Divide and drool

12 DECEMBER 2009

The Brits had a policy of 'divide and rule', by pitting one princely state against another, and so managing to capture all of India. Our politicians, with ill gotten fortunes rivaling those of erstwhile princes, believe in dividing and drooling! The divided states give aspiring politicians to loot the resources, such as mineral or forest wealth, of the newly created state. Last week, a few days after the Congress caved in and approved the division of Andhra Pradesh to carve out Telangana, the Chief Minister of UP proposed carving her state into three parts. It is not far off when the Gorkhaland issue will be raked up in West Bengal and splinter movements will revive in North East and other states. The only ones to benefit are corrupt politicians who can prevail upon their smaller fiefdoms and drool.

------- FREE Newsletter -------
Dont't get tempted to gamble your savings on some 'hot tips'
Get The Honest Truth, the e-letter by Ajit Dayal, directly in your mailbox.
It's FREE. Sign Up Today.

In my last column I asked whether readers thought India to be a global power. Most readers agreed that India has the potential, if only it is governed well and corruption is reduced. In the 18th century, China and India were global powers. China accounted for 33% of global trade and India 23%. The West then had the industrial revolution, and its navies came to our shores armed with guns, to our arrows, and with a divide and rule policy. India's share of global trade is now 1%.

Both these countries are expected to lead the world in terms of economic growth, to take up the slack from an America that still suffers from huge structural problems. It has to roll over $ 2.5 trillion in debt in the next 12 months, as Government has borrowed hugely to stimulate the economy. If consumers start consuming less, and saving more (the structural change required to pay off the debt) then the US economy will move at a pace that would make it come third in a race between the hare and the tortoise. Consumer spending is 70% of GDP in the US. So China, which now depends hugely on US consumption, is planning to boost domestic consumption, spend massively on infrastructure (it just announced the commencement of the world's fastest train) and reduce dependence on US assets by buying commodity assets globally.

Chinese banks are now the top 3 in terms of market capitalisation, in the world! In 2005, 10 of the top 20 banks were American, whilst there were no Chinese banks. In 2009, the top 3 are Chinese, which has 5/20 top banks, whereas America has 3. (the largest Indian bank would be below 150 in rank). How does this matter?

If India is to become a leading global economy, its companies would need to grow to global size. A few Indian companies are aggressively pursuing acquisitive growth, the latest being the attempt by Reliance Industries to purchase Lloyndell Basel for around $10 b. and by Essar Oil to acquire refinery assets in Europe from Royal Dutch Shell. The latter has acquired a $1b. line of credit for the purchase from Standard Chartered Bank, and the former is in talks with some banks to have a $10b. line of credit; all of them foreign banks. Indian banks do not have the size to manage deals of this size because their growth is stunted. Public sector banks have 70% of the business and the Government would neither dilute below 51% nor pump in their share of the pie for PSU banks to increase capital. Mergers between PSU banks is the only option, under these constraints, but the pace of our Government decision making places it 4th in the earlier race. Our politicians are busy splitting the country rather than strategizing on how it can grow.

Challenges to growth would be huge, and further complicated by the cuts that are going to come on global emissions; the UN wants all countries to agree to cut emissions by half, by 2050. If a chunk of this burden falls on the developing BRIC countries, it would stymie their growth.

The Indian economy is doing well. Industrial production grew by 10.3% in November (though China managed 19%) and car sales are up 61% in November. Whilst cheering such a high growth rate, one must ponder over what controls on emissions would mean for the auto industry. It is surprising that our Government has not yet introduced fuel efficiency norms and also gone on to make them more stringent with passage of time. On the contrary, because of a life time tax collected by State Governments at time of sale, they have a vested interest to increase, not reduce car sale.

However, on the other hand, food inflation is rising sharply and will prompt the Government to take action, most likely by raising interest rates. Now that IIP numbers are encouraging, the RBI would be emboldened to raise them. Such a hike would adversely impact stock markets.

Globally there are concerns about the financial health of several countries. After Dubai, Greece is in financial straits and the next one may be UK! That would be a financial disaster.

Our market is trying to, but unable to, pierce the highs made in October. The BSE-Sensex rose 17 points over the week and ended at 17119 whilst the NSE-Nifty rose 8 to end at 5117.

It may happen that the October highs are pierced, perhaps coinciding with the RIL Lloyndell deal. RIL has about $8 b worth of its own stock in treasury which can be used to part finance the deal. Looking to global problems, it would be better to be a bit cautious.

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.

Equitymaster requests your view! Post a comment on "Divide and drool". Click here!

7 Responses to "Divide and drool"

J Mulraj

Dec 17, 2009

Thank you readers, for your comments and feedback.
I sometimes get calls for stock tips. I have scrupulously avoided giving them. For one, conditions change constantly and what is a good idea one day may not be so good the next, since conditions have changed. Stock tips are best sought from portfolio advisors.
My column instead, seeks to give (hopefully) some direction and to provoke thought ...not to replace it.


Ashok Dambal

Dec 16, 2009

Please forward tips for stock trading and in particular intra day tradin thanks & regards



Dec 14, 2009

The news filters down slowly here.
What Nehru was faced with right after independance has happened and breakage of the country has begun in the right earnest. This morning there was some news of Maharashtra being divided yet again.
Go on break up the country. Go on invite the politicians to inaugurate hospitals and other events !!

VOTE THEM OUT !! If you have the guts ! Or else just sit back and be taken over.

In the U.S. it's the banks and the corporations hand in glove with the politicians.

In India it is the politicians hand in glove with the goondas.




Dec 13, 2009

please send stock tips for investment



Dec 13, 2009

Mr mulraj your thoughts upon the recent economy events are very useful and provide lot of insights to the young readers like me. Your article is really a great treasure trove for people like me who are aspiring to be perfect fiduciary.


naval anklesaria

Dec 12, 2009

Mr. Mulraj you are not only an market analyst and an economist but you are more than an astrologer. Your comments & predictions are 100% accurate & I fully agree with you that India can no where come near China in any field. India belongs to only corrupt Politicians & Industralists who have bought this country and its destiny is entirely in their dirty hands. No Prime Minister or President of India can save this countery from these filthy hands. But hats off to our Honourable Prime Minister who has hold the reins so long to put this country on right tracks but will not be able to save this country from disaster in future. So Indias economic growth is at stake and the boat will sink any time, its only question of time.


Gautam N

Dec 12, 2009

It is amazing to get through these info and analysis thanks very much for providing such valuable info in quite simpler language.
But looking at obstacles in the path for growth of India. Is it posible that chienese will overpower us due to our ssolw pace.. in coming future?
Will increase in interest rates will make much heavy impact on stock market? Can we guage intensity of that?

Equitymaster requests your view! Post a comment on "Divide and drool". Click here!