The flip side of economic growth

16 OCTOBER 2009

The stockmarket celerbrated Divali in the week prior to it, with the sensex zooming up 384 points on the opening day, cheered by a 10.4% increase in Index of Industrial Production (IIP) in August, and by the overtures made by Anil Ambani to his brother, Mukesh, about the possibility of a settlement of their gas dispute. The BSE-Sensex ended the week at 17322 for a weekly gain of 680 whilst the NSE-Nifty ended at 5142 up 176.

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The 10.4% increase in IIP was thanks mainly to consumer durables, which showed a 22.3% growth in August, on top of a 21.3% growth in July.

Investors, of course, take economic growth as a welcome sign, and demonstrated their happiness with the 384 point rally on Monday, when the IIP growth for August was announced. And well they should. However, economic growth also has a dark side to it, and an eye ought to be kept on that too.

Ever since shareholder capitalism took root in the US, taking over from the stakeholder capitalism as practised by Japan, Germany and other European countries, economic growth has often not been tempered. The interests of other stakeholders has become subservient to that of shareholders, and the effort of corporate management has been to increase shareholder wealth, though nowadays there is a realisation that it has to be balanced.

Consider the story in Bloomberg magazine Sep 09 issue, 'Plundering the Amazon' which talks about how Alcoa, the world's second largest primary aluminium producer, has, by bypassing laws meant to protect rainforests, wrought immense destruction to the environment. It is clearing a path for a railroad leading up to a mine, which would transport 7000 tonnes of bauxite. In clearing this path, the forests are set afire, which spew out carbon dioxide equivalent to half of that created by the global fleet of cars, trucks, planes, trains and ships! Brazil has become the world's fourth largest emitter. Its rainforests are the world's lungs!

Cattle ranchers in the region, are responsible for 80% of the illegal deforestation; their beef is bought by companies like Mc Donalds or Carrefour, who, in turn, are pressured by shareholders for higher profits each quarter.

The global financial crisis was similarly caused by shareholder pressure for increased returns, to obtain which, money managers/banks/institutions created all sort of Frankenstinian derivative products that caused the mess.

In India, too, we are seeing the protest by dispossessed tribals by mining companies, in the form of Naxal/Maoist terror attacks.

Or consider the impossible traffic situation in Mumbai. Production of cars is up (cheers, say investors) but the cost is borne by clogged transport arteries, and the inevitable pollution. The Government encourages the increased production of cars because of the higher excise revenue (to the Centre) and the one time, upfront, road tax (to the State). The State happily collects the road tax, using it for its administrative expenses instead of expanding roads; the cost is borne by society in terms of delays and health issues. Shareholders of the auto companies are, however, happy.

They are also happy about the better corporate results, for the second quarter to Sep. For the top 50 companies, sales growth was 31%, compared to 29% for Q1 ending June (and 13% in the previous quarter ending Mar). Net profits grew, for these 50 companies, by 32%, compared to 20% in Q1 (and 9% in Q4/09). Thus q-o-q, or quarter on quarter for the layperson, performance is improving. Foreign investors have, belatedly, taken cognisance, and are re-entering the market. During the week, we saw good Q 2 results from HDFC (net profit up 24%), Axis Bank (up 32%), Uco Bank (up 36%) and Bajaj Auto (up 117%)

In corporate news of interest, Anil Ambani's overtures, that a negotiated settlement to the gas dispute with his brother Mukesh, helped cheer sentiment, though there has been, as yet, no acceptance of it. The Supreme Court is to commence hearing on the case from Oct 20, and would probably pass judgement in a month, which would be the time frame for a negotiated settlement to emerge, if it were to happen. Reliance Communication came under fire from TRAI for having shown different sets of revenue figures to investors and to TRAI, ostensibly for lowering its license fee, which is based on revenues. This has been denied by RADAG.

Telecom stocks took a hit last week after TRAI asked all operators to offer a pay per second tariff package. The move towards MNP (mobile number portability) would be a bigger game changer. Perhaps the ones to be most hurt would be MTNL or BSNL, whose cheaper tariff plans are attractive enough to sacrifice call, or customer service, quality. But after MNP, tariff plans would not be vastly different and customer service quality would become the key success factor. In order to assure better quality of service (fewer call drops, for example) the industry would need to spend more on capital costs (more towers) and will have smaller free cash flows.

The rally may meet resistance at a sensex level of 17700, from where it had declined in May 09. Should that resistance be pierced, the Jan 08 peak would be the next target. The long term picture is good, the short term one a bit hazy.

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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3 Responses to "The flip side of economic growth"

James Mathew

Oct 19, 2009

"This Week's Straight From The Hip.."

Straight From The Hip!! Does it have any meaning? If so, kindly explain what do you mean - Straight From the Hip.





Oct 17, 2009

Hey, Joseph, Investors need to divest their holdings in companies that plunder natural resources without replenishing them, sell unethical and immoral goods and services, just they would stocks that cheat the shareholders by more direct means. This is termed Ethical Investing - Please Google for more details



Oct 16, 2009

So Jawahir, You have mentioned about the cost of economic growth but did not give your opinion on what should the shareholders do. It is greed that plunders and spoils all natural resources. Recession is the exhaustion of that greed. I have been to Bangalore and there I am surprised, if one owns a car they cannot drive, it is so congested, noisy and polluted. My relative would take the car on Saturday or Sunday but still driving makes them nervous. It is quiet shocking about the situation we are in, nobody cares. Presently I am in the middle east and do enjoy driving than that in India.

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