“The policy of being too cautious is the greatest risk of all.”— Jawaharlal Nehru
When the UPA-II was sworn in, there was great hope that the ‘dream team’ of Manmohan Singh, P. Chida-mbaram and bureaucrat Montek Singh Ahluwalia would usher in the next wave of reforms.
Such was the euphoria when the election results came in that the markets opened with a gain of over 500 points.
Policy apathy
Since then, this government has been delivering a series of disappointments, starting with the appointment of Pranab Mukherjee as finance minister.
Initially, we all were led to believe by the government that the Euro crises were a Western disease and that we would not catch any side effects.
Then we consoled ourselves that whilst our growth rate is slipping, we will still grow faster than other economies.
Inflation has been another area where government policy has not been able to make any impact, except in perhaps a negative way.
Populist moves that give away something free to others, tend to add to money supply, without doing much.
Such policies and the lack of any fresh initiatives, have left the markets at the mercy of the market forces of demand and supply.
The stance of the Reserve Bank and that of the government seem to be at variance with each other. Which of them is right, only time will tell.
However, as global economic conditions called for a higher level of competency, and though a little late in the day, it is good to see the right person back at the ministry.
Uncertain bourses
Our markets are witnessing a strange divide. There is a huge demand for high quality stocks (FMCG, pharma and the like) that have become very expensive. It is unlikely that anyone will make serious money buying the stocks at present levels.
At the same time, high-risk stocks have cooled off and will perhaps drive the next round of market rally when it happens. And by no stretch of imagination can this market be labelled a bearish one.
The broad markets are trading at sixteen times earnings and it is possible that the earnings growth in the coming financial year may be in single digits.
Stocks from the PSU universe continue to behave like yo-yos based on what one feels about government policy each day.
For example, when the government policy was interpreted as freeing the oil sector, the oil marketing companies looked good.
We saw what happened to the stock of Indraprastha Gas which was accused of making too much money.
Coal India is another example of government policy being at variance with shareholder justice.
The foreign investor The sharp deterioration in the rupee-dollar exchange rate has led to tremendous losses for foreign investors who have already put their money on India. Given our inflation, the rupee can only weaken further.
To nullify this, we need to attract FDI and/or FII money in a big way. That can come only if government policies are stable and not capricious.
The threat of retrospective taxation has shaken the faith of people across the globe. Perhaps the the Gen-eral Anti-Avoidance Rules (GAAR) has been the single-largest contributor to the sad state our stock and currency markets are in.
Inertia no more
The real issue is that we have not had the government address anything with reference to the economy or markets over the last three years. The expectations have gone so low that anything they do will be viewed as positive.
It is heartening to see the finance ministry opposing the distribution of mobile phones. A lot of belt-tightening is needed if we are to survive around two years of a downturn that has just started.
So, fundamentals apart, the policy changes should hopefully bring cheer to the markets.
I am not talking about more bailout or dole packages but something positive like hiking diesel/ kerosene prices, reducing any other subsidy or lowering interest rates or giving incentives to promote new industries etc.
At this juncture, when it is clear to everyone, including politicians, that India cannot be islanded from global troubles, we need positive or affirmative action from the government.
Hence, my take is that there is safety in fixed income. I don’t mind sacrificing the upside in equities (from here, there is not much upside left, though valuations are not very stretched except for the good quality stocks) for peace of mind. And inflation refuses to budge much lower, thus delaying the fall in interest rates.
(The writer is an independent analyst and can be contacted at balakrishnanr@gmail.com [1])
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[1] mailto:balakrishnanr@gmail.com