Economic parameters good but market down - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
Economic parameters good but market down A  A  A

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4 DECEMBER 2010


Stockmarkets are fascinating! They move on so many factors, including, very importantly, investor psychology. Last week India posted good GDP growth for the second quarter ended Sep 2010, of 8.9%. Its growth in 6 core industries was the highest in 7 months and the purchase manager index, another indicator of confidence, was at a 6 month high. Food inflation is down in single digits. Yes, the market did rally 830 points on the sensex, but the mood of investors is down, thanks to the series of revelations of corruption.

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Corruption in high places goes, largely, unpunished. Thus, whilst the role of former telecom minister A Raja in the grant of out-of-turn spectrum is uninvestigated, the firms who obtained the out-of-turn spectrum are threatened with its cancellation. Similarly, the flats of illegal allottees of Adarsh are to see the building razed, even whilst those who perpetrated the scam go unpunished, if they are politically connected.

As a society we seem unable to seriously tackle corruption and one wonders if things will ever change, since the process of reaching a political pinnacle is such that it would be rare to find another as honest as the current Prime Minister. If he wants to go down in history as having made a significant contribution to his country, he would take action. Wipro's Azim Premji is making a contribution by donating 8.6% of his stake in Wipro, amounting to $ 2 b. to a foundation meant for providing education; earlier HCL's Shiv Nadar had been similarly philanthropic. Honest politicians who have not such sums to do largesse with, can contribute through their moral actions.

Myriad are the examples of how bureaucratic and political interference is destroying public sector companies. BSNL, once a telecom monopoly, has suffered a loss for the year to Mar 2010 of Rs 1823 crores, which would have been Rs 5955 crores had it not been for other income. This is largely thanks to interference. It wanted to expand its network and had floated a tender, but telecom minister A Raja, who recently resigned, scaled down the tender from 63 m. lines to 23 m. lines (and then further still). Thus, since 2005, BSNL's capacity has grown by 20m. lines whilst mobile subscribers have grown 450m. The destruction of BSNL should also be investigated.

Another example is Air India, hitherto the sole domestic airline permitted international operations. Its balance sheet is redder than its emblem, thanks to a politically driven expansion programme that has bankrupted it when combined with its poor service despite being overstaffed.

The three oil marketing companies, IOCL, BPCL and HPCL, are also swimming in the same red sea thanks to the policy decision of loading them with a burden to share subsidies on petro products, which will cost Rs 65,000 crores this year. It later compensates the companies partially, by issuing bonds, which is simply a way to conceal the correct fiscal deficit situation of the Government. IOCL is making a public issue of shares in January.

The reason for all this is because policy decisions are often taken on consideration other than the good of the country. Consider the decision on pricing of urea, a nitrogenous fertiliser, the only one amongst the three, N, P and K, which is still subsidised. Because of this, it is cheaper than P and K (potassic and phosphatic) and is, therefore, used in larger proportion than desirable, which degrades soil quality. The subsidy needs to be phased out, but attempts to do so are met with political opposition. Fertiliser and chemicals minister Azagiri, has reportedly refused to recommend a phasing out of subsidy on urea, perhaps because Tamil Nadu goes to the polls mid 2011 and he does not wish to upset farmers. But the point is that continuing the subsidy is actually hurting the farmers.

In such a context, the news that India is to ratify a United Nations Convention against Corruption, is laughable. We have, in fact, slipped to rank # 87, from 84, in most corrupt nations.

In banking, too, Government policy is thwarting the growth, to international size, of Indian banks, by virtue of its decision to retain a majority control on all public sector banks. A study by McKinsey has pointed out the need for Indian banks to grow their balance sheet 5 times in 5 years but, unless the Government lets go majority control in all but, say, 3 big banks (enough to ensure safety of the financial system) this is unlikely to happen. Which, in turn, means that when Indian companies grow, organically or inorganically, they will need to increasingly turn to foreign banks to fund their growth. It seems ironical, therefore, that the RBI Governor, is exhorting Indian banks to acquire assets abroad.

In corporate news, tobacco companies like ITC and Golden Tobacco, have downed shutters in protest against pressure to have a more ghastly pictorial depiction of the effects of oral cancer. The Government will be in a major dilemma here, balancing the need of public health (there are some 70,000 diagnosed cases of oral cancer in India) against the fate of 7 m. workers employed in bidi making and the tobacco farmers. Bidi makers are not subjected to such pictorial warnings; only the organised sector is; and smoking unfiltered bidis is a greater cause of oral cancer than smoking cigarettes with filters. Another factor for Government consideration would be the excise taxes the tobacco industry pays. So it will be a tough one to crack. A thoughtful Government would have started the process of providing alternative employment opportunities to bidi workers, and alternative crop alternatives to tobacco farmers long ago but, as has been said, the heart of many people in Government is not the welfare of the country but the welfare of their bank balances.

The stockmarket bounced back from the correction of the previous week, to end up 830 points on the sensex, which closed at 19966, and up 230 points on the Nifty, which ended at 5992. Investor psychology is still cautious about the corruption scandals and the unwillingness to tackle them and also about global factors. Investors are now worried about Italy and Belgium and, of course, about Spain. One hopes that the pain in Spain stays mainly on its plains. There could be a small dip in the coming week, before the climb begins again.

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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7 Responses to "Economic parameters good but market down"
TAK
Dec 8, 2010
BSNL (and MTNL) deserve to close asap. India should hand over Air India to the Tatas at Rs.1- After all it sold it's Maruti stake to Suzuki more cheaply and that too with a healthy balance sheet. After all JRD Tata started Air India and nationalizing it was a historic injustice crying out to be reversed. The same with PSU Banks and government owned oil companies. The sooner government gets out of business the better it is for our citizens.
Like 
N.M.R.Shreedhar
Dec 6, 2010
Unless there is an all-out war against corruption, this scourge of modern society will not get eliminated. One way of minimising corruption is to install CCTV's to cover all such major events as Tender opening, important meetings and make these available to the public thru' the RTI act--- the media can play a constructive role here --- once accused, these netas should be stripped of their posts/perks and assets frozen, giving them only a subsistence allowance till proven innocent. regds Like 
rp77
Dec 5, 2010
Will we the Indians ever get a chance to choose our leader directly i.e. the PM to avoid any lame duck spineless PMs in future... present electoral system does more harm than good... any changes in the constitution required or we continue with British Raj copy paste constitution? Like 
krishnan
Dec 4, 2010
you have hit the nail on the head.More than any other reason corruption is the one which is going to pull down this country.watch dogs and vigilance squads have become corrupt.why everybody was silent when out of turn allotments were being done blatantly?Press is after sensationalism and owned by people with close links with those in power.
and lastly but not the the least, the people have become corrupt.and have started voting after taking money.
Only a person of the calibre of MMS can do something .But he is also very busy guarding American interests?will he take action?
A million dollar question .lets us hope so.
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Sachin Wagal
Dec 4, 2010
Easy question for Prime Minister which the whole nation seems to be wanting an answer too, that to directly from him: Why did PM remain a mere spectator to all actions taken by Raja all this while if he was so confident on Raja's wrong doings.
I mean mere shooting letters is not enough, he could have easily recalled him and reversed his actions. The people of this country will be grateful if Supreme Court judges should put forth this question to the PM if they really want to deliver justice to this nation.
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Om Prakash Sharma
Dec 4, 2010
In these times hardly anybody thinks like you do.I am a non-smoker and I whole heatedly support your idea.There is one Bimdheshwary Pathak who single handedly liberated the people who used to carry the human refuse on their head.After Sulabh Shochalya he provided them with people many kinds of alternative employments. The Govt did nothing. We also continue writting on such matters but we fail to produce any alternate to them. Every body in this country knows that POLITICIANS don't do anything except querreling in the parliament and making fool of people.
We got to do something about many things.
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the innocent
Dec 4, 2010
Sir, i beg to differ you with regard to your comment on our prime minister.How can you give a clean chit to him if he does not take action against the criminals&culprits.He dances according to the tunes of antono manio of ITALY. Like 
  
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