Bulls in full cry, but it’s time for caution

The Indian bull is raging, crashing through the 9,000 barrier on the Sensex. This is driven by both domestic and foreign money wanting to invest in the India story. The economy is growing at a healthy 8.1% clip, with all sectors performing well (agriculture 2 %, manufacturing 10.2 %, up from 8.8 %, and services 6.4 %, up by 1%).

The corporate sector has been regularly gymming and is in healthy shape, to become the envy of the world. According to a study done by Deloitte, (DNA Money, November 30), topline growth of Indian companies was 15 %, more than double the global average, and earnings before interest, depreciation and tax at 16 %, again double the global average.

Japanese management guru Kenichi Ohmae (pictured), in a Mumbai lecture last week, talked about trillions of dollars which fetch abysmal returns (0.1 %) in Japan, and which are seeking a higher return. These could easily be attracted to India, especially in the infrastructure sector, where long-term funds (not generated in India as the pension fund industry is yet to take off) are needed, but provided we get our act together.

With economic growth and higher corporate earnings comes increased tax revenue. In the eight months to October, net tax revenues are up 24 %, or by Rs 22,700 crore. Corporate taxes are up a whopping 50 % and other taxes (including the controversial fringe benefit tax and the morally reprehensible tax on withdrawal of one’s own money) have doubled. One would expect, with such buoyancy in collections, to see a smile on the finance minister’s face. It is, however, a frown! Expenditure has grown faster as politicians are easy with other people’s money and have no qualms about spending on their constituencies on the assumption that by doing so they will be re-elected. The fiscal deficit has grown by 48 %, or Rs 29,100 crore! This is the Achilles heel of the Indian stockmarket boom. An uncontrolled fiscal deficit is what will one day bring the boom to an abrupt end and the economy to its knees. There is some time to it; time enough to correct things if politicians had the vision and the will. Alas, they are myopic and invertebrate!

The largest single item of expenditure on the government’s books is interest payment as each departing government has left a legacy of higher debt to the succeeding one. The quickest way to reduce this mountain of debt is for the government to get out of businesses it need not have ever been in; disinvestment is, however, anathema to a dogmatic and ostrich-like Left. In our system of democracy, each government department and its uncle has a veto; the department of mines has shot down a proposal to divest 5 % of non-navratna Nalco (out of an 87 % government stake). The Left has vowed not to allow privatisation of the Mumbai and Delhi airports, for reasons not deeply rooted in logic.

The government should be queasy enforcing good corporate governance in private sector companies given what it does to public sector units (PSUs).

It has ‘recommended’ to profitable PSUs that they should consider stock splitsbonus issues and give out 30 % of profits as dividends. Since the Left won’t allow them to sell anyway, one wonders why the thought of getting bonus shares should excite them.

The State Bank of India (SBI) is to go in for a hybrid issue (part shares, part debt), in the international market after receiving some clarifications. Indian banks as a whole would need to raise between $ 9-12 billion of additional capital over the next few years, of which some 30-40% would be hybrid. The banking sector should be interesting to watch.

Bhel, Indian Oil and ONGC are some of the PSUs that are looking at inorganic growth through acquisitions. Of course, if they are compelled to divert part of the money to pay dividends to a fiscally incontinent government, the kitty available for acquisitions would shrink. A pity.

There was a sharp dip midway last week, triggered by a normal Sebi enquiry into the sequence of events regarding the demerger of Reliance. The market shrugged this off to go into a new high the next day.  The Sensex ended the week at 8,961, up 72 points. Time for caution as profit-booking may be around the corner. Maybe after an initial spurt to induce the marginal investor to enter.