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Market confident, but structural problems remain

The basic problem of the Indian economy is structural. As reiterated by Planning Commission Chairman Montek Ahulwalia, agriculture needs to be made viable, writes J Mulraj.

india Updated: Sep 16, 2007 23:24 IST
J Mulraj

Indian stock markets are near their all time highs and seem to be shrugging off both global factors (like the collapse of a UK mortgage bank, indicating that the sub-prime problem still persists) as well as domestic ones (such as the nuclear fission between coalition partners). It also shrugged off news of a lower growth of 7.1 per cent in July index of industrial production. The Sensex ended the week up 13 points, at 15,603 and the NIFTY ended up 11, at 4,518. Interestingly, the major contributor to the Sensex gain was Reliance, which pulled it up 90 points, after the government cleared its formula for gas pricing (though subject to ongoing litigation), and arrived at a price of $ 4.33 per unit. The biggest drop was because of Infosys (-67), perhaps on worries of a weakening dollar.

The corporate sector is optimistic, judging by some capex plans. Public sector steel major SAIL is set to double capacity, to 26 million tonnes, by 2011, and more than double again, to 60 million tonnes per annum by 2020. Reliance is outlaying $ 2 billion to go into building ships and dredgers. Suzlon has lined up $ 1.4 billion to increase turbine capacity and Videocon is looking to spend $ 1 billion on acquiring oil assets abroad. SBI plans to raise Rs 10,000 crores ($2.5b) and Cairn Energy $ 1billion through an overseas issue.

Good IPOs which have left money on the table for investors are well received, such as that of Power Grid, which was oversubscribed 64 times and can be expected to open with a substantial premium over issue price of Rs 52. Issuers that priced aggressively, such as Puruvankara, find that the issue just manages to get subscribed, and that the price drops on listing. Leaving money on the table for ensuring continued investor support was something the late Dhirubhai Ambani had mastered in Reliance.

The basic problem of the Indian economy is structural. As reiterated by Planning Commission Chairman Montek Ahulwalia, agriculture needs to be made viable. It supports 60 per cent of our population but gets 19 per cent of the income. This is both the result as well as the cause of, fragmented land holdings, leading to low productivity and unviable operations. Instead of helping improve terms of trade for farmers, the government imposes crazy restrictions on movement of farm produce and controls the price of many. Organised retail tried to solve that by getting permission to purchase directly from the farmer, eliminating middlemen and thus improving the viability of farming. This has been stalled in a few states succumbing to the middlemen traders’ protests, unmindful of the fact that the vote bank of farmers is several times that of the traders.

Industry is also clamouring for a more flexible labour policy which would allow them to expand and create jobs, but provide the comfort of being able to shut the unit (paying mandated compensation) if the customer switched to another source, as happens in a globalised world. The labour ministry is now likely to accept this for exporting textile units. However, this would become one more bone of contention with the Left.

Confrontational politics would also stymie the Sethusamudram canal project as it would destroy a mythological bridge not scientifically proven to be man made, even though the canal would save some 30 hours for each ship that currently navigates below Sri Lanka.

Next week would see the announcement of the next interest rate cut by the US Federal Reserve, expected by markets to be 25 basis points. Since this is already built in, the market would be enthused only with a higher cut of 50 basis. Next week would also see nuclear steam being let off when the Congress meets the Left parties over operationalising the 123 agreement. An obdurate Left is likely to withdraw support and create political uncertainty, never a pleasing thought for stock markets.

So, better to become a bit lighter and await the outcome of these events.

Feedback on this column could be sent to jmulraj@hathway.com