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Good news for the market

It was a steady upward trend, Sensex traded in a range of about 150 points and ended up at 3180, says Dr Bhaskar Dasgupta.

india Updated: Jun 07, 2003 21:29 IST
Dr Bhaskar Dasgupta
Dr Bhaskar Dasgupta

The India Babble
So, it was a reasonably good week for the markets, steady upward trend, the Sensex traded in a range of about 150 points and ended up at 3180. It was a series of good news.

The falling POL prices across the board are giving a boost to the fortunes of all the industries. Oh! my kingdom for the days when Indian industry will be able to deal directly with the petroleum prices and hedge with derivatives. That way, only those industries, such as airlines and freight, will get directly affected but will leave the rest of the economy alone. Administered POL rates impact the entire economy in a very brutal fashion and hold down industries, which are better able to manage this risk directly.

There have been some good murmurs about the privatisation of the public sector and that gave a fillip to the markets as well. The good performance of the NASDAQ in the US also gave a boost to the Indian high tech sector, although the ongoing US blowback against the Indian technology sector is a cause for concern. Are you listening, Ambassador Mansingh? Please put in some more effort on the US-Indian economic front besides hobnobbing with the great and good about an Asian NATO.

I know, I keep banging on about the inefficiencies of the public sector, but sometimes, just sometimes, a piece of news comes across, which warms the cockles of my heart and fills the hope container again. Hrushikesh Panda, an IAS officer in Orissa, headed the Industrial Development Corporation for just 1 year and turned it around from a loss making unit into one making a
good profit, inspite of glum economic conditions. In appreciation, the company board extended his term by 3 years.

Guess what? Poor Mr Panda has been transferred 25 times in the past 10 odd years, simply because he told the proxy politicians to take a running jump. Mr Panda, my thanks, appreciation and kudos’ to you. It is rather sad that it takes a committed individual to do such things in the public sector, which are considered to be run of the mill in the private sector.

Pakistan is mulling over giving the MFN status to India, which is causing a bit of a hoo haa in the old economy corporate ranks. Industries such as tea, flour, capital goods and the like, are getting a bit excited about this new market, and a corresponding doom and gloom on the other side of the Wagah.

Looks like what India likes from Pakistan are some TV serials and a huge amounts of dried fruits (nuts???!!!). Given the vast panoply of subsidies and protection given to the Indian economy (at least compared to Pakistan), the Pakistanis are understandably nervous about opening the economy to Indian goods.

The Indian diplomats have been pretty nifty indeed, by not using the WTO regime to pry open the Pakistani market, which it can legally do. It is indeed better that Pakistan opens up on its own, rather than be forced to do so. What Pakistan doesn’t realize is that Chinese goods are already flooding the market and if a future South Asia Free Trade Association is to be constructed; building relationships with India will be of a far greater benefit to all, than to let China take over the entire bottom end of the manufactured goods market. After all, the volume of India-Pakistan trade was highest in the past couple of years, when the tension was highest.

Absolutely no reason to allow the smugglers and the traders in Dubai to pocket the money, when the national exchequers can earn it themselves.

The Babble in the Ivory Towers
Last week, we checked the Gulf Cooperation Council’s attempts to start off on their path to monetary union. We also talked about how financial liberalisation is a must for monetary union to succeed.

This week we look at a paper by Abdul Abiad and Ashoka Mody of the IMF, who have written about financial liberalisation within 35 countries over a period of 25 years, what shakes it and what shapes it. Their findings are fascinating. Looks like there is a heavy element of inertia (of both rest and motion) with reference to financial liberalisation. Countries which are repressed will continue to remain so, while countries which have started reform will keep on reforming.

It looks like reform, after a certain critical point, becomes self-sustaining. Regional pressures and competition seem to be very strong; countries that are furthest away from the regional leaders face the greatest pressure for reform.

US interest rates seems to be proportional for the reform process and an increase accelerates this process. Balance of payment crisis situations have a strong accelerator effect on financial liberalisation (ahem, anybody remember India’s crisis?) but banking crises usually have a dampening effect on the reform process.

Openness in trade has a good and positive impact on financial liberalisation and funnily enough, left wing governments seem to be more prone to financial liberalisation than right wing governments. What was interesting, was that the authors find that the type of government or the legal system really didn’t have much to do with financial liberalisation. This provides ammo to those who keep debating on the link with democracy and economic/financial liberalisation going together.

Pretty good set of recommendations coming out of the paper as well, governments should not shy away from implementing reforms, especially in their first year, as the honeymoon period allows them to take steps which they may not be able to do so in the following years.

The World Babble
It was a good week for the markets, with the Dow and S&P powering 3% up over the week, while the NASDAQ ended up almost 6% up since the beginning of the week. This is hitting highs not seen in months, in the case of NASDAQ, not seen in 1 year! Volumes on the NYSE have steadily increased as well over the past month, and that is giving indications that the small investors and
funds have started to come back into the market.

As it was last week, most of the movement was coming from the foreign exchange market. The Bank of Japan has made a record amount of intervention in the markets to keep the yen down and it was reflected in the Nikkei 225 which ended up above the psychologically important 8400 barrier at 8424. This is the best monthly performance in almost 4 years. It is surprising that the banking crisis was shrugged off and it seems like this is a victory of hope over reality.

With such major issues still pending, this intervention is a purely temporary fix for the Japanese economy. While saying that, the BoJ intervention in the markets and the other currencies being either pegged or not important, the entire focus of markets has been on the battle between the euro and dollar.

This week, the euro was priced higher than the launch price almost 4½ years back and the ECB is really not making suitable efforts to handle this. A combination of the high exchange rates and the steady decay of the European mainstream economies (low demand, high rates of unemployment, lower productivity, et. al.) is slowly forcing the ECB to lower interest rates, perhaps even next Thursday when the ECB meets. I am afraid this will be a situation of too little too late.

Gold has been powering on and the World Gold Council and its members are cautiously optimistic that the decades long slide in the price of gold has now been reversed if not stemmed. Prices hit a high of $374 per ounce this week before closing at $365 per ounce. The bond market on the other hand has been volatile and seems like its hitting a floor. With bond yields at lows not seen in years, investors are turning cautious.

The market is being buffeted by strong winds coming from the mostly positive economic numbers, the worrisome news of the global economy, the slowly upward trending equity markets and the sinking of the dollar. The deflation bug bear is live and kicking and people have been keeping a beady eye on the long dated treasury bond market.

With the large amounts of cash sloshing around in the world markets, there seem to be two drivers which are making the rounds, two D-words. First is the US Deficit which relies on keeping a very large amount of the world’s funds invested in the USA, but which is now getting dangerous because of the lower US dollar rate.

This overseas cash is now looking for better places to invest, but the problem is with the second driver, deflation. With the deflation bear still stalking almost all markets, it becomes a question whether the funds will be withdrawn to the home market or be invested on a relative basis. If we have to invest in South East Asia, do we avoid Hong Kong with rampant deflation and invest in Thailand?

The World Trade Organisation released a study on the shot term impact of trade liberalisation and it makes for interesting reading as well. The adjustment costs to trade liberalisation are much lower than the benefits.

Adjustment costs can be reduced if trade policy reforms are underpinned by international commitments. Trade liberalization is an agent of economic change, but evidence shows that it does not lead to drastic changes in a country's overall production structure.

(Dr Bhaskar Dasgupta will be writing 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.)

First Published: Jun 07, 2003 21:28 IST