requiring skill sets not easily obtainable, and only open to those with a risk appetite and very deep pockets. The cost of hiring an offshore platform, for instance, just to look for oil/gas, can be $ 750,000/day. Without any guarantee of finding it. So, whilst allegations of wrongdoing should surely be probed, the resultant change in terms must not scare prospective bidders for future blocks on offer. In the last round of bidding for oil and gas blocks under NELP, there were few takers.

In other corporate news of interest, the RBI has objected to the proposed deal between Axis Bank and Enam. The former was acquiring the latter, to beef up its investment banking and broking business, which would be housed in a subsidiary of Axis Bank, but paying for the acquisition by allotting stock in itself. The RBI has objected to this, asking the Bank to make an all-cash offer, which the bank is unwilling to do as it would eat into its capital.

In global news, President Barrack Obama has unveiled a $ 447b. plan to create jobs (giving small businesses a tax break if they hire people), a $ 1500/year benefit to working families, a proposal to tax the rich, and another to create a fund pool to expand the country's falling infrastructure. The markets were unimpressed and declined on Friday, when it was announced. They believe all this spending is borrowing from the future. Comedian Conan 0'Brien talks about McDonald's offering an Obama Value Meal in which one can order anything one likes, and the guy standing behind in line pays for it!

Last week the BSE-Sensex started weak, picked up and fell again, after the Obama plan failed to enthuse, but managed to end the week with a gain of 145 points, at 16866. The NSE-Nifty ended up 19 at 5059.

The sensex faces resistance at the 17,500 level and it seems to be moving in the range of 16,000-17,500. With better governance it can crack the ceiling and move higher. Alas, better governance in India would be the next episode of Aesop's fables!

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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1 Responses to "The political pot is churning"
anupam garg
Sep 10, 2011
Gujarat shining at with a quality of 4 (car)ats

RBI's intervention in case of Axis bank is surprising...RBI has been highly apprehensive with anything when it comes to broking...whether it is entry of new players or acquisitions made by existing ones. perhaps in best interests of ppl

once again, a substantial portion of column consumed by political news...the author may start a separate section altogether for it...though its inclusion in a financial news site is not a good idea, i think
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