Stockmarket breaks out, but doesn't gallop - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
Stockmarket breaks out, but doesn't gallop A  A  A

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12 SEPTEMBER 2009


There was an uptick on each of the 5 days last week, after the anticipated breakout occurred decisively, at the level of 15,750 on the sensex. The BSE-Sensex ended the week at 16264, up 575 points, contributed mainly by RIL (which contributed 172), ICICI Bank (with 139) and SBI (with 60). The NSE-Nifty rose 149 points over the week, to end at 4829. The failure to gallop is a bit worrying, despite the second monthly increase, of 6.8%, in the index of industrial production (IIP), in July, after a 8.2% rise in June. This could be because of domestic factors, or external factors, or both.

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In external factors, the ticking debt bomb in the US can be hugely disruptive. Every citizen has a debt burden of $ 38,396 Americans have been living beyond their means for a considerably long period of time, with other countries lending money to the US. The systemic change would involve reducing consumption to increase savings to repay the debt; in a consumption led economy like the US, a reduction of it would cause it to stagnate. The symptoms of this are in terms of deflation in countries such as US, Japan, China, Germany and France. Another symptom is the increasing gold price. In 1999, as per Chart of the Day it took 44.8 ounces of gold to buy the Dow index; today it needs just 9.7 ounces.

The US and its poorly regulated and unrestrained financial innovation were the cause of the global financial crisis, to get out of which the US has pumped in over $ 11 trillion by borrowing it. Fancy derivative instruments were created by financial institutions, rated by rating agencies and sold by brokers. The rating agencies are now under fire, which could have serious repercussions for them. A case has been filed against Moody's by Abu Dhabi Commercial Bank and Washington State King County, for losses incurred by them when a $ 5.8 b. special investment vehicle called Cheyne Finance went bankrupt. It has invested in sub prime mortgages rated AAA, later downgraded, after the damage was done. An article in the Economist pointed out that, in the case of Alt A mortgages, Moody's (in which Warren Buffet owns 19%) did a 5 day review of ratings and downgraded 90% of them from AAA to junk! Ratings downgrades, or upgrades, can only be a step process, one notch at a time and not a Greg Louganis dive.

In external factors the threat of cross border terrorism continues to exist. This can only increase if the developed world, basically US followed by UK, pull out of Afghanistan, being unable to commit more resources (financial and manpower) to fight the Taliban.

Domestically the worry is, as always, abysmal public governance. In an interview Petroleum Secretary R S Pandey (Mint, Sep 12) says that the Government will, henceforth bear the subsidy burden on LPG and kerosene, amounting to around Rs 30,000 crores, and upstream players like ONGC/OIL/GAIL will not be required to share it. This is great news for these companies. The oil marketing companies (IOC, HPCL, BPCL) would bear these and be compensated, probably with oil bonds maturing after 5 years. In short, the Balance Sheets of the OMC's are heading towards extinction. Subsidies on petrol and diesel will continue to be shared by upstream companies and by OMC's! The Government will not bear these subsidies, estimated at Rs 15 - 16,000 crores!

This policy of petroleum subsidies and pricing has more holes than a swiss cheese!

First take the environmental aspects. Globally, autos account for some 10% of carbon emissions. With growing affluence in China and India the global vehicle population will quadruple by 2050. China already consumes more cars than the US. Think about the environmental impact of such quadrupling. And, by subsidising petrol and diesel, we are adding fuel to the fire (pun intended). Completely barmy!

This news came on the same day that Minister of State for Environment, Jairam Ramesh, stated that India is considering laws to reduce emissions by 2030, in line with global responsibilities. Would Prime Minister Manmohan Singh co-ordinate his two ministries please? Would he also ask oil regulator PNGRB (Petroleum and Natural Gas Regulatory Board) the logic behind imposition of a turnover tax on companies (such as GAIL and RIL) marketing CNG? So here we are, subsidising petrol and diesel, produced out of imported oil and bankrupting the OMCs in the process, on the one hand, and levying a tax for domestically produced CNG which, by the by, is an environmentally friendlier alternative. Alice in Wonderland would have muttered 'curiouser and curiouser'.

Little wonder, then, that India has slipped a notch, and now ranks # 133 of 188 countries in a World Bank ranking of the ease of doing business. Even Rwanda, which suffered genocide last year, is at # 67.

Another offshoot of our asinine petro pricing policy is that air turbine fuel remains free of subsidy and hence bears the burden for other petro products. State Governments also milk this cow by imposing higher sales tax burdens; airlines, as a result, are bathed in red ink. Pity the air traveller today. He has a choice of Jet, whose pilots are on strike, or mass sick leave, leading to cancelled flights. Or of Kingfisher, which is being hauled to bankruptcy court by OMCs. Or of Air India, for the thrill of sliding down an escape chute when the engine catches fire.

Perhaps the game plan of the Petroleum Ministry is to allow the judiciary to solve problems created by the legislators and bureaucrats. For, surely, investors in the OMCs can, and should, file suits of oppression of minority interest. After all, the OMCs are being asked by the majority owner, the Government, to follow a pricing policy for which the Government is loading them with the burden. Remember, it was the judiciary that forced buses to use CNG in Delhi, when air pollution had reached unbearable proportions. The legislative and administrative branches of Government did not have the political will to tackle it.

The Finance Minister is confident of India achieving a 6% GDP growth, and this columnist agrees. The pick up in the monsoon in September augurs well for the kharif crop, so the impact on agriculture would be less than earlier believed. The road sector is going ahead with a gigantic (Rs 300,000 crores) plan for road building. When this happens, the impact, both economic and social, would be hugely positive and, in fact, unimaginable. It is estimated that some 300 new townships would come up along the main highways, each with a population of 1 million. In other words, whenever this happens, there would be a migration of 300 m. people from rural areas to urban areas, which would make it the largest migration in history. This would reduce the pressure on agriculture, which supports some 60% of the population, who get 18% of the national income.

So the potential for India is huge. Now we need a strong, and sensible Government thinking of holistic development and not piecemeal with different ministries doing their own things. Please rise to the occasion, Mr Manmohan Singh!

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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6 Responses to "Stockmarket breaks out, but doesn't gallop"
Radhakrishna rao
Sep 28, 2009
Dear Mulraj,

I appreciate your suggestion for Minority Share Holder in Oil companies to approach Judiciary to set right the simple mutually beneficial commercial decisions ie consumers and Company concerned.

This is need of the hour.
RK
Like 
Prathap
Sep 18, 2009
Well mentioned the burden of subsidies.

But I dont understand from where the people gathers thse fancy numbers like 300m people migrating from rural to Urban which are already over populated.

Townships and roads will not bring people to urban areas. Creation of employment Opportunities, better standard of living will help them.

I am not sure whether you are aware or not there was a reverse migration in countries like china. We should be proactive in creating more facilities in rural areas rather than encouraging migration.

If everybody stops agriculture(already in degrowth phase for years) how do you handle food inflation?

Like 
SHRINIVAS BHATWADEKAR
Sep 17, 2009
I always look forward to your informative & thought provoking articles.They are all well-thought,well-written and are simply excellent. Like 
V S Gurumani
Sep 13, 2009
Kudos for highlighting the core issues in pricing of oil and gas in India.
Can Equitymaster and like minded groups and individuals please start a massive petition to wake up the PM and the Congress President to the enormous opportunity they are missing to lead the world in energy management? Some very simple statements and actions can shift the focus from consumption to conservation of energy by all Indians. Once we do this, other countries will follow. A lot of work has already been done on this by experts like Vivek Murthy of IIM Bangalore and we do not need more committees of the government--incidentally, there is one under Kirit Parikh which has just been appointed!
Like 
ANIL R. PUNJABI
Sep 12, 2009
HAVE BEEN READING YOUR COLUMN FOR THE PAST SEVERAL MONTHS:

VERY INFORMATIVE, OBJECTIVE, UNBIASED, SEES THINGS AS THEY ARE.

EXCELLENT SNAPSHOT OF EVENTS !

KEEP UP THE GOOD WORK SIR !
Like 
Anil R. Punjabi
Sep 12, 2009
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