The $ 700 b. bail out package is not a quantum of solace - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
The $ 700 b. bail out package is not a quantum of solace A  A  A

15 NOVEMBER 2008

Wall Street investment banks, insurance companies, commercial banks, fund houses et al. were allowed license to kill investors, unregulated by M or any other regulator. In stepped US Treasury Secretary, Henry Paulson, seeking, and obtaining, permission for a $ 700 b. bailout package, hoping to provide the sinking financial system with that quantum of solace. It is, alas, a drop in the ocean of losses the gun slinging greedy bankers have toted up and the crisis is now spreading, from the financial world, into the real economy, bringing with it a recession to a theatre near you!

The US and UK were already in recession and now it is Germany that has officially gone into one. China, which depends on the US for its export led GDP growth, is also expected to follow, as growth slows from double digits to, some expect, around 5.5%. India, less dependent on exports, would also face a slowdown, perhaps to between 6 - 6.5% next year. This, in turn, will impact Government's tax revenues. Already, for Oct, excise collection is down 8.7% and customs down 0.9%. With falling oil prices (down to $55/b) imports would come down sharply, which is good news, but so will, in turn, customs revenues.

Falling revenues would, in turn, mean reduced ability to fund the kind of infrastructural activity which is needed to provide a counter-cyclical thrust to the economy when other sectors face the inevitable slowdown. Infrastructure activity would also slow down because of electoral considerations. For one, clearances for large projects would not be forthcoming since, pending elections, the smoothening grease for wheels of Government could turn to impeding rust. For another, prior to elections, the Election Commissioner normally debars the commencement or announcement of new projects that may influence voters.

The Finance Minister has squandered the increasing tax resources generated during the boom years forgetting the fact that the squirrel gathers his nuts in spring for an impending winter, and now has no elbow room to provide a fiscal thrust that would help India come out of the slowdown faster. Corporate profit growth would be lower in Q3 and Q4, which is causing FII's to continue selling and repatriating funds to even more troubled parents. The sale, to repatriate $, increases demand for $ and depreciates the rupee. To prevent the $ from rising further, the RBI sells $, thereby sucking out liquidity from the system, at the time when it is, through cuts in SLR and repo rates, trying to pump it in.

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The G20 (group of 20, an enlarged group from the G8 group of developed nations, in belated recognition of the need to also rope in emerging economies) is to meet in Washington this weekend. Leaders of 20 nations would discuss ways to prevent a deepening of global recession, though the talks would definitely be less interesting than T20! The US is the worst hit, with iconic giants like General Motors expected to go into bankruptcy this year unless bailed out. US property prices are still sliding, leading to more foreclosures, and lending institutions holding the foreclosed properties find they are unable to bear the cost of maintaining them, which includes property taxes and security/maintenance costs.

When property prices were rising, it led to the 'wealth effect' of increasing consumption based on rising home equity and on the ease with which properties could be refinanced. Homeowners took a second loan and spent it on a vacation, or on consumption, boosting the economy. The reverse is now happening and, given that 70% of the US GDP is coming from consumption, the reduced consumption is leading to a prolonged slowdown. US retail sales in December are expected to show a fall for the first time since they were first tracked in 1953.

In India, too, the economy would slowdown, albeit to a lesser extent because of a large domestic population. Investments are being postponed, e.g. Welspun Gujarat has postponed a Rs 5,000 crores ($1b) project and Arcelor Mittal's plans in Orissa and Jharkhand are also set back. Arcelor has cut global steel production 30%.

We also have general elections coming on before May 2009 but, possibly, earlier, given the fact that inflation has fallen to 9%. Depending on how it fares in the 5 state elections, the Congress may call early elections. The Left parties are gloating about the 'failure of capitalism' claiming they always said so, which seems rather like the stuck clock telling the correct time twice a day!

The dispute between RIL and RNRL over pricing of KG gas is entering its final phase in the Bombay High Court. It is interesting to see how print media reports news. On Saturday Nov 15, the Times of India headline read 'Government claims right to fix RIL gas price' whereas that in Hindustan Times read ' Government cries off Mukesh-Anil gas row'. The former opined that the Government stated, in an affidavit, that KG gas could not be sold below the price of $ 4.2/mmBtu determined by the empowered group of ministers to be a fair price whilst the latter said that the Government distanced itself from the issue and would not influence the price. The Economic Times of the same day had another take, viz. that the Government had not clearly stated whether RIL could sell gas below $4.2/mmBtu, a lower price was not envisage by eGoM under the production sharing agreement. Investors would be well advised to read the full news reports not just the headlines, and to read several sources, before making investment decisions based solely on them.

Last week the BSE-Sensex ended the week at 9385, down 578, after a Sehwagian opening of plus 571 when China announced a large bailout package to spend on infrastructure. The NSE-Nifty ended at 2810, down 152. Rallies, whenever they occur, are brief and the sensex can be expected to test its bottom of 7700. Money managers have been greedy beyond belief and the losses far exceed the efforts of G20 and central banks to provide a quantum of solace.

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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