Contrastingly, our political leaders work, instead, towards personal goals, more’s the pity. This tells on various facets of life, including, of course, on the economy and hence on the stockmarket.

It tells, for example, on the law and order situation which, in the recent past, has seen random terrorist bombings in two cities, Bengaluru and Ahmedabad, on consecutive days. Ved Marwah, former director general of NSG, maintains that intelligence agencies have been completely politicised and senior intelligence officers work harder to be in the good books of political masters instead of on their jobs. Given that some two thirds of our MPs have criminal cases filed against them, such subservience is rather disconcerting. One can only hope that Bengaluru and Ahmedabad were not rehearsals for a bigger outrage, on Aug 15. To underscore the point of intelligence agencies being made ineffective, the ban on SIMI was lifted by a court which maintained that the intel agencies had not sufficiently backed their plea for it with evidence.

It tells, for example, on the sorry state of our country fiscal discipline, despite several years of a booming economy providing unprecedented growth in tax revenue. Direct tax revenues are up a whopping 47% in the Jun – Sep quarter, showing a continuation of buoyancy, despite economic growth having slowed down. DSP Merrill forecasts FY 09 growth at 7.6%. Yet the fiscal deficit is so high that Moody’s joins S&P and Fitch, to warn of a lowering of India’s sovereign outlook. Using accounting methods to hide fiscal problems that would have made Enron proud, the Finance Ministry presents a rosier-than-thou budget. This may fool the people for sometime, but not the rating agencies. It certainly manifests itself in the sorry state of 3 public sector oil marketing companies, IOC, HPCL and BPCL, who are reportedly losing Rs 600 crores/day selling petro products at Government decided, instead of market determined prices.

Not that the subsidies are well spent; they aren’t. Subsidies on petrol, for example, are helping to artificially create additional demand for cars which would cause a bigger problem in future. Oil is not made by God anymore! Why are political leaders creating an infrastructure of vehicles, and plants to build them, which will create a disposal problem in the future? In doing so, are they serving national interests or personal? Why not, instead, build a good public transport infrastructure and discourage, through taxation, private transport?

It tells, for example, on the disaster of our education system. One of the features of the India story is the demographic dividend it will get as, over the next 5 years, some 45 m. people would be added to the workforce in the age 20-25. We have the numbers, but will we have the quality? Getting admission into a college of choice is a nightmarish experience, because of the mess leaders have made of the education system largely for the same reason, i.e. placing of personal interests above national interests. The paucity of seats results in huge income flows from ‘donations’ to procure admission, making education a lucrative business rather than a Government’s duty. The IITs, for example, are institutions that have produced excellent engineers, and the IIMs excellent managers. Yet, standards for admission are being lowered as affirmative action. Affirmative action is good and necessary, but at the cost of destroying educational standards built up over decades? Far better to open up education to the private sector so that there is no paucity of education and so that the demographic dividend does not convert itself into a bounced cheque! Fast forward a decade or two into the future and India may need to send students abroad for education, at enormous foreign exchange cost.

The Indian political leaders have, in our early years of independence, spent their resources and energies investing in public sector companies (PSUs), neglecting, for want or both financial resources as well as vision, to build a safety net. There is no pension payable if a job is lost, and no medical facility for the poor who can’t afford it. Both these prevent the introduction of a flexible labour policy, which is needed in a globalized world dictated to by instantly mobile capital and vagaries of consumer demands.

What is happening to these wonderfully built and carefully nurtured PSUs? The 3 oil marketing companies are being pushed into a premature demise and will, in all likelihood, be sold to private enterprise for a pittance. Perhaps that is the intent of leaders who have now nationalistic compunctions. ONGC, the most profitable, is also being bled. The Government now want to cap its revenue at $ 75/barrel and to claim any revenue above that for itself. But companies who search for oil in the deep seas such as ONGC in the public sector, RIL, Cairn and others in the private sector, do so at enormous risks and costs. The current daily cost of hire of a deep water oil exploration rig is some $ 585,000 and there is no assurance that a discovery will be made. Those who take such risks do so with an assurance of gain should they succeed and by capping gains the Government would be reducing the number of participants willing to take such risks. This has already happened in NELP VIIth round of bids, where giants such as Exxon (NYSE:XOM) did not bid due to lack of clarity and changing of goalposts (gas, for example, has been excluded from profit computation, although oil and gas can emerge concurrently, a foolish example of myopic nitpicking).

Another successful PSU is telecom giant BSNL, in which the Government has cleared sale of a 10% stake reportedly valuing the company at $ 100b. Employees of BSNL, numbering some 300,000, are opposing the IPO, despite being offered ESOPs which would fetch each of them a gain of Rs 200,000 on listing!

What the Government ought to do is unwind its holdings in the PSUs and use the sale proceeds to build up the social security system it has failed to do. This would enable it to move towards flexible labour policy which, in turn, would help create more jobs with entrepreneurs then willing to set up companies.

That would require a political mindset of nation building not in evidence in our political leadership today.

Last week the BSE sensex climbed 511 points, to end at 15162, whilst the Nifty gained 115 to end at 4529. This was mainly in response to falling prices of oil, which went below $120 after OPEC increased output.

The monsoon session is to start soon and it is expected that the Government will go full steam ahead with economic reforms. If it takes up pension reform, and allows for divestment in PSU banks to under 51%, the market would rally sharply, probably going above 16,000 on the sensex. Thereafter, however, it just may call early elections, gambling on an assessment of inflation having been tamed to 7-8% around Dec/Jan. Should early elections be announced, there would be another sharp dip. A sustained upmove would be seen when our leaders commit themselves to economic policies that will do the nation good, not just themselves

Then we would have one flying over the chidya ghar!

Source: Wen Flew Over the Bird’s Nest

It is a well managed bank with healthy financials. But after 119 years, it is valued at $3.6 b., less than half the valuation Ranbaxy, a private company, achieved in 47 years, which is less than half the time.

Okay, one may say it is in a different line of business. Fair comment. Compare ICICI Bank, with a market cap. of $ 22 b. with SBI, at $ 21b. Now SBI is no ordinary bank. It has a 200 year history and has an unbeaten record of uninterrupted dividend history for over 150 years, testimony to its financial strength and good management. With such a long history of success, why is it valued at one twentieth the value of China’s ICBC, with a market cap of over $ 450b. HDFC Bank, at $ 10.5b. is nearly 3 times PNB.

In oil and gas sector, Reliance Industries, also set up in 60s, has a valuation of $ 80 b., larger than that of ONGC, at $ 45b. even though ONGC has excellent financials. Take telecom. Bharti, an upstart, has a market value of $ 40 b. whilst MTNL, an erstwhile monopoly, is only $ 1.5b.

The reason is obvious to all but those in Government who are in denial of true facts. Government treats public sector companies as milch cows, irrespective of the fact that they have minority shareholders. ONGC is valued where it is because it has to bear a huge subsidy bill for petro products. Regrettably, most of this subsidy goes to people who don’t deserve to be subsidised, such as car owners for petrol, truck owners for diesel, the mafia who adulterate diesel with kerosene, for kerosene, and restaurants for LPG cylinders. ONGC, Oil India and GAIL pay the bill, but are still very profitable. IOC, HPCL and BPCL also pay the bill, and have been bankrupted.

There was a joke about the Chairman of a company asking his finance manager why their company’s share price was half that of their competitors when their performance and profitability was the same. A month later it had caught up, so he called in the finance manager, complimented him and asked him how he had achieved it. The manager said he had just spread a rumour…that the Chairman had resigned!

One thinks that if the Government were to resign from these companies they would be doing the companies and themselves a favour. But the disinvestment process is stuck, like a lot of other necessary and sensible reforms, in the quagmire of a failed politics.

The Government did not take the necessary and sensible decisions to hike petro product prices in line with rising oil prices, to sell companies which they have demonstrably failed to manage (look at the valuation differentials), and a whole host of other things, because of politics. The argument was that taking tough but necessary decisions would cost it votes in the next election.

Well, election time is near. Do they now think that subsidised petro product consumers are going to vote for them en masse? Why, then, have they spent Rs 200,000 crores a year subsidising them when a better targeting of subsidies to the needy would have probably cost less than a fifth of the amount?

Do they think farmers are going to vote for them when they continue to reel under inadequate financing, lack of fertiliser and unfair product pricing? Unlikely. Why, then, did they incur some Rs 100,000 crores on subsidising one bit of fertiliser, viz. urea. How much of this has gone to absentee farmers from Punjab and Haryana enjoying tax free income in Canada?

It is easy to spend money, but the spend must result in a gain in productivity. For example if a Government employs, say, 1 lac people, paying them Rs 100 to dig a hole, and another 1 lac, paying them Rs 100 to fill it, GDP will grow by Rs 2 crores without any increase in the nation’s productivity. Such spending thus results in increasing money supply, hence inflation, without increasing the economy’s ability to compete. Inflation has now hit 11%.

Not that the PM and his officials do not know all this; they have been hobbled by survival politics subjugating revival economics.

Investors know all this too, and react to it by selling shares. FIIs continued their selling last week, except on Tuesday, causing the market, which seemed to be rallying till Tuesday, to collapse. The BSE sensex ended the week at 14571, down 618 points. The NIFTY ended the week at 4347, down 170 points.

The market is at a crucial level. If it goes significantly below 14500, the sensex would then look for support at around 12,500. What are the factors that investors need to look out for.

Basically it is how domestic politics shapes up; next week there is a crucial meeting between the Government and its Left allies (is that the correct word?) over the nuclear deal with the US. There is no more time for waffling over this. If the Left continues to be obdurate and prefers to withdraw support, the 14,500 level can crack. Investors do not like political uncertainty and the withdrawal would lead to early elections. If, however, Mulayam supports the Government, it can survive and the nuclear deal can make progress. The market will rally sharply.

Added to this is the likelihood of a fall in global oil prices. A lot of the price rise in oil is now speculative with too much money chasing it. It is not a mismatch of demand and supply; in fact there are a lot of full oil tankers whose cargo cannot find buyers.

In USA consumption of petrol is likely to fall for the first time in 17 years, simply because prices of petrol have been raised. South East Asian countries like Indonesia, Thailand and Malaysia have raised prices 30-40%. They are not, perhaps, hobbled by ‘allies’ or maybe their political leaders have the necessary anatomical parts ours don’t.

So the next week is crucial. Since it involves trying to predict political behaviour it is anybody’s guess.

Source: Stark Contrasts in Creation of Value

They, therefore, maintain a majority stake in 18 public sector banks, which have 70% of the business, and have kept a cap of 74% foreign holding in the telecom sector. This hurts economic growth.

At a recent analyst meet, the CMD of Punjab National Bank, was asked by this columnist why it was that, given their pedigree (it is 113 years, SBI is over 200 years old) and their finances (both have produced excellent results), their market caps are, respectively, $4 and $ 23 b., far lower than the $450 b. commanded by ICBC of China, which is far younger and doesn’t produce such impressive results. Although, given China’s earlier start down the path of economic liberalisation, ICBC has a balance sheet more than 7 times larger than SBI.

Perhaps one of the reasons could be the reluctance of Government to bring down its ownership below 51%. In a globalised world this is stupid, because you Lilliputianise your large players (if I may coin a term). Look at the top Fortune 500 list and see how many are family owned. To grow to a global size, firms have to give up stakes and it will be institutional investors who would buy them. Bill Gates would not be the richest man in the world if he had held on to his 78% stake when he first listed; it is now down in the early teens. ICICI Bank is no less Indian even though more than 70% is held by foreign investors.

Dr Chakrabarty, PNB’s ebullient and frank CMD, made a good observation. If, he said, India is to become the third largest economy in the world by 2050, as everyone now believes, there must be financial institutions from India that have become global and will be able to serve the needs of Indian companies that would also have grown. PNB is taking steps to move in that direction.

It will not, however, happen, unless Government lets go of the fear of financial Armageddon if foreigners control the financial sector in India. One should think a majority stake in SBI plus one or two other large banks would be enough; the others must be allowed to grow through organic and inorganic growth.

In telecom the cap is at 74% for foreign holding. This is making it difficult first for Bharti Airtel and now for Reliance Communications, to make a sensible merger/acquisition of MTN of South Africa. Since foreign investors already hold 13% of R Com, Anil Ambani can offer a maximum of 61% (swapping it with a 33% stake in MTN to emerge as the largest holder of the combined entity); besides MTN has to make an open offer for 20% from minority shareholders.

The reason the Government retains majority control has less, however, to do with the wolf at the door syndrome, and more to do with controlling and appropriating the profits. That is why oil and gas companies are being looted. Indian Oil Corporation, a Fortune 500 company, has reported a loss for Q4 ended Mar 08. Prices of petrol, diesel and other petro products are kept artificially subsidised and the oil marketing companies like IOCL have to bear a part of this subsidy. They have run out of money to buy petro products and there is a looming rationing of petrol and diesel. Moreover, because they are partly compensated via issuance of non marketable petro bonds, they have had to borrow heavily from SBI which, in turn, has made its largest repo borrowing of Rs 13000 crores and has had to hike deposit rates.

There was even an asinine suggestion that in order to make up for loss of revenue if excise duties are reduced (the oil sector contributes some Rs 70000 crores, the highest, to tax revenue) the Finance Ministry was thinking of levying a cess on all taxpayers. Look at the ridiculousness of this! It means that for car owners to get cheaper petrol, all tax payers must pay! And this has got support of the Left parties!?!

Look further at the insane consequences of this. Facing a liquidity crunch for no fault of its, IOCL is thinking of selling its 7.7% stake in ONGC and 2.4% stake in GAIL!

All this to save car and truck owners the pain of paying market related prices for petrol and diesel! This reduces demand elasticity which is 16% in America and so leads to artificially high demand for them, and hence for oil, pushing up its price. Is this a responsible Government?

Under insistence from its Left coalition partners, the Government is following a policy of not selling profit making PSUs. Now that IOCL, BPCL and HPCL are hurtling towards becoming loss making PSUs one supposes they will be sold at bargain basement prices. Does no one in Government see that this is sheer idiocy?

The Government has to take several steps to make India a more energy efficient nation. One of these is to improve public transportation systems and to discourage private transport. During the past few years it has had hugely buoyant tax resources to allow it to do so. These, sadly, have been frittered away, a lot in subsidies which do not serve their intended purpose. Because of poor ports and roads, it is felt that power generation target of 70,000 MW would fall short by 20%, as the equipment would not be able to reach the work sites on time.

Look at the Government’s appetite for tax in the case of a tobacco company, for instance. Granted, tobacco is harmful to health and must be taxed. In the case of ITC, for the year ended Mar 08, the Government collected Rs 15,398 crores through excise and corporate tax, leaving a profit of Rs 3120 for shareholders. The ratio of Government share to shareholders’ share is 5:1. None of this has, however, been used for providing tobacco farmers an alternative livelihood to wean them away from tobacco.

In corporate news, Tata Motors is coming out with a rights issue of Rs 7200 crores to part fund its acquisition of Jaguar Land Rover.

Last week the sensex fell 234 points to close at 16415 and the NIFTY fell 76 to close at 4870. The fiscal deficit is hugely understated by all the off balance sheet bonds given to oil and fertiliser companies; the RBI Governor has quietly stated as much. Interest rates would have to be raised as inflation is not under control, partly due to Governments fiscal incontinence and largely due to its thoughtless policies of state control over important sectors (banking, oil & gas, coal). The US is also likely to end its interest rate cut cycle and start to raise them. Rising interest rates makes debt markets relatively more attractive. So it is unlikely that the sensex would do anything dramatic this calendar year.

Source:  Who’s afraid of East India Co Wolf?

The underlay of these two emotions are complacency and lethargy, respectively.

The current rally which took the sensex up from 14,700 to 17,700 may lead investor to become complacent, or sanguine, for old times sake. They ought not to. Better buying opportunities should come later.

The reason for the caution are that both domestic and global factors warrant a display of caution. General elections at the Centre are due next year, but expected to be called late this year as the ideological strains of smiling for a family picture will start telling and as a coalition Government turns into a collision Government. States like Karnataka are going to the polls shortly.

Governments, except under severe pressure as in 1991, tend to take foolish economic decisions. As elections approach, they compete even harder for foolishness, bordering asininity. Parties in Karnataka are promising things like free power, a complete waiver of farm debt and other things, in order to curry political support. This largesse, of course, comes from Government (hence tax payers) coffers and not from party coffers which, logically, it should. One way to bring a measure of sanity would be to ask political parties to bear a part of the cost (say 10%) of electoral promises from party funds!

Foolish decisions take their toll on companies and on the economy; thus on stokmarkets. The subsidy provided for petroleum products is estimated at Rs. 77,000 crores, comprising petrol (7,300), diesel (35,700) PDS kerosene (19,100) and LPG (15,500). This is borne by the Government and upstream and downstream oil & gas companies who are partly compensated for the losses through issuance of bonds. The downstream companies such as IOC, BPCL and HPCL are financially haemorrhaging and have become highly leveraged. They do not now, have money to import diesel without which road transport would come to a halt and economic growth would not be the expected 8.5% or more.

With crude oil prices relentlessly rising (they hit $ 126/b) the subsidy burden can only balloon and the foolishness of the subsidy policy only exacerbate. A rebalancing of our energy mix is needed and the main hope is gas, which, fortuitously, we have discovered in good measure. Gas, however, would remain buried under the sea until its pricing, now in dispute, is expeditiously resolved. We cannot afford the luxury of a slow moving judicial system; the issue has to be settled soon and with finality.

The foolishness of Government interference and its impact on companies is also evident in the telecom sector. In Mar 2006 BSNL, a wholly owned Government telecom company, launched a tender for some 45m lines. Being a Government entity, the tendering process was subjected to challenge by writ, and finally the tender was drastically pruned on ministerial instruction. BSNL, which then had 17.6m customers, grew to 40.7m customers two years later. Private sector Bharti Airtel, not subjected to meddling, has grown from 19. 5 to 62m customers in the same period.

Bharti is now seeking to expand overseas, by trying to acquire MTN of South Africa (not to be mistaken with MTNL, which Bharti would be reluctant to acquire, given the differences in work culture). BSNL is now opening a new tender for 93m. lines, worth some Rs. 40,000 crores, which would have equipment suppliers salivating and one hopes that the Government has learnt the errors of micromanaging and doesn’t do anything foolish to interrupt it.

Yet other examples of Government pre election actions are in its arm twist of steel companies in both public and private sector, to bring down prices, never mind higher input costs, which they have agreed to now. The prices would, naturally, play catch up once elections are over. Or in the ban on future trading in agro commodities in order to contain inflation is another. Even though a Government committee found no link between prices and futures trading, this was banned. Consequently prices of soya oil, e.g. have soared, instead of fallen!

In fact there is now an illegal market in Indore, called dabba market, which trades in commodities like soya oil and settles trades through the unofficial hawala route. The ban is completely irrational and only a gesture towards containing inflation, without success. The market for the commodity is being exported. If this is not Kafkaesque, what is?

In corporate news of interest, L&T is undertaking a restructuring which would involve hiving off of a dozen operating subsidiaries, thus unlocking a lot of value. The parent company would have a board to guide these subsidiaries and to manage the L&T brand, which is estimated to be worth $ 2b. It is one way to protect the company from takeover; perhaps the trigger was the likely sale by SUUTI (the SPV formed to take over distressed UTI 64 assets) of its 9.1% stake in L&T.

The US $ slid against the Euro and other major currencies, but, surprisingly, especially with elections around the corner, has strengthened against the rupee, which went up to over Rs. 41.5 to the dollar. Perhaps due to massive RBI intervention in buying the greenback.

Globally, too, there is need for caution. Warren Buffet has warned of further pain in the financial system, though not, thankfully, of a panic. Panic was caused by excessive fears of counter party risk having slowed credit growth and was averted by the actions of the US Fed whilst rescuing Bear Sterns. Poor quality securitised mortgages were exchanged for higher quality Government bonds. It seems to have worked in restoring confidence for now. The US Fed seems to have suggested an end to cuts in interest rates.

The sensex fell on all five days of trading last week, losing 862 points to end at 16737. Of the 30 stocks, only two, viz Tata Steel (which contributed 35 points) and HUL (1) were in the black. Major contributors to the decline were RIL (156), L&T (117) and ICICI (99). The Nifty lost 245 points to close at 4982.

It is possible that there could be another rally to take the sensex back to 17,500 levels. If and when that happens, remember the title of this column.

After an initial teeth jarring fall of 726 points on Monday, the sensex seemed to steady itself, but got another shock when an inflation figure of 7% was revealed on Friday, causing it to slide 489 points. Of the weekly 1028 point fall, L&T contributed 176, HDFC 118 and ICICI 115. Inflation would be countered with a hike in CRR, and a tightening of credit which has affected such heavy industry and financial sector companies.

A big part of the problems with our economy can be laid squarely at the doorstep of bad public governance. No, make that abysmal. Take the oil industry, where stupid Government policies have turned the scenario into a tragi comedy! Three PSU marketing companies, IOC, HPCL and BPCL have been converted from being ‘navratnas’ (nine jewels in the PSU crown) to seas of red ink. The losses on account of subsidies they are forced to bear are partially covered by giving them oil bonds (which defers liability of payment to a future Government).

Now the condition of the 3 companies has become impossible, and they have to borrow to continue paying wages. They could, of course, sell the bonds and continue operations, but for some reason the Government has capped sale of bonds to 25% in any quarter! Not only that, but it refuses to grant the bonds the SLR status that would allow banks to invest in them (banks are forced to set aside some of their funds into SLR securities, but oil bonds don’t qualify for some inexplicable reason). So the market for the bonds becomes restricted, and the bonds have to be sold at a discount.

In essence, therefore, the Government subsidises prices of petroleum products which benefits the intended beneficiaries less but helps truckers lower their costs (by adulterating diesel with kerosene and causing environmental problems), helps restaurants cut costs and helps private sector financiers get bonds at a discount whilst bleeding PSU navratnas. If this cannot be called a Pavlovian tragi comedy, what can? Remember, the bill for all this is to be paid by a future Government.

It is the same in every sector the Government is preponderant in. Industry is hampered because of a shortage of power, some 40% of which is wasted through theft! Soft politics to favoured constituencies and corrupt administration doesn’t allow this issue to be tackled firmly, as it should. In an election year, it would be even tougher. Result? The consumer is paying, and will continue to pay, higher charges than necessary. Wonder why inflation is high at 7%?

Where a large part of the industry is in the private sector, the Government is able to pressurize companies to reduce prices, which, in an election year, becomes of paramount importance. Steel companies had raised prices some 20% in March, partly as a result of rising input costs of power and coal, largely under Government control. They have acceded to the request to roll them back.

On top of this, we have had unseasonal rains in some parts of the country, which would impact agricultural output. Interest rates will rise, to combat inflation, which will add to the debt servicing cost of industry.

Expect, therefore, the stock market to have a bumpy ride this year. It would be advisable to get light on every rise. Foreign investors are not likely to come rushing in because the financial sector problems in the US have yet to be fully played out. UBS wrote down $ 19 b. of losses last week. Other worms will emerge from the woodwork.

In India, there would be problems with FX derivative contracts. Mid size companies have entered into these contracts and are now suing banks that advised them to. These losses may now be required to be shown in the accounts; hitherto they were not immediately required to. So maybe results for Q1 of 08-09 may start reflecting such losses, which would also impact the market.

All in all, prudence is the better part of valour and one should become lighter on rallies. In an election year, vote for caution.