The Indian stock market scored better last week than the Indian cricket team, winning all five matches and ending up each day of the past week. The BSE sensex ended the week up 893, at 15318, and the NIFTY ended up 274, at 4464. Of the 893 sensex points, Reliance contributed 196, or more than a fifth, ICICI Bank 81 and Tata Steel 69. What next?
The market went up because, for the moment, the political kettle has let off steam, after the Government set up a committee to satisfy the Left parties about the nuclear agreement with the US, and agreed to defer its operationalisation. The deal, which provides both an alternative source of energy, needed to sustain a high economic growth, as well as access to technology, and a chance for India to be taken more seriously, is in India’s long term interest. The stock market, sadly, is myopic, concerned with short term interest, and the removal of uncertainty about the government’s continuity, made it ecstatic.
Once the monsoon session of Parliament ends, mid September, it is likely that the Government would take small steps towards its operationalisation. For there is only a tiny window for this to be done, before the next US elections; a new US President may not push the deal through the US Congress. Once this happens, the Left would start making noises, until Parliament next opens for the winter session. So for about 3 months from mid Sep there could be high volatility with an upward bias.
The economy is chugging along well, with growth in the first quarter to Jun 07 at a healthy 9.3% and inflation tamed at under 4%. Given strong foreign currency reserves and the healthy economic growth, the Government is embarking, before the next elections, on a huge defence build up for the airforce, inviting tenders for a $10 billion (Rs 42,000 crore) order for 126 fighter jets. Dangling of such a large order would also help secure the support of supplier countries for the nuclear deal.
But officialdom can still spell doom! India ranks 134th out of 175 countries studied by the World Bank, for the ease of doing business. We require over 120 procedures to be completed, which takes several months and a substantial amount of grease. Fortunately, the World Bank has still not thought of researching the ease of closing a failed business! What politicians do not accept, at least publicly, is that the easier it is for businesses to be allowed to close, the more willing business is to open. The Left staunchly protects unionised labour rights, which is its vote bank, never mind about paucity of growth opportunities for unorganised labour.
In the interest of oil conservation, the Government is likely to mandate two things. One is a 10 per cent ethanol blending in fuel. The other is fuel efficiency norms for cars. Both are sensible, both likely to be opposed and it is hoped that Government will go ahead with will. Some state governments have not even gone up to 5 per cent ethanol blending, for fear of losing excise revenue from diverting molasses from potable liquor! For fuel efficiency, auto companies desire tax concessions to implement them! This is hogwash and the Government must staunchly refuse and concessions. A good idea would be to introduce fuel efficiency in a tax neutral manner. Mandate desired norms for each segment and reward those bettering the norms with excise cuts, paid for by those flouting the norms who bear higher rates.
Similarly in telecom sector, mobile operators have been resisting the introduction of mobile number portability (MNP). Under MNP it is the customer who owns the number, not the operator. He is thus free to switch operators (albeit at a cost) if he is dissatisfied enough with service. MNP will ensure true competition in telecom sector. As of now there is enough competition for customer acquisition but none for customer retention, and MNP is the only thing that can achieve that. TRAI’s attempt to not limit number of operators in a circle, and to ease M&A, will help in creating competition, though only for acquisition and not for retention.
The market can be expected to go up steadily till the monsoon session ends. After that, depending on the Government steps towards operationalisation of the nuclear agreement, one could expect a lot of noise and hence volatility. Investors should forsake the leisurely waltz and learn the quickstep.
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