The latest issue of The Economist maintains that the Indian economy is overheating, with inflation going up (6.6 per cent), high credit growth (over 30 per cent), high capacity utilisation (over 90 per cent), a lack of infrastructure and high fiscal deficit. This leads to fears of rising interest rates. Together with reports that the government is considering raising short-term (i.e. over a year) capital gains tax rate from the current 10 per cent to 15 per cent, this means that the flow of money from bank deposits into equity markets may reduce. Banks like ICICI Bank have hiked home loan rates by one percentage point and also deposit rates, though public sector banks are not hiking home loan rates in deference to the wishes of the Finance Minister.
On the flip side, others feel that though inflation has gone up, it is not worryingly high and that interest rates would not move up very sharply. In an encouraging signal, 18 States have a combined budget surplus, the first time in 20 years! True, infrastructure has been neglected as any Mumbaikar will testify. But corporate results are stunning, the economy is growing at over 9 per cent, which looks sustainable, especially if more attention is paid to agriculture.
Both arguments are therefore valid in part. Net net, given that India continues to grow healthily and the politicians haven’t yet made a right royal mess of things, the India story will continue to attract funds and the bull will continue to run with the occasional pauses for breath.
This does not, however, assure that the government won’t do anything foolish. In fact there are several examples of just how much it wishes to destroy its most valuable assets. The most valuable of its companies is ONGC. The man responsible for creating much of that value, Subir Raha, was not granted an extension of his chairmanship, despite showing fantastic performance, for no good reason. The PESB (Public Enterprises Selection Board) then backed R. S. Sharma, the Chief Financial Officer, as Chairman. It took five months for the PMO to reject his candidature, without good reason! ONGC is spearheading India’s search for oil in a world that is soon reaching a break-point so not only the company, but the country. It needs someone to head it.
The three public sector oil refining companies, IOC, BPCL and HPCL, once classified as ‘navratnas’, have been driven into spasmodic bouts of red, when they debit the subsidy burden, and alternate it with black, when they get bonds compensating them for this sharing! Valuations of these companies, with the government as the main shareholder, are being destroyed. Or take SBI. Despite more than 150 years of dividend payment (I can’t think of another company that has it) and despite good fundamentals, it is valued at under $15 billion. A more recent Chinese bank, ICBC, with inferior ratios, quotes at $ 134 billion, the, fourth in the world.
The truth is that politicians and bureaucrats are loath to give up their power to get their companies to do things (like sharing subsidies or footing bills for junkets), never mind that the companies are slowly becoming uncompetitive and less valuable.
The government is also watering down its own credibility when it claims it is not bound, despite having voluntarily signed an agreement, to offer the remaining 26 per cent it holds in VSNL, if the Tatas exercise their call option after February 13 to buy it. This seems legally untenable, ethically reprehensible and practically illogical. By refusing to honour its commitment is the government not becoming a punter, hoping that the stock price of VSNL under private management would appreciate faster? And if yes, why not speed up divestment when, admittedly, private sector management creates more value?
The Sensex climbed 135 points last week to 14,538, thanks mainly to Infosys (77) and ICICI Bank (66). The Nifty was flat. If there is a pre-budget dip it may be a good idea to jump in.