Causes of concern

PSU splurging without reforms, high rates on dollars and absence of long-term visibility on interest rates

By Mohan Sule

During a bearish phase, investors tend to sit out on the sidelines or view it as an opportunity to indulge in selective bottom fishing. Looking at the low volumes on the stock exchanges, it looks like investors are preferring to err on the side of caution. Despite attractive valuations, many stocks are getting ignored. This reflects the lack of confidence of investors that things are going to turn better any time soon. This stems from the pessimism that it would take years for the euro-zone region to revert to its role of an economic powerhouse. The slow recovery in the US is not accompanied by creation of jobs. More than global economy, investors are fretting that the current crisis is not getting the attention it should from the political class. The well-meaning prime minister is busy listening to investors’ woes. His trained mind might even know the answers to the problems. Experts are there to draw up blueprints. Foreign investors are ready to pump in capital. Yet there is hesitation to execute these plans as the solutions call for disruption of the present way of life. Take the power crisis. This has three components. One is the shortage of coal. PSU Coal India has the monopoly but hobbled by the government’s price sensitivity. Facing obstacles in tying up supply at home, companies have to shop abroad. The generation sector is bogged down by delays in permission. The users of the power, the state electricity boards, are incapable of making payments as a large portion of the power they distribute is subsidized or pilfered.

The prime minister and the bureaucrats in the power ministry know what needs to be done to offer relief. But the cure is unpalatable to the political class. Farmers and the poor form a crucial electoral block and have to be wooed with free or cheap electricity. Coal is considered a national resource, and the mining bill makes it expensive for the investor to dig it up. Natural gas to the power generators have to be distributed through quotas and nuclear power generation is stirring political controversies over safety. All these ingredients make up a perfect recipe for chaos. During the Great Depression of the 1930s, US President Franklin Roosevelt embarked on a spending spree by building a network of roadways as a means to provide employment and business to the private sector. After the dot-com bust triggered a bear phase, the NDA government led by Prime Minister Atal Bihari Vajpayee flagged off the ambitious National Highway project, which is bearing fruits now. As the fiscal deficit has overshot its target due to schemes providing employment to the rural poor and selling petrol below cost, the UPA government is no position to embark on another round of fiscal stimuli by way of tax reductions. Even the proposal to cut the securities transaction tax has been scrapped. Instead, cash-rich PSUs have been asked to splurge to boost business confidence. Perhaps the government is hoping that the capital expenditure would get better valuations for PSU shares, thus lifting market sentiment.

It would be interesting to see what answers the PSU CEOs give to the shareholders during next year’s results. These include CEOs of banks, which are offering interest rates on dollars comparable with those on domestic deposits of equivalent tenures. The measure smacks of desperation though it has started producing results: inflows have increased, boosting the rupee. The plight of companies saddled with FCCBs should have made banks cautious. The depreciation of the rupee and fall in stock prices, extinguishing the bondholders’ option of equity conversion, has saddled issuing companies with huge debt. Some of them have had to roll over or incur additional debt to redeem the bonds. With western banks busy with their own problems of staying solvent, Indian companies are in an awkward situation. RCom has turned to a consortium of Chinese banks, providing them indirect access to our telecom sector. The US$1.2-billion credit to refinance the US$ 1.8-billion FCCBs is nearly half in value of the promoters’ 68% holding. Add to this the reluctance of the Reserve Bank of India to offer a long-term view on interest rates though it has been providing estimates of inflation and GDP growth. In the October 2011 credit policy, the central bank noted the peaking of the interest rate cycle but left the reduction timetable to a number of unspecified factors. Of late, the trend is to provide guidance on interest rates at least for a year: the US Federal Reserve has announced its intention to keep the rock-bottom interest rates unchanged till end 2014. This creates a stable environment for investors. Such a courageous move by the RBI would ensure that India attracts quality money from pension funds rather than arbitrageurs.

Mohan Sule