Stock market movements are a fascinating interplay of two human emotions, greed and fear. At times like these, when the BSE Sensex is just half a chin away from crossing its peak of 14,697, even as the Nifty has crossed it, the churning of stomachs on both greed and fear becomes quite acidic! India has several paradoxes, the result of abysmal governance, and these could, perhaps, be used as a framework to understand the market.
Last week the Sensex closed at 14570, up 232 (of which L&T contributed a whopping 105 points) whilst the Nifty was up 49 at 4297.
One of the paradoxes was in the simultaneous announcements of a whopping 9.4 per cent GDP growth for India in 06-07, its highest ever, with news of riots by the Gujjar community, which is demanding the State government uphold its promise to classify them as a scheduled tribe, thus eligible for education and job quotas.
Another is the paradox of rising real estate prices with rising percentage of slum dwellers. Yet another would be the increased savings rate (32.4 per cent of GDP) and a consumption boom with increased farmer suicides. One of the roots of the problem is the neglect of agriculture.
Around 60 per cent of the population relies on agriculture; they get a 19 per cent share of national income. This is due to several reasons like fragmentation of land holdings with each generation leading to low productivity, neglect of road connectivity to rural areas leading to a 35 per cent wastage in transport of fruit and vegetables and the arbitrariness and control over agro product prices by the government.
The fallout of this is in other areas. Denied a livelihood, there is urban migration, leading to increasing slums (growth of slum dwellers is more than 3 times growth in urban population), parts of which are impeding airport expansion, which, in turn, will affect future business and commerce.
The Maharashtra government, which hitherto locked up large tracts of land with a foolish urban land ceiling act, is now more foolishly, contemplating release of 5,500 acres of salt pans, never mind the ecological impact (we could see worse flooding again), succumbing to the builders lobby.
Paradoxically, a Bombay High Court judge could not buy two flats in an all-cheque deal, pointing to the enormous role played by unaccounted money. It was WR Alger who opined that ‘true statesmanship is the art of changing a nation from what it is into what it ought to be’. We have no true statesman in India.
Human testing of new drugs without due process is common, because the migratory population has little income. Contrast this with China where the former head of the FDA has been given a death sentence for approving drugs without due process and accepting bribes!
These are the undercurrents that can blow up, like demonstrations in Rajasthan show, unless the government starts doing its job — which is providing education and infrastructure. To have the resources to do so meaningfully it has to get out of its businesses. It is destroying them!
The three PSU oil companies, e.g., IOC, HPCL and BPCL, have declared better results due to being allotted bonds in compensation of losses suffered by them for subsidising kerosene and LPG. They were asked to bear the losses initially (so the fiscal deficit doesn’t get worse) but are compensated for the losses through bonds (locking up funds senselessly). Luckily, gas has come to India’s rescue and a surplus is projected from 2009-10. This will obviate the need for subsidy on LPG.
The largest ever IPO from real estate firm DLF Ltd will be opening on Jun 11 and would be well received as its business model has income streams from rentals as well as development and sale. As and when rentals are renegotiated on expiry of term, which would be inflation positive, there would be net flows to the bottom line. DLF and Fortis are to set up a JV to establish a string of hospitals.
It looks like the Sensex will pull its chin over and cross the peak, perhaps by a few hundred points. Getting light in that rally would be prudent, to enable a future entry. India’s long-term story is good, but the paradoxes need to be addressed.