Samuel Johnson once remarked upon watching “— a dog walking on his hind legs. It is not done well; but you are surprised to find it done at all.” One was reminded of this politically incorrect statement – which had an exceedingly male chauvinist context – as the Congress awoke from four years of slumber with sudden reformist zeal.
The senior partner in the United Progressive Alliance (UPA) -II coalition didn’t handle the political dimensions of this exercise well, though it must be granted that “Didi management” is no easy task. Nor has it necessarily taken the right decisions and, certainly, it hasn’t gone far enough with its reform proposals. But one was surprised that it even made the attempt.
What prompted Dr Manmohan Singh into this act of brinkmanship and how did he persuade his boss to go along? The official explanations would be along the lines of realising that the twin deficits were running out of control, growth was stagnating, inflation was up, and so on.
All true but, cynically, I’d assume two or three factors would have been critical. One, the Congress has realised it’s rapidly running out of the money it needs to fund entitlement schemes that might just help it stay afloat in the 2014 general elections. Two, the party fund-raisers are returning empty-handed when they approach their usual contributors. Three, hard-nosed politicians are calculating that, if the 2014 elections are indeed going to be lost, it would be better to exit power with coffers full.
| Current (Sep 21) | Value 14 days ago | Change % | |
| Nifty Value | 5691.15 | 5342.10 | 6.53 |
| Index PE | 19.12 | 17.92 | 1.20 |
| Index dividend yield | 1.55 | 1.55 | 0.00 |
| Index Book value | 3.10 | 2.91 | 0.19 |
| USD/INR (RBI Ref rate) | 53.91 | 55.52 | 2.91 |
| FII net buys/ sales(Sep 1-21)# | 11619.42 | 9729.6 (*) | |
| DII net buys/ sales(Sep 1-21)# | -2847.08 | -1600.3 (*) | |
| # Rs crore, Sep 21 provisional figures; * Aug 1-31 net buys/ sales | |||
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Be that as it may, the deed is done. Didi is out, and now it’s up to the fixers to work out the optimal methods of Mulayam and Mayawati management. The Congress has a narrow window of opportunity to get things done before the winter session of Parliament starts.
If it loses a vote of confidence (VoC) in December, it will have a window of up to six months before facing the next general elections. If it survives the winter session, it will face its next major political challenge in the Budget session with again, the prospect of a six-month window as a lame-duck government, if it loses a VoC instead of passing the Finance Bill. If it survives the 2013 Budget session, the next test will come in the 2013 monsoon session.
To quote Johnson again, the prospect of being hanged can concentrate the mind wonderfully and by analogy, politicians insecure about their gaddis tend to be more focussed as well. In Indian history, the two major bursts of reform have come from a lame-duck government in 1999 and a minority government dependent on outside support between 1991-93. One can only hope that history will repeat itself in 2012 and 2013.
The market has been enthusiastic about the change in attitude and, certainly, traders seem to have recovered their animal spirits. The major indices are up 6.5 per cent in the past fortnight and the Nifty-Sensex have hit successive new 52-week highs. The uptrend has been broad, volumes have been good.
Looking more closely, domestic financial institutions have sold into the rally. So have major operators and the bulk of retail investors. Foreign institutional investors, or FIIs, have pumped in huge sums and one major effect has been the rupee strengthening substantially. The inflow of liquidity from abroad is likely to continue since both the Fed and the European Central Bank have opened the taps. Always assuming the UPA coalition doesn’t fall apart, of course.
If the market moves higher, and the technical signals suggest it could, that helps with the disinvestment programme. A rate cut by the Reserve Bank of India would help this process along. It would allow domestic institutions to cash out profits in their debt portfolios and transfer some funds into equity.
Maybe the central bank will announce a cut in the next policy review. Maybe it won’t. But it’s safe to say the interest rate cycle has topped out and a fall in rates is much more likely from here on than another increase. Raising debt and servicing it has been a major issue through the past two years. Lower rates would shorten the long queue of businesses lining up for referrals to the Corporate Debt Restructuring cell.
A stronger rupee should also help substantially in the reduction of the impact of the crude import bill as well as easing pressure on companies that must redeem foreign currency convertible bonds and external commercial borrowings. Coupled to the increase in diesel prices and the expected petrol price increase, a stronger rupee should, therefore, take some pressure off balance of payments, and off the balance sheets of oil and gas public sector undertakings. That’s one depressed sector that looks likely to see a higher bounce than the overall markets. Another such laggard could be the aviation sector in which carriers are starting to import aviation turbine fuel rather than pay usurious sales taxes.
The easing of foreign direct investment entry norms and the raising of sector limits in multi-brand retail, broadcasting, aviation, and so on, are merely proposals on paper at the moment. It’ll take years before there are substantive changes on the ground.
There could be a bounce across Q3, 2012-13 corporate results if animal spirits translate into higher consumption. However, the problems caused by three years of inaction will not be rectified in three months. The ground reality is, interest rates have not dropped yet, earnings growth will remain sub-trend for a while, and the structural issues with government finances have certainly not disappeared.
If the market goes up, traders will need to ride along. But there could be a huge correction on the cards if the political equations change. Be prepared for that. I’d reiterate my earlier recommendation of holding deep Nifty puts till December at least.