Their erudition and their education, would, it was felt, help them steer a coalition Government hobbled by Left parties with antediluvian ideas of economic growth, on a sensible path. For four years, it seemed things were going well, with the Indian economy growing at 8% and pouring enormous amounts of tax revenues to the Government. The triumvirate, alas, forgot what they had learnt in economics classes and succumbed to the politics of survival. We will now pay the price of neglect to plan for the future.

Poor governance matters. Look at Vietnam, till now one of the tiger economies, whose fast economic growth attracted a lot of foreign capital and created a stockmarket boom. The growth was not managed. The stockmarket has fallen 70% from its peak and every single day in April was a downtick! Look at Zimbabwe, where Robert Mugabe’s neglect has turned a country once the rice bowl of Africa, feeding other nations, into one that has to beg for food as it is bankrupt. Look at North Korea where upward of 1 m. people will die of famine as the great leader chases his nuclear nightmare.

Luckily India has democracy, and democratic institutions. But economic realities must be faced, such as rising crude oil prices unable to sustain untargeted subsidies, without fully prostrating to political compulsions. The triumverate ought to have been protected from political interference, much as Narasimha Rao did when Manmohan was the Prime Minister!

GDP growth is expected to slow down this year, though we should still be over 8%. If services, which account for 55% of the economy, continue growing at above 10%, that provides 5.5% GDP growth; industry, which accounts for 28%, growing at 7% (as in April), would provide another 2% and agriculture, accounting for 18% would, with a 3% growth, chip in with 0.5%, adding up to 8%. Or more, with higher growth in any sector.

The irony is that the resources generated during the past four years in terms of tax revenues, have not been spent in ensuring the future. Most of it has been wasted in political gestures, such as the subsidy on petroleum products. Only a small fraction, perhaps not even a tenth, goes to the truly deserving, who would need subsidised kerosene and LPG as fuel for cooking.

This population could provided the subsidy in a more effective way, using technology, without needing a blanket low price for all. The kerosene mafia, which adulterates diesel with subsidised kerosene, is a beneficiary of this largesse, as are car owners who are not discouraged from buying fuel guzzling cars. (Belatedly, the Government has woken up to its responsibility and levied a special excise of upto Rs 20,000 on fuel guzzlers; too little, too late). Contrast this with Indonesia, where the Government had the cajones to hike petrol prices by 30% last year. Demand for oil has fallen 10% since.

The BJP Government had, when in power, hiked petrol and diesel prices by an equal amount, even though the underlying crude oil price growth was much less. However, it did it in 34 small increases, without attracting public fury, instead of one large one, leading to protests. (Ironically the protestors were the very people who prevented the small hikes). So even when politics comes into economics, management of it becomes important.

Kerosene coupons, much like food coupons in America, would be one way of better targeting subsidies to reach only the intended beneficiaries. Modern day technologies like smart cards embedded with chips to distribute products can also be used. The Government could, and should, have used buoyant tax revenues to develop resources using floating turbines to generate wind power and wave power technology to generate power from waves is now advanced enough to make it equivalent to nuclear power, which would give the Government an alternative. India, with its huge coastline, would be able to develop this, had the priorities of nation building been determine by strategic thinking and economics instead of populism and accommodative politics!

Because prices of petrol and diesel have been subsidised, there is no price effect on its consumption, resulting in a ballooning import bill for crude oil. This leads to a current account deficit, taken care of by capital inflows. To attract which, and to control inflation (which in the last week of May touched a 7 year high of 8.75%), interest rates would need to be raised. RBI did just that, raising the repo rate (the one at which it lends to banks) by a quarter percentage, to 8%. The interest rate cycle is turning up, globally, which would negatively affect equity markets.

With all these untargeted, hence largely wasteful, subsidies on oil, on fertilizers, with the increase in salary after the pay commission hike and with the farm loan waiver, the Government’s fiscal position is atrocious, which is why foreign investors have been selling in spades. Which is also why the Government approved a procurement price of Rs 850/quintal for wheat, lower than the Rs 1000 recommended by CAC.

There was a lot of interesting corporate news. The promoters of Ranbaxy, India’s largest pharma company, agreed to sell their 34% stake to Japanese Dai Ichi Sankyo at a price significantly higher than market price, which consequently shot up. Dai Ichi will make an open offer for 20% at the same price, of Rs 737 per share.

Reliance Communication, which is planning a merger with MTN of South Africa which would be the largest deal from India, will have to face another complication. (The cap on foreign investment in telecom is a major complication which calls for a convoluted route to takeover). Reliance Industries has claimed that it has the right of first refusal if R Com is sold.

Idea Cellular is taking over Spice, in which Telekom Malaysia has a 39.5% stake. Post merger and preferential allotment, it would end up with 20%.

The India story is still good, largely due to the demographic dividend, with a young, well educated population who are free to pursue dreams. At a recent analyst meet of NIIT it was pointed out that India will have an addition of some 47 m. educated people in the 19-25 age group. The rest of the world (including China) will have a reduction of some 53 m. in this age group. Given proper governance, and a polity that cares for the future of the country more than for its longevity, there is no reason why the boom should not continue for years. Given good governance!

Last week the sensex fell sharply by 506 points on opening day (high oil prices, weak Dow), rallied thereafter, then fell again, to close down 382 points at 15181. The Nifty fell 110 points to end at 4517.

It is possible that the sensex can rally to over 16,000 level. One could exit if it does, for thereafter, at some point, early elections may be called. Oil prices are likely to fall, which would help control inflation. The inflationary environment would probably be most benign in Nov and Dec. An election then may probably be seen to be in the best interest of the ruling Government.

Source: Investing in India – What They Didn’t Teach Them at Harvard!

The BSE sensex rose 474 points over the week, ending at 17,600 and the Nifty added 116 to end at 5228.

Other than DLF, Q4 PAT growth was encouraging at Reliance Communication (47%), Hindalco 49%, HDFC 40% and Corporation Bank (73%). Some more results in the next two weeks of the larger companies could enthuse investors and take the sensex up perhaps another 1000. Between now and then would be a good time to get lighter, as the next move would in all likelihood be south.

The RBI did not raise interest rates because the interbank rate is closer to the reverse repo rate so an increase would not really help suck out liquidity. The RBI Governor sees GDP growing at 8.1% this year, with a 35% gross domestic savings rate and a 36% gross domestic capital formation.

Though PAT growth has been generally encouraging, margins are under pressure by increased interest cost. According to Multi Consult P Ltd, for the quarter ended march 2008, sales of 818 companies are up 22%; interest cost up 41% and profit after tax up only 17%. This quarter shows a combination of higher interest cost and the squeeze on margins.

One concern is that, in order to combat inflation, which will become a political hot potato as elections approach, interest rates would need to be raised, sacrificing a bit of growth in the process. In areas where consumers rely on borrowing (automobiles, consumer durables, housing) this could impact demand and squeeze margins. Inflation is already at 7.57%, too high for comfort. Computation of inflation does not include several items (such as rent) which are commonly used; probably so as to contain the wages of Government employees which are linked to the official computation.

Globally, the falling interest rate cycle could be coming to an end and if the US currency weakens further, may call for a rise in rates to stanch the fall. One of the factors that can lead to a further weakening would be if other oil producing countries follow the example of Iran, which has reportedly stopped quoting for its oil in $ and uses a mix of yen and euro. Were others to follow suit, the US $ could come under greater pressure.

In the telecom sector, introduction of mobile number portability is likely to take some more time. This is the only thing that would bring in true competition for customer retention and so improve service standards. There is enough competition for customer acquisition (witness the slashing by Bharti Airtel of long distance telephony rates and roaming charges) but none for customer retention. Customers are locked into a provider because the hassle of informing contacts (and thus of losing out on some) makes them suffer inadequate service.

The Supreme Court has determined that R Comm and Tata Teleservices, which provided mobility on their fixed line networks, would be liable to pay ADC (access deficit charges) to BSNL of Rs 400 crores and Rs 300 crores respectively. R Comm claims to have already provided it in its accounts, with no impact on future profit statements. BSNL, on its part, is taking TRAI (the regulatory authority) for having phased out ADC, as it continues to provide telecom services in unviable areas, for which the ADC levy was introduced.

The Government is expected to sell big blocks of stock in 3 companies held by SUUTI, the entity that was formed to take over the assets of US 64 when it collapsed. It will start with the 27% stake in Axis Bank which is expected to be sold to various institutional bidders and fetch over Rs 9000 crores. Then will come its holding in L&T and in ITC. ITC’s stake sale could well attract the attention of BAT, which has been trying to get majority control and, with it, management control, for a long time.

With tobacco consumption declining in developed countries, BAT, Philip Morris and others are trying hard to get into developing countries like China and India, where sales are rising yet and profits are enormous. The tobacco used by foreign brands, however, is different from the variety grown in India, and tobacco farmers would find the going tough should local brands which use the local variety be phased out.

The rally can thus continue for a week or two, spurred on by more corporate results which are encouraging. One ought to use it to get lighter. There are too many imponderables for comfort at these levels. Not least being the poor fiscal health of the country and the neglect of planning for the future. Goldman Sachs says India is the worst amongst the BRIC countries in its spend on education. If only political leaders were to concentrate their minds on such matters, of planning for the future, rather than, as they do, on whether cheer leaders are needed, or whether actors should stop smoking in movies or other inane matters, it would be very welcome.

Have you read the latest Honest Truth by Ajit Dayal?

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.