Compare and contrast - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
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India is a land of such contrasts! In my column last week I gave 3 reasons to feel bullish, viz the flow of KG gas, the huge spend on roads and the UIN project. Last week gave a powerful reason to be bearish, which this column has also been harping on for some time, viz. the abysmal quality of public governance.

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Just consider the contrasts.

Assets of the judges were made public last week. Many Supreme Court judges do not have a car. In the same week, the authorities are investigating whether Mr Koda, a former Chief Minister of Jharkhand, amassed Rs 2000 crores! What does this say about the perverted political system we have built?

It reminds me of the joke about a pastor giving a sermon on the evils of drinking by pointing out that hard earned money spent on drink enabled the innkeeper to have the best house, the best car, and send his kids to the best school. After the sermon a couple thanked him for the advice; they had not decided to stop drinking, but had decided to become innkeepers! Are we not encouraging our children to take to corruption rather than upholding the law?

Look at another contrast. An innocent bystander, prevented by Prime Ministerial security guards from entering the hospital, died a few yards away from treatment! On the other hand, Koda gets admitted to the hospital in order to avoid interrogation and possible arrest!

Koda is not the only politician to show a spurt in wealth after a few years in power. None of these are really fully investigated by tax authorities (unlike you and I who are artificially defined as 'traders' or 'investors', with varying tax implications, purely on the whims of the assessing officer) and even when they are, the investigations are allowed to die down. The explanation for the spurt is usually 'agricultural income' because this is tax free. This throws up another contrast! Whilst politicians show extraordinary increases in their agricultural incomes, thus showing their prowess as farmers, the true farmers don't perform that well. In fact, 60% of India's population, which earns agricultural income, gets only 18% of national income. The claim of agricultural income is so patently unbelievable that not investigating it is a mockery of all forms of justice and of governance.

If the Prime Minister, an honest person, wishes, he can easily ask the Finance Minister to start taxing agricultural income above a certain limit. There is no reason not to. The only reason is that the whole political class will oppose it.

Now for a good contrast! In 1991 India had to pledge, and send out, its gold, to the IMF for a loan. Last week it bought 200 tonnes of gold from the IMF! The economic liberalisation which followed the crisis in 1991 so energized the economy that it caused this change. Which, again, points to the benefits of good governance.

Last week the market dipped sharply on Monday, on weak global cues. The Australian central bank raised interest rates, the second time it has raised them, suggesting that others may follow. The US Federal Reserve, however, did not. Rates are still low at 0 - 0.25%. However, UK had to give a further $51 b. to RBS and Lloyds, suggesting that for that country, the financial crisis is far from over. The sensex fell 491 points on Monday, and the Nifty 147.

The market recovered its fall the next day, when the Finance Minister stated that the stimulus package would continue. The sensex rose 507 and the Nifty 146.

Over the week the BSE-Sensex gained 262 points to end at 16158 and the NSE-Nifty added 85 points to end at 4796.

A wonderful article by Nouriel Roubini in FT of Nov 1 explains why almost all asset classes, including emerging market stocks, have been rising since March. The US Fed has pumped in, and is pumping in, huge amounts to stave off the financial crisis ($1.8 trillion). Interest rates are low, almost zero and both the US $ and the pound sterling have fallen against other currencies. Traders are shorting the $ and borrowing money at low rates to do a carry trade by buying high yield assets. In 2004-5 it was the yen carry trade that created asset bubbles, which finally burst. Now it is the $ carry trade and these asset bubbles will burst whenever the trade reverses. This would happen when the US $ starts firming up and when US interest rates start rising. Investors must therefore look out for both these as signals of an impending reversal which, when it comes, will be horrendous.

So far this monetary and fiscal injection seems to be working in the US, which is the most flexible economy in the world. US productivity gains in Q3 were the best in 6 years and jobless claims the lowest in 10 months.

Another contrast. The US has been pressuring Swiss banks, and filed lawsuits against them, for non disclosure of assets of US citizens. In 2007, the largest growth of nonresident deposits was in Delaware, in the US, beating Luxemborg and Switzerland! If our Government had the guts, they could easily do the same; Indians are reported to have the maximum deposits of any country, in Swiss banks. There would then be no stopping the Indian economy, only the corrupt political one.

In corporate news of interest, a judge hearing the Ambani gas dispute recused himself from the case because his daughter worked in a law firm which occasionally advised RIL, one of the contestants. One wonders if this is sufficient ground to recuse, as big companies have generally engaged most of the top law firms some time or the other. It would mean that judges would not be able to get their children into leading firms for fear of a perceived conflict of interest. So on top of not earning enough to even afford a car, judges would be deprived of allowing their children to take up good jobs!

In India, RBI is in a piquant situation. It cannot raise interest rates because credit growth is still poor. As against the 29% growth of non food credit forecast, it has so far been a paltry 10.3% yoy. Major PSU banks have lowered their forecasts of loan growth. On the other hand, there is a liquidity surplus, since money is fungible and a bit of what is pumped into the US finds its way to other places and assets, creating bubbles.

It is possible that the market may dip once, to test the recent bottom, perhaps even going a bit under it. Should it do so, one could buy. But with a wary eye on the US $ strength and another on the US Fed rate. For now, breathe a bit easy.

Note: This 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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13 Responses to "Compare and contrast"
Nov 18, 2009
In my opinion, a ministry for corruption (only to keep check on ministers) is very essential and this ministry should be controlled by the Supreme court directly. This ministry should work in parallel with the Income Tax Dept and all law-related hearings should be executed directly by Supreme Court (to avoid delay in execution and allowing no gaps for the accused to jump from one court & thereby buy time) That's what is being happening now i.e. The victim dies but the then meaningless case is still unresolved.

For the staff appointed under this ministry of corruption, yearly targets should be given (as given to the income tax officers or traffic police officers) for tracing with substantial evidence all corrupt ministers within or outside the govt(opposition or other parties). Once, if the big fishes (ministers) are controlled or streamlined, fear or discipline will penetrate into the lower levels and you will slowly see strong control on corruptions within India at all levels.

So, Is there anybody in the current Govt. daring to take this proposal for execution?
Nov 10, 2009
A beautiful piece of thoughtful analysis. Koda is being hounded since he does not have a political party to cover his 'lapses'. An insight into the assets of some of West Bengal's senior ministers may also uncover some more Kodas, but then these belong to a political party that harps on its members' "honesty". Like 
Udai Pratap
Nov 7, 2009
This is excellent.I fully agree with hin. Like 
Nov 7, 2009
Among the best analyses I have read recently. India has a long way to go towards rule of law. If it does, the economy can keep growing in double digit for long time to come. Best regards, GP Like 
Nov 7, 2009
Koda is only a small fry. If the govenment introspect all the former, current chief ministers and ministers they could find many large fish and that also in the name of their trusted partners and not in their name. One example is the former chief minister and the current cabinet minister. Such comments made in the Times of India is not published may be fearing the minister. Like 
PK Swami
Nov 7, 2009
Your article makes an interesting reading but is very disparaging in result in terms of the country's governance.

The tragedy is that the people want this system alone to prevail as nothing else suits the interests of the people who matter - be it politics or business- and apart from this class the word people has no meaning or relevance in this country. Rest of the population does not constitute the people as they have no Interests and therefore it is irrelevent for them what happens in the country.

Readers at large would appreciate if your article is specific in terms of identifying the present investment opportunities - a guidance much sought after by persons who earn the hard way and wish to gain high with knowledgeable person like you around.
Dr. K. K. Singh
Nov 7, 2009
I am happy to know someone can see right through the scenes. Very Thoughtfull. Like 
RD Patel
Nov 7, 2009
Thanks a lot for a good article taking into account all the major factors likely to affect the Indian market. Really insightful. Like 
Nov 7, 2009
80%of our earth is covered by ocean,full of salt water, and in the remaining 20%, lives man, crying for potable water, free from pollutants, and he cries aloud-water water everywhere ,but no water to drink.Mother who cooks for the family is always the last to eat, as Service is her guiding principle, emanating from her soul.Parents save for their children, and are ready to retire into vanavasa, expecting that their child will follow their foot prints in promising their wards a brighter future, before they themselves retire to oblivion,Hence in BhabwatGeetha,Krishna exhorts us to do our duty , without expecting for the fruits thereof. Like 
Sumati Chatur
Nov 7, 2009
Well thoughtful and mindblowing article,matter,, as every reader of any news paper may be thinking all about these instances,may be thinking famous song line,"asmaan pe hai khuda aur jameen pe hum,,aajkal wo is taraf dekhta he kam," Like 
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