The old order changeth - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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17 SEPTEMBER 2011


Change, it is said, is the only constant. The centre of financial power is slowly but inexorably shifting eastwards, towards China and India, whose economies continue to grow, thus pulling in the capital.

The changing of the old order was exemplified last week in the financial hand extended by China to Italy. Greece is close to default and the yield on its bonds is 24%, indicating inability to raise money. A few centuries ago, it was China and India which controlled over half the global trade but lost their economic supremacy after Europe discovered sea power.

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India, too, is witnessing a lot of change in the old order. One could not have imagined a time when political leaders, of the likes of Raja, Kalmadi, Amar Singh and Kanimozhi, would be jailed. One hopes the attempt underway to prevent people with a certain number of criminal cases pending against them from contesting elections, is successful, and succeeds in cleansing our polity.

The old order changeth was witnessed, last week, in the remarks made by the auditor of Kingfisher, that the airline is unviable without further funding by the promoters! An auditor would not have previously been emboldened to make such a remark, however justified he was in making it.

The old order changeth was, of course, manifest in the people's movement, led by Anna Hazare, to introduce a Lokpal (Ombudsman) bill with effective powers to bring to book corrupt officials.

In the political realm the old order may, perhaps, changeth, if a recent Supreme Court ruling were to pave the way for Narendra Modi, Chief Minister for Gujarat, to play a role in national politics. It is allegations of his role as Chief Minister of Gujarat, during the communal riots, that is preventing him from assuming a national role.

Were he to do so, it would be the biggest challenge thrown up so far to the Nehru-Gandhi old order.

All these changes are welcome if they usher in a more responsive administration.

Yet, the change comes slowly. The Ministry of Commerce, under Anand Sharma, is trying to set up special industrial zones, in a bid to increase the share of industry to 25%, and thus create 100 million jobs. Creation of such large number of jobs is absolutely crucial to the encashment of India's demographic dividend from a youthful population, even as that of China's is prematurely aging. The India growth story depends on the creation of large number of jobs, else there would be unprecedented social unrest.

The idea behind such industrial zones was to give manufacturing units set up in them the freedom to shut down, after paying due compensation to labour. Without such freedom, industry is loath to invest. Without such investment, there would not be the scale of job growth that is needed. Bangladesh probably has more people employed in its textile industry now than India, with its history of textiles, its abundance of cotton, its established textile machinery manufacturing facilities and its competencies across the value chain, has.

Yet, at a ministerial meeting to discuss the special industrial zones, the proposal ran into trouble from the labour minister and the labour minister was absent.

The Maruti plant at Manesar in Haryana is seeing labour agitation, and a sharp drop in production, over this issue, viz. of making temporary, or contract labour, permanent. Industry would be willing to offer permanent employment were it to have the flexibility to shut shop, after payment of compensation, in the event of the unit becoming unviable, for whatever reason.

Another good attempt being made is to digitise land records. Previous attempts have not succeeded. The reason is that a large chunk of money obtained through corruption finds its way into land, and politicians are not keen to have a more transparent land record system.

Macro economic news was not good last week. The July index of industrial production grew at a paltry 3.3%, much lower than the expected 6.2%. IIP growth was 6.6% a month ago and 9.9% a year ago.

Then came the inflation number of 9.78%, higher than expected, compelling the Reserve Bank of India (RBI) to continue with its upward revisions of interest rates (they were raised 0.25% for the 14th time) in a bid to control inflation. Rising interest rates is severely impacting both investment demand as well as consumer demand, and thus will lower GDP growth.

Farmers are also earning less, despite producing more, because prices of inputs have gone up. Pesticides are up 11%, diesel 32% and seeds a whopping 55%.

Strangely, this does not get reflected in figures for indirect tax collection which were up 24.7% in August and 23.9% for the period April-August. Interestingly, excise tax collected (from manufacture) for Apr-Aug was Rs 59,626 crores, whilst from service tax was Rs 34,772 crores. Yet manufacture accounts for some 20% of GDP and services around 65%. So the attempt of the Ministry of Commerce to have special industrial zones to facilitate and boost manufacture, would not only create 100 m. jobs but would also boost indirect tax collection significantly.

In corporate news of interest, the follow on public offer of ONGC, expected to fetch Rs 12,000 crores, was postponed, after roadshows revealed invetor interest at a discount. This would make it tough for the Government to hit the disinvestment target of Rs 40,000 crores.

MCX, the commodity exchange with an 80% market share, has received SEBI nod for an IPO, which will help bring the promoter, Financial Technologies' stake down below the mandated 26%. The exchange is valued at $ 1 b. FT's sale of 5% would fetch it about Rs 240 crores.

MCX-SX, promoted jointly by FT and MCX, is engaged in a dispute with SEBI after the latter refused it permission to trade in stocks. It only trades in currencies, the licence for which was extended by a year. Last week the Bombay High Court asked SEBI to sit across the table and settle the dispute, indicating that the court wants greater competition in the exchange space. Were this to happen, the old order, of the virtual duopoly of NSE and BSE, would change.

In other corporate news, Pipavav Defence & Engineering signed a non binding agreement with JP Morgan PE to sell an 18% stake for $ 400m., valuing the firm at $1 b. It had, last week, announced a JV with Mazagaon Docks and is building badly needed indigenous capabilities to build ships for defence, including aircraft carriers.

The board of Axis Bank has cleared the takeover of investment bank Enam (alongwith its experienced team) in an all stock deal valued at Rs 1540 crores; this would strengthen Axis's capabilities.

Last week the market shrugged off the lower IIP numbers, the higher inflation number, and the 25 bips interest rate hike by RBI, and gained ground lost during the first two days, to end the week up. The BSE-Sensex gained 66 points, to end at 16933, and the NSE-Nifty gained 25 to end at 5084. This was thanks to Europe standing behind Greece and postponing the day of reckoning.

The sensex should meet resistance at around 17,500-18,000 levels.

Note: The author is travelling and would not be in a position to submit this column next Saturday.

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 old order changeth"
anupam garg
Sep 18, 2011
ah, will miss the letter next week Like 
  
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