Henry Paulson is Home Loan - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
Henry Paulson is Home Loan A  A  A

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13 SEPTEMBER 2008

Times are a changing! The US, the freest of free markets, has nationalised the two big mortgage institutions, Fannie Mae and Freddie Mac, leaving Treasury Secretary Henry Paulson, home alone. In doing so, USA has earned the sobriquet USSA (United Socialist States of America!). Meanwhile, Russia, once communist and state controlled, is using, to its advantage, market forces to deploy its gas supplies to Europe as a political bargaining chip to silence dissent over its incursion into South Ossetia!

As an ad. line for a tobacco company once said, when such ads were permitted, 'you've come a long way, baby!

The takeover of Fannie and Freddie, which, between them have outstanding mortgages of over $ 5 trillion, was necessary because a further fall in house prices would jeopardise them, as well as, given their size, the US financial system. It seems that Freddie and Fannie were adept at misreporting the true picture, and aided in so doing by all the regulatory agencies They had claimed to have enough regulatory capital, but didn't, by hiding losses on mortgage related securities simply by claiming them to be temporary!

Now, the US is a consumer economy, with consumption accounting for some 70% of its GDP. US consumers borrow for overconsumption, and were comforted by the fact that the value of their assets, chiefly stocks and properties, were rising fast enough to enable them to borrow for consumption. With stockmarkets having fallen and property prices falling too, that comfort has disappeared. The Government tried to inject money through tax refunds, but those have been used. So, a further fall in property prices is likely to send the US economy into a deeper recession which would, of course, have its negative impact on global stock markets.

In India our political leaders are on a governance sabbatical and are ruining anything they touch, for no good reason. In West Bengal, political rhetoric has made the State lose the last hope of an industrial resurgence; negotiations between the Government and Mamta are over and Tata Motors would pull out. If a group such as the Tatas cannot succeed in as prestigious a project as the Nano, one doubts if others would be brave enough to venture. Orissa, Maharashtra, J&K are also having their own sets of problems. With general elections due before May 09, one can expect the governance and common sense sabbatical to continue.

Poor governance obviously tells on the economy. The market got elated because inflation for the week ended Aug 30 came down moderately, to 12.1% and because industrial production for July was higher than expected at 7.1%. But have a look at the indirect tax collections for the first 5 months of the year Apr-Aug. Whilst growth in indirect taxes has been 12.6% for this period, growth in excise duties has been only 3.7%. This suggests an anamoly with the better July IIP figure, for excise collections ought to move more or less in tandem with growth.

Poor governance and planning is, for example, set to derail increase in power generation capacity. Of the approximately 100,000 MW of power generation about two thirds is coal based. Well, since coal mines are managed by the Government, guess what? Coal supply has not been organised for all new projects, hence the power generating capacity would not be enough to power the forecast GDP growth! Some 68,000 MW of new capacity is doubtful because of poor coal linkages. In any case, there is a global movement to curtail the use of coal for its effect on emissions.

Oil prices have fallen to $ 100 providing some relief in our import bill. But OPEC is not likely to allow oil prices to fall further.

Our Government is doing nothing to curtail consumption of petro products; on the contrary, it encourages its overuse by subsidising petrol and diesel, for which there can be no justification on grounds of social equity. Running into a fiscal problem, it is now thinking of silly ways to have dual pricing of diesel involving a higher than subsidised price for industry, SEZs and defence. Given the fact that poor supervision only spurs greater corruption, is this not a bad idea?

In fact, the Government has a huge fiscal vested interest in encouraging the auto industry, for the various taxes it collects from it. But reality bites, and car sales are down 2.4% in August, and commercial vehicle sales down 6.3% thanks to both higher interest rates and higher fuel rates. The only viable option is efficient and affordable public transport, but the movement towards that is pathetically slow.

Because our political leaders are busier thinking of ways to embarrass the other than of thinking of ways to improve the economy, India has slipped two ranks, to # 122 (out of 181) in a World Bank list of ease of doing business. Even Pakistan and Bangladesh have higher ranks, for chrissake! Perhaps, after the Singur experience the rank next year would be even lower.

In corporate news, Tata Motors is reportedly planning a $ 500-600 m. overseas issue with differential voting rights, the first such. Tata Tele is likely to sell a 12% stake, for about Rs 5000 crores to companies like DeCoMo and France Telecom.

The sensex closed last week with a loss of 483 points, at 14,000, and the NIFTY dropped 123 to end at 4228. The increases, with arrears, permitted in the Sixth Pay commission is expected to be released soon and can be expected to lead to a splurge in Divali spending. The market may briefly rally then, providing an opportunity to exit.

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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