Discounting India

The country upgrades also celebrate cash transfers, which would loosen the control of the ruling party on government finances

By Mohan Sule

Current stock prices are supposed to factor in about a year’s forward earning. A stock that may look expensive on trailing 12-month earning could be a bargain pick based on next fiscal’s outlook. Yet this conventional wisdom is being severely tested of late. Guidance by companies acts as a trigger to accumulate or exit from the counter without waiting for the actual figures to roll in. Meeting the forecast or exceeding expectation is a signal to book profit. The opposite is considered a signal for value buying. Consider the current run-up of the market despite the stubborn persistence of inflation, plummeting GDP, slowing industrial production and a weakening currency on the inevitably of cut in policy rates. Companies would be able to borrow cheaply and restructure their debt, kick-start stalled projects or undertake fresh expansion. Besides, the rabi crop is also supposed to blunt food-supply shortages. All this could cool price indices in the medium to long run. In the short run, however, softer rates could inflame prices, whose recent rise has been contributed by delayed southwest monsoon and slashing of fuel subsidies. This means the market is running ahead by discounting the imminent tamping of inflation. There could be a sell-off when the central bank actually comes out with data showing the good results of its tight money policy. Similarly, a series of measures by the government to bolster capital inflow has triggered re-rating of India despite the frightening obstacles in execution and percolation.

The increase in the FDI cap in the capital-intensive multi-brand retail to 51% and aviation to 49% was long overdue. Organised retail creates jobs and eliminates tax evasion. Suppliers get assured market. Consumers benefit, too: the responsibility of stocking quality goods at bargin prices is shared by the retailer as well as the producers. Nonetheless, MNCs are worried about issues of dilution of brand equity due to quota for local sourcing. Most states ruled by non-Congress parties are not cooperating in order to protect mom-and-pop shops. The aviation industry is making losses worldwide. If at all a foreign investor shows interest in the Indian space, he will require patience to navigate bureaucracy and negotiating skills to make the airline shed staff. The restructuring package for state electricity boards and distribution companies calls for tariff hikes, when free electricity is the norm. Besides, the transmission and distribution sector will need many years to shake off its debt. Even if the National Investment Board, another remedy to fast-track big-ticket infra projects, does its job speedily, getting environment clearance and acquiring land face formidable hurdles including approval of parliament to make the process painless. The 2-G spectrum auction, which could have made a major impact on fiscal reduction, collected only 25% of its objective. PSU stake sell-off also makes foreign investors happy. The amount mopped up through the offer for sale of Hindustan Copper’s equity, however, is not even 3% of this financial year’s target. The problem is with the low floating stock, which make efficient price discovery difficult. The lukewarm reception is no deterrence due to the cushion of financial institutions. In short, shares of one state-owned entity are transferred to another at a hefty price.

The cash transfer scheme is another move that has impressed foreign investors. The move could indeed be a game-changer but not in the sense the UPA II government is hoping. It is not a giveaway like other welfare schemes, the most significant being the rural employment scheme guaranteeing 100 days of wages to one member of every family. Subsidy will be credited to the account of the beneficiary to buy the product at market rate. So far, PSU oil exploration and marketing companies had to bear the bill. In return, the government compensated them with bonds, which did not fully bridge the gap between production cost and selling price. Now the government has to take the entire burden on its balance sheet. With their bleeding staunched, PSU upstream and downstream oil companies will be able to raise funds to expand, benefiting their shareholders, employers and customers. On the other hand, the higher subsidy bill may force the finance minister to cut down on expenditure. For instance, the proposed food security bill and other welfare measures could be watered down, if not axed. By backing cash transfers, the ruling dynasty has unwittingly, or on fear of getting the country dubbed as junk, let go its hold on government’s finances, used to consolidate its reign. No wonder, rating agency Moody’s and investment banks Goldman Sachs and Morgan Stanley are bullish on India. The next upgrade would be on loosening of government control over bank lending.