Colas bring black mark for India

The country got a black mark globally on a place for investments, writes Dr Bhaskar Dasgupta.

The India Babble
The news that Mahindra and Mahindra was considering making two overseas tractor acquisitions made its scrip boom. Volumes hit the highest for the year and the Sensex touched a 29 month high at 3,977. The rupee got into the act and reached a 3 year high at 45.85 to the USD. The 4000 level is the psychological target for this week and if the Sensex reaches that, then the market seems to think that there will be a qualitative jump in the index in the coming weeks.

So it proved on Tuesday when the Sensex closed at 4006, with cement, steel and consumer durable firms leading the charge. Over the next three days, the Sensex kept on powering up and hit a high of 4125 at the close. GDP growth rate for the Indian economy was predicted to be 6 per cent for this fiscal year and that pushed the markets up even higher.

The Financial News reported that Emerging Market equity fund managers are going overweight in India. The MSCI Emerging Market Index has already returned 20 per cent till date over this year. India is the biggest overweight of them all. The average allocation is 6.5 per cent and the average 2 per cent overweight is the largest ever.

We talked about providing healthcare outsourcing to other countries some weeks back. Just out of interest, the FT on Wednesday reported that General Motors spends more than $1300 per car on healthcare for retired workers and this is more than the cost of steel which goes into each car. Makes one think of the weird situation these days and the economics behind healthcare
in the western world.

Here's another rant. The Government tests on the cola wars came out to be positive for Coca Cola and Pepsi. Not one laboratory but two laboratories tested them and found them ok. The issue is with the standards that the Indian government sets, not the 2 companies. Look at what happened. The government is not affected, the NGO who first started off this is having
nice loads of publicity, and the papers are selling well. Who lost? The companies lost out on sales and the employees will suffer, the general populace lost out, as they are still nowhere near good water and drinks standards, the country got a black mark internationally on a place for investments. Nice one, boys, very nice indeed.

Just as we were closing down this column, I glanced over to Reuters and noticed that Bimal Jalan had thrown a googly at the markets, by announcing a 50 basis point rate cut to the repo rate. I have to admit that I am quite surprised at this rate, while the inflation is pretty low at around 4 per cent, the fact that the RBI will be this aggressive following a good monsoon is
surprising. What this will do is to increase the supply of credit to the economy and can really boost it. Thinking again about it, it looks like its well timed and can, God willing, really boost the economy immediately after the harvest period.

The Babble in the Ivory Towers
Valery Lazarev and Paul Gregory have investigated a fascinating part of economic history. They studied the political economy of dictatorships, by analysing the allocation of cars and trucks in the 1930's by a 3 person commission of top Soviet officials. This is one of the first examples of an empirical investigation of resource allocation by a dictatorship.

They applied two models of dictatorial allocative behaviour, namely, an economic planning model and a political gift exchange model. Based on empirical analysis, they determined that the political gift exchange model was more appropriate than the economic model. They carried out some further analysis on how the petitions were rejected and concluded that the dictator preferred unconstrained decision - favouring discretion. Finally, they also concluded that the dictator used gift exchange to purchase loyalty against uncontrolled market exchanges and that political bias in resource allocation was undermining the dictator's power in the long run.

A fascinating study, something which is applicable to a rather unfortunately vast number of countries in existence today, which are still afflicted by crony capitalism, dictatorship and the like. From countries such as South Korea, Taiwan, Thailand, India, Bangladesh, almost all of the African countries to South America, these countries are run on the basis of personal greed, crony capitalism and dictatorship of a tiny elite.

Most of these countries have scarce resources, and for them to carry out resource allocation based on purchasing loyalty to entrench their rule and line their pocket is just criminal. The recent petrol station imbroglio in India and the telecommunication licences in Thailand are just 2 examples of how corruption and personal enrichment go against the country's needs of doing resource allocation on economic principles.

Details of this paper and past columns are available on
http://beady.blogspot.com

The World Babble
On Monday, US blue chip stocks closed at a 14 month high, while European equities were at their highest for more than 8 months, all driven by hopes and figures of an economic recovery. Japan got into the game with the Nikkei 225 closing above 10000 for the first time in a year, GDP numbers and machinery orders were high, foreign institutional investors showed interest, so the market looked up.

Tuesday's figures showing that US new home construction is at a 17 year high, gave further hope that the recovery is starting to take root, but Wednesday, HP's limp results dragged the markets down slightly. Thursday, the good jobs data coming from the US gave a fillip to the market and made it resume the rally, which had rather sagged on Wednesday. This effect was in US as well as in Japan and Europe. The Footsie closed at 4225, the DOW at 9348, the NASDAQ at 1765, while Japan powered ahead, breaking the 10,000 barrier and ended up at 10281.

The fact that up to $50 billion dollars will have to be plucked from the wallets of US consumers to pay for the upgrade of the US Electricity Grid, will be hanging heavily over them. Some reports indicate that almost $100 billion may be required. This is bound to hurt, especially when considering the impact on the deficit.

An indication that the job market is improving is felt in the admissions numbers for the Business Schools, which are down about 30 per cent compared to last year last year. Candidates do an MBA mostly to improve their job prospects or to park themselves in a place, where they can pick up jobs once the economy picks up.

US, Canada and Argentina launched a big broadside at the European Union at the WTO on genetically modified crops, which obviously was followed by a strong counter reaction by the EU. The EU's labelling process simply is too expensive and rather difficult to implement. Watch this space and this could well be the start of a big trade war. On the other hand, the fact that US has retreated slightly on the drugs issue is good news. If you recall, the US single handedly managed to block the agreement on poor countries manufacturing patented drugs for epidemics and public health emergencies, but now it looks like this issue may be heading for agreement. Now for that proxy agricultural agreement.

US failed to get its own body set up to manage Iraq's oil, now a group of 9 Iraqi members will manage Iraqi oil reserves, thereby raising the hopes of the non-US oil companies. In any case, this is all hypothetical, till the security situation is improved, there will be no oil at all.

An interesting development came to light when Sumitomo Mitsui Financial Group, Japan's 2nd largest bank, Bank of China, one of the largest banks in China, and Korea Exchange Bank, the 5th largest in South Korea signed an agreement to seek joint business opportunities. While this is non-binding, the very fact that there is an agreement to do something about cross-border business deals, specially in a politically sensitive sector as Banking is very heartening. Watch those barriers melt away (ok ok, so this is a bit of an exaggeration, but still)

France seems set to slip into recession after news that the French economy shrunk by 0.3 per cent in the second quarter. This will mean trouble for Prime Minister Raffarin, who is hoping to have good economic results to contain the public sector deficit. Mind you, the Iraq war could have had an impact, but looking at Switzerland, Germany, Italy and Netherlands, who are all technically in recession, one would worry about France. Add to that the entire laughable situation surrounding the 10,000 heat wave related deaths in France, the self professed champion of healthcare system in the western world, and you can see why people are getting suspicious.

The dollar hit a 4-month high against the Euro on Thursday, breaking through the $1.10 mark, as the markets took in the positive news coming from the US sector versus the doom and gloom from the Euro Sector. We all know about the significant difference between the productivity on the US side versus the Euro side, but this is getting ridiculous!

(Dr Bhaskar Dasgupta writes a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.)