After plunging from a high of 15,868, on July 24, to 13,779, on Aug 17, on sub-prime concerns as well as domestic political worries, the Sensex rallied to end the week at 15,590, within striking distance of its peak. The doctors at both the European Central Bank as well as the US Federal Reserve gave large doses of monetary injections to avert a credit crisis as banks were chary of lending to others, fearing a taint that could arise from the sub-prime problem triggered by loans to borrowers with poor credit records.
At home, an imminent collapse of the government after the Left parties huffed and puffed, threatening to bring the house down unless the nuclear deal with the US was kept in abeyance, was seemingly averted. Last week the Sensex added 271 points, to close at 15,590, with ICICI Bank (55 of those) and HDFC (53) being the main contributors. The Nifty ended up 45 points at 4509.
There may yet be a bit of steam left in Indian markets, but one would need to get lighter. In India, inflation is seemingly tame, at a 16-month low of under 4 per cent and, with the corporate sector doing well, corporate tax collections are up 42 per cent year-on-year in the five months to August. The US Fed, which meets in the next fortnight will likely cut interest rates by 25 basis points to shore up a weakening economy. For the first time in four years, job creation was negative at 4,000 jobs lost, in July. Cutting interest rates, though, would send a wrong signal to profligate lenders in the sub-prime market; the task of a regulator is never easy.
From October, corporate results for the quarter ended September would start flowing, and, bereft of 'other income' from currency hedging, may not meet investor expectations. Globally, too, Osama Bin Laden has released another threatening video. The Left parties adamantly oppose operationalising of the nuclear agreement which spells political uncertainty. This could lead to the uncertainty of a mid-term poll, one that all parties profess to wish to avoid. So, caution is needed.
With the Left in no mood to cooperate, several of the pending economic reform bills such as the new Companies Bill and the Pension Bill would get stalled. The government owns a majority in some 28 public sector banks, none of which are in the top 200 in the world (barring SBI). For a country India's size, this is a sorry statement of policy. There must be a reorganisation and consolidation in the banking sector; however, the politics of confrontational coalition would not allow it. Hence the government is pumping in more money into PSU banks that have close to 51 per cent government holding and need to raise more capital.
The telecom sector, touted as the biggest success story of economic reform, is also hobbled by policy. The Defence Ministry has released 25MHz of spectrum, but its allocation is going to cause problems. The government wishes to auction it, to raise revenue in a scarce resource, but thereby making the service more expensive, and also in the process giving squatters rights to telcos that obtain spectrum but are unable to compete. There is a huge untapped demand for telephony; witness the capital expenditure plans of Rs 60,000 crore over the next three years by BSNL to reach 140 million lines!
The government would also not be able to tackle an inflexible labour policy, which protects existing jobs in the organised sector, which only covers a small fraction of the population, at the cost of stalling new job creation and at the cost of productivity. Meanwhile, Bajaj Auto is finding it tough to close its Akurdi plant, far less productive than a new one in Uttarakhand, partly because of logistical problems created by octroi. The Maharashtra Government is so dependent on octroi revenue that it is unable to remove this tax which causes a criminal waste of fuel and of time, unlike other states that have managed to.
The market may near, perhaps marginally cross, its July peak but one needs to tread with a lot of caution. As the saying goes, he who fights and runs away shall live to fight another day.
Feedback on this column could be sent to email@example.com