Strong start to the week

Indices in the Indian stock market came off the day's highs during the closing hours. However, the selling was not particularly intense and as a consequence, they managed to close the day strongly in the positive. Thus, BSE-Sensex edged higher by around 170 points whereas gains on the NSE-Nifty came in at around 55 points. Gains were also seen in the BSE Midcap and BSE Small cap space as both the indices closed higher by around 0.8% each. On the advance to decline ratio, only one stock closed the day in the red as opposed to four that edged higher.

While most Asian indices closed the day in the red, European indices are trading mostly in the positive currently. The rupee was trading at Rs 45 to the dollar at the time of writing.

State-run Rural Electrification Corporation (REC) witnessed a positive sentiment on the bourses today and closed higher by around 3%. Investor interest was perhaps triggered by news doing the rounds that the company is planning to diversify into power generation by setting up renewable energy projects with an investment of about Rs 28 bn. This would be done over the next five years and would be undertaken by its subsidiary REC power distribution company. REC is targeting a capacity of 300 to 400 MW in renewable energy and is in discussion with a number of players for the same. The company will like to have projects that have PLF of 50% or more. PLF is an indicator of the average capacity utilisation of a plant.

Tata Steel, world's sixth largest steel producer, has said that it may increase production of auto-grade steel by 20% to 1.2 m tonnes in the current financial year. This step will be taken on account of increased demand of steel from the auto sector. It should be noted that the company supplied one million tonnes of auto grade steel in FY11 and this year it is aiming to touch 1.2 m tonnes. However, it has no plans of stopping here. It aims to increase its capacity in auto steel at a similar rate over the next few years as well. Currently, almost 40% of the country's auto steel comes from the company and it is taking adequate steps to ensure that the market share remains the same in the forthcoming period. The stock closed 2% higher on the bourses today.

PSU, Oil & Gas, Auto stocks lead gainers
01:30 pm

Heavyweights continued to support market gains as the Indian stock markets continued their journey in the positive zone over the last two hours of trade. Stocks from the PSU, Oil & Gas and Auto space are the main gainers. However, stocks from consumer durables space are trading in the red.

The BSE-Sensex is trading up by 224 points while NSE-Nifty is trading 75 points above the dotted line. The BSE Midcap and BSE Small cap indices are up by 1% each. The rupee is trading at 45.06 to the US dollar.

Power stocks are currently trading on a positive note with Power Grid Corporation, CESC Ltd and Reliance Power leading the pack of gainers. However, Reliance Infrastructure is trading weak. As per a leading financial daily, Coal India Ltd (CIL) in its first official response to the power ministry's demand of temporarily stopping spot sales of coal has said that the move will fail to boost availability at power stations. The company has a monopoly in coal production in India and it has suggested that restricting e-auction sales would rather push up inventory at its mines and aggravate coal shortage. The company in a letter to the coal ministry has said that restriction of e-auction will result in accretion in pit-head coal stock to the tune of 8% of the overall production. This is because around 80% of the e-auction (8% of the overall production) is under taken by road which normally cannot move to power stations. The company had sold 43 million tonne (mt) of coal through e-auction last financial year at a price 83% over the notified price. It has currently got a total of 70 mt of inventory at its mines versus an estimated shortage of 83 mt in the country this financial year. The company attributes shortage to unavailability of railway rakes for dispatch. The stock of the company is trading firm.

Engineering stocks are trading mixed led by Alstom Projects, Cummins India and KSB Pumps. AIA Engineering and Voltamp Transformers are trading in the red. As per a leading financial daily, Larsen and Toubro Ltd has plans to set up another 2000 MW power plant and a 3 m tonne steel plant in Orissa at a combined investment of Rs 300 bn. This along with earlier plans of Rs 440 bn alumina and aluminium plant and Rs 110 bn power project in Orissa have raised the company's total investment in the state to around Rs 850 bn. The company's new power plant would also involve state government association and a contribution of Rs 100 bn. The project would require about 1,200 acres of land. For its 3 m tonne steel plant and a captive power plant near Paradip, the company has already identified 600 acre of land. Once a memorandum of understanding is signed with the Orissa government, the company would start work on the plant. The stock of the company is trading in the green.

Markets extend early morning gains
11:30 am

Indian stock market indices made further inroads into the positive territory over the last two hours of trade as buying intensified across index heavyweights. Barring consumer durables, all sectoral indices are trading in the green.

The BSE-Sensex is up by 144 points while NSE-Nifty is trading 60 points above yesterday's closing. BSE Midcap and BSE Small cap indices are up by 0.6% each. The rupee is trading at 45.10 to the US dollar.

Engineering stocks are trading firm led by KSB Pumps and Everest Kanto Cylinder. As per a leading daily, BHEL is looking to increase its revenue from exports to Rs 45 bn. It is mainly looking at expanding operations overseas especially in Africa. At present, exports contribute 8-10% to the company's turnover. It may be noted here that the engineering company's export revenues last year amounted to Rs 40 bn. Apart from Africa, it is also focusing on South East Asia and Gulf countries. BHEL is interested in exploring any opportunity with respect to new markets, new technology or for strategic reasons. It has appointed Kotak Mahindra and Merill Lynch as advisors to scout for the right opportunities in the overseas market.

Power stocks are trading firm led by CESC Limited and Power Grid Corporation. As per a leading financial daily, Tata Power's Mundra project which is currently on track for completion could face delays. This is due to problems with the associated transmission link. Issues with forest clearance and right of way are holding up the transmission line which would be used for evacuating power from the project. This would result in bottling up of electricity from the initial units of the 4,000 MW project.

The main issue of the holdup is the line involving a wildlife and forest clearance in one of the patches. As per a company official, unless the forest clearance and the right of way issues are sorted out, the mandatory clearance cannot come through. Unless the clearance comes through, the construction of the line on that section cannot proceed. It may be noted that Tata Power had announced last month that the project was progressing as per schedule and the first unit of the project would be synchronized by September 2011. The company has already completed the critical steam blowing process at unit-I of the project. This project is one of the four Ultra Mega Power Project (UMPP) awarded till date in the country. When completed it will have five supercritical units of 800 MW each and would run on imported coal.

Energy stocks propel Indian stock markets
09:30 am

Most Asian stock markets have opened the day on a weak note. Stock markets in Hong Kong (down 0.8%) Indonesia (down 0.8%), Japan (down 0.9%) and South Korea (down 1.1%) are leading the losses. However, the markets in China (up 0.4%) are trading in the green. The Indian stock market have opened the day in the green. Stocks in the energy, capital goods and healthcare space are trading firm.

The BSE-Sensex is trading higher by around 114 points (0.6%), while the NSE-Nifty is up by about 29 points (0.5%). The midcap and smallcap stocks are also trading in the positive with both the BSE Midcap and BSE Small cap indices up by 0.3% and 0.1% respectively. The rupee is trading at 45.11 to the US dollar.

Bank stocks have opened the day on mixed note with ICICI Bank and Yes Bank trading in the red. However, HDFC Bank, Federal Bank and IndusInd Bank are trading firm. ICICI Bank is planning a major expansion drive in which it will add about 2,500 new branches over the next four years. At present, the private sector lender has 2,533 branches and 6,301 ATMs in the country. With the expansion, the total number of branches will be over 4,000 by 2015. The move will not only help the bank expand its presence but also help in growing business. This is because branches are important for acquiring customers and also for generating fee based income by selling third party products. During the financial year 2010-11, the bank acquired Bank of Rajasthan which added to its branch network and also helped it gain a greater exposure to northern and western India.

Auto stocks have opened the day a weak note with Hero Honda, Maruti Suzuki, Ashok Leyland and Tata Motors facing selling pressure. However, Mahindra & Mahindra (M&M) and Bajaj Auto are trading firm. Tata Motors has launched its small car Nano in the Nepal. The introductory price for the same has been set at 7.98 lakh Nepalese rupee (approximately Rs 5 lakh). All the three variants of Nano will be offered for sales across the Himalayan country through the company's authorized distributor Sipradi Trading and those authorized by it. In the first phase, the company will keep bookings open for 10 days. Tata Motors has had a presence in Nepal for 36 years and it is currently the third largest passenger vehicle marketer in the country.

Subsidies subsidizing India's growth

The latest increase in diesel and LPG prices has come at a time when the country is already reeling under high inflation rates. This increase is bound to send inflation rates to new highs. This is because diesel and LPG form a significant part of the inflation basket. But one might ask as to why rates have been raised especially when crude oil prices have been on a decline trend over the past few days. Such an increase definitely appears to be a paradox.

Well the reason behind this is a word called 'subsidy'. The Indian government has typically subsidized the fuel for the weaker sections of the economy. This has artificially kept prices of things like diesel, LPG and kerosene below the prevailing global market rates. The idea is that the oil marketing companies (OMCs) sell these products at the lower or the subsidized rates. In turn, the government would compensate the OMCs for the loss in prices through a subsidy.

The process appears to be excellent in theory. The weaker sections of the economy keep getting fuel at lower prices. The oil marketing companies continue to make a profit. And the government earns the trust and most importantly the vote from its citizens. But in reality this is not the case. The subsidy is actually a huge burden on the country's fiscal deficit. Particularly in the event of rising crude oil prices, the subsidy burden increases. It eventually reaches a point where the government cannot increase the subsidy payout. This leads to an under-recovery in oil prices for the OMCs and forces them into losses.

One might think that well all this is ok as long as the weaker sections of the economy continue to benefit. Well the truth is that in reality they don't benefit either. This is due to the skewed consumption pattern. It is actually the 30% of the richest members of the society who consume nearly 72% of the country's total LPG. The poorest 30% only consume 2%. As a result, the subsidized rates are actually enjoyed more by the economically better off sections of the society. So the premise that lower rates help the economy completely falls flat on its face.

Subsidies tend to skew the domestic prices. So much so that they no longer reflect the reality of the markets. In reality, if prices go up, consumption is supposed to decline. This is how markets remain in balance. But subsidies skew this balance. The result is that there comes a time when this skewed nature starts reflecting on the country's growth. In addition to this, subsidies fuel chances of corruption as seen in the infamous kerosene scam. This further hampers the country's growth. And the worst impact of subsidies is that it deters private sector participation. It is a known fact that private sector only participates in those industries that have an open pricing. They prefer to shun those sectors that are highly regulated.

The choice that the government has today is to end the 'subsidy' structure. It may lose some votes. It may not be able to fill the pockets of the politicians with the huge wads of cash that they are accustomed to seeing. But it is the right step towards driving the country to its next level of growth.