The stock of global financial assets is a multiple of global GDP, and resides, largely, in the Western world. Any time there is a serious crisis, global asset managers' first reaction is to flee to safety, by selling assets in emerging markets and taking the money home. That is why, during the global financial crisis, the stockmarkets of countries like China and India, fell by over 60%, even though these countries showed economic growth through the crisis, whilst the stockmarkets of developed countries, like US, UK etc, fell around 40%, even though these countries showed negative economic growth.
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So when the Greek government was unable, as required by its lenders, to show how it would cut costs (everytime the Greek Government tried to cut costs there were street riots), it was downgraded and may default on its debt obligations. This, in turn, would trigger a problem in other weak economies like Portugal and Ireland, and may even compel them to leave the European Monetary Union to allow them to devalue their currencies, something being a member disallows. FIIs sold, dragging down the sensex and other emerging market indices.
Yet, the economies of the BRIC countries are showing resilience, and those of the developed world not, and it is only a matter of time when the perception of what is 'safety' in the 'flight to safety' by institutional investors changes. There is an ongoing shift in the centre of financial power eastwards, and more financial assets will be allocated to the emerging markets, for that's where the growth is.
On our part, we must show good governance and sensible economic policies, to be able to attract the larger pool of foreign capital, both direct and indirect, that is waiting to be invested here. The magic word 'abracadabra' that will open the treasure trove is 'governance'. Are there signs that we are, indeed, behaving more sensibly?
There are a few. Years after subsidies on petroleum products were introduced, the Government is finally able to muster the political will to phase them out, although the final phase of doing so is going to be extremely painful. Subsidies on kerosene and LPG will be phased out next year, driving up prices of the former from Rs 12.32/litre to Rs 40.6! The poor will get a certain quantity at reduced rates. LPG prices will shoot up from Rs 345 to Rs 675/cylinder, making this a good time to invite friends for dinner and take a rain cheque on the reciprocal invitation! No mention is being made of phasing out of diesel subsidy, perhaps because there is a huge vested interest (maybe political too) in its continuation. This phasing out would have a significant impact on inflation, but the Government has finally bitten the bullet. It will improve the fiscal position of the Government and worsen that of the householder. It will also enable companies like Reliance Industries to make the whole range of petro products; it could not have competed earlier when prices were subsidised and only State companies like IOC, HPCL and BPCL were eligible to be partly reimbursed for the losses.
Another sign of a desire to clean up is in the consensus reached, between the Government delegation and the people's delegation led by activist Anna Hazare, on 40% of the points raised in the drafting of the Lok Pal bill, which seeks to bring an ombudsman, with enough independent power, to investigate any complaint of corruption against any public servant. The Government seems confident of having a draft bill tabled in time for the monsoon session.
There is gigantic scepticism, and deservedly so, about the genuineness of avowed intention of politicians to seriously tackle corruption. A better way to demonstrate this intention would be, as mentioned in my previous column, to do away with complete tax exemption on farm income, which serves corrupt politicians better, as a means to whiten their black earnings, than true farmers. Were Dr. Manmohan Singh to be bold enough to take the step to modify the tax exemption on agriculture income, allowing genuine farmers a generous exemption, that would, indeed, be a strong signal of real intent. The announcement of a decision to table the draft Lok Pal bill in the monsoon session can only be taken as sceptically optimistic.
On the flip side, there is no move towards obtaining data of Indian account holders, as offered by the Swiss Government, on bank deposits in that country. Mauritius has also made a similar offer last week.
Also on the flip side is the statement by Civil Aviation Minister, Vayalar Ravi, that he took charge of Air India to run it, not to close it down. Well, hello!!!! Please look at your job description, Mr Ravi. You are the civil aviation minister, which looks after the civil aviation sector, and not the CEO of Air India, which is one of the many players. If Air India needs to be privatised, (as it should, because it has been murdered by your predecessors), then surely the option must be explored of cutting losses and privatising it. Why should honest tax payers keep footing the bill for periodic cash infusions into an unviable airline? Especially when dishonest tax payers, with Swiss bank accounts, are not being pursued?
Another item on the flip side is the notice sent to Wipro, similar to the one sent a month ago to Infosys, slapping a demand of Rs 450 crores, on the ground that personnel sent for software development abroad, represented body shopping (ineligible for tax exemption) and not export of software (eligible). Software is the result of mental effort and, unless I have missed the scientific breakthrough, the human mind normally travels with the human body.
RIL has been given freedom to price its gas sold to 'non priority' users, such as power plants and fertilisers. This would be around 18% of its production of around 62 mmscmd and would boost its profitability.
Over the week the BSE-Sensex fell 59 points to close at 18266 and the NSE-Nifty dropped 10 to end at 5476. Whilst India continues to be a good long term story for investors, there are a lot of things Government must demonstrate in order to make the good story better. We are getting there, but in baby steps. It is time for Manmohan to become a Formula 1 driver of economic reforms.
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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