»Straight from the hip by Jawahir Mulraj

What price, growth?
7 JANUARY 2012

My earlier columns have mentioned how 'shareholder capitalism' was encouraged as a means for the US to regain its economic hegemony, when, in the '80s, it was threatened by the 'stakeholder capitalism' followed by Japan and Germany. This resulted in the phenomenal growth of the mutual fund industry which now controls more assets than the banking industry. In fact, the funds under management by Blackstone, the largest fund house in the world, exceeds India's GDP. The stock of financial assets globally is three times global GDP of $ 65 trillion, and so the institutional investors managing these assets are able to exert a lot of pressure on corporate leaders as well as Government.

Since shareholder capitalism regards the interests of providers of capital as paramount, and assumes that interests of other stakeholders will fall into place, it seeks to ensure this by continuous growth. Earlier, productivity improvements also contributed to this growth but, over time, its contribution has reduced, and growth comes from expansion. This insistence on growth has several ramifications.

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One is the inequality it has generated in executive compensation, thereby leading to the 'Occupy Wall Street' protest by the 99%ers against the top 1%ers. The more sensitive Governments, like Singapore's, have responded, by cutting the pay of the Prime Minister by 36%, something unlikely to happen in India, where politicians show an unbelievable rise in prosperity, with the IT Department turning a convenient blind eye, on the premise that the increase is due to tax free 'agricultural income'. One reform that would go a long way to tackling corruption is to make agricultural income taxable, with much higher exemption limits, so that it is not used as a route to conceal graft payments.

The other ramification is in the overuse of natural resources to fuel that growth. Nature is hitting back, whether it is via tsunamis that hit South East Asia a few years back, or Japan recently, or floods in Bangkok, Philipines or, recently, Brazil. This is a direct consequence of the rapid economic growth of the world's two most populous countries, China and India, and the consumption of resources this entails.

China's consumption has been fuelled by, and is directly proportional to, the rise in money supply especially in the US. This is brought out by the article by Darryl Schoon 'China, 2012 and Von Mises' crack up boom' As per the article, China, in 1995, also rapidly expanded its money supply "To offset the global collapse in demand, China expanded its money supply in 2008 by an extraordinary 150 %, an increase driven by China's need to maintain economic growth or risk losing political control"

The credit creation has gone into creating a real estate boom in China, which has now reached bubble proportions, awaiting a pinprick. The easy credit, together with the demand for greater shareholder returns by a massive institutionalised money system, is what led banks to relax lending standards and overlend to countries like Greece, Iceland, Ireland and others, the cause of today's Eurozone problems.

Everything has its price, including growth. We will have to pay that price. In terms of a collapse of the Chinese real estate market, which would cause a sharp slowdown in construction activity, leading to job losses and thence to social unrest, already being manifested. In terms of a default by Greece, even after the 'voluntary' haircut of 50% of private debt .Voluntary because it avoids the triggering off of insurance payments on credit default swaps, held mainly by European banks, which could start a run on them). In terms of the problems of Italy snowballing.

Should Italy be unable to institute reforms, it would be unable to refinance 500b. Euro of debt that falls due in the next 18 months, and that would surely lead to a major crisis in Europe George Soros, the legendary investor, says that the Euro crisis is bigger and more serious than the 2008 US crisis.

What is India doing?

A small measure is an accounting fudge. Companies that have borrowed heavily in foreign currency find their liabilities have shot up after the 15% fall in the rupee. If they were to mark these losses to market in their P&L accounts, corporate results for the December quarter would be a nightmare. So they have been allowed to show these in their Balance Sheets, as an increase in assets, to be amortised over the life of the loan.

Then there is the 'Honey I Shrunk the Fiscal Deficit' trick being played by the Ministry of Finance. The fiscal deficit is overshooting the targeted 4.6% of GDP, because of Government spending being incontinent. Because of the fall in stock markets, the disinvestment target of Rs 40,000 crores will not be met. So the scheme is to transfer, at a discount, the Rs 31,800 crores of shares held by SUUTI (the erstwhile Unit 64 scheme good assets), comprising 11.5% of ITC, 23.5% of Axis Bank and 8.2% of Larsen & Toubro (L&T), into an SPV (special purpose vehicle), ask public sector banks to hold the equity of the SPV, borrow from them against the Rs 31,800 crores of assets, and use the borrowed funds to buy out the shares that were to be divested. That's essentially a transfer from one pocket to another. The PSU banks have objected.

Perhaps the Government can re-work it. The SPV can become a mutual fund, and the public could be invited to take units in it. The Rs 31,800 shares would be sold at the same discount the Government is willing to give to the SPV, making it attractive for investors to buy units of a mutual fund at an initial discount to NAV. This could be done with a precondition that the shares be locked in for, say, three years, at the end of which the Government would have the right of first refusal at the market price. This way the consent of the PSU banks is not necessitated.

Another thing being done is that Securities and Exchange Board of India (SEBI) has opened up two new routes for IPOs. One is an institutional placement programme or IPP. The other is to offer shares for sale through a stock exchange to qualified institutional buyers.

In a more important way, the Government has permitted foreign individuals, pension funds and trusts to invest directly into Indian equity. This could, if implemented properly, be a game changer and the harbinger of a bull run in Indian stock markets. More so if Chinese real estate implodes.

A tertiary benefit of this permission is that it may assist in round tripping of Indian money held abroad, which is now finding it increasingly difficult to maintain anonymity. Were this to happen, the bull could start running on Dalal Street much before it runs in Pampalona, Spain, in July.

In corporate news of interest, Reliance has entered into a series of complicated deals to bail out debt laden Network 18 group. It is lending the promoters Rs 1500 crores in order to subscribe to rights issues, which would hopefully raise some Rs 3500 crores. Of this, Rs 2100 would be used to buy out a part of RIL's stake in Ushodaya, which it had bought in 2008 for Rs 2600 crores and which includes rights to some print and electronic media properties in the South. RIL would also get content for delivery, which it would use when it launches its 4G services through Reliance Infotel.

The Adani group has moved the Supreme Court, after losing in two earlier levels, asking for an agreement it had made, to supply 1000 MW of power, to a Gujarat utility, at a fixed price of Rs 2.35 per unit, for 25 years. It is unable now to supply power at this price because coal prices have shot up. Coal India has hiked prices by 12-15%. For imported coal, countries like Indonesia and Australia have imposed taxes on exports of coal. Other promoters who have entered into fixed rate agreements would follow suit. Unless the issue is resolved, it would exacerbate the already strained power situation.

Kingfisher Airlines has been declared a defaulter by State Bank of India (SBI) and Bank of India. New system driven NPA recognition norms would have resulted in an automatic declaration as such. The DGCA has also issued a safety warning. It thus seems strange that new Civil Aviation Minister, Ajit Singh, says that no airline would be allowed to close! If there are safety issues, it must either close or change hands. Several pilots have quit Kingfisher, for non payment of salary.

The BSE-Sensex gained 412 points last week, to end at 15857 and the NSE-Nifty ended the week at 4754, up 129.

The market is interestingly poised. If one believes that a European crisis will burst soon, then the market would collapse. The sensex level of 15,000 would then give way, and it could fall another 20%.

If, on the other hand, Indian money is attracted back home, through the anonymity of a watered down KYC (know your customer) approach of Foreign Institutional Investors (FIIs), as compared to Swiss banks, who are under the lens for greater scrutiny, then investors may be left lamenting 'yeh mauka na milega dubara'.

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. 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 stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
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