Rich like us

Or why a country’s treasury depends on the better-offs to meet its expenditure obligations

By Mohan Sule

How are you feeling?
Ummh…okay. Feeling a bit tired.

Why is it so?
Not getting enough sleep, I guess.

Since when?
Recently. I think I may be having a relapse.

Why do you say so?
Remember when I first told you about loss of sleep? In 2009? It’s the same sinking feeling: Nightmarish vision of being on a planet without air conditioner.

What were the reasons then?
There was bloodbath on the street. The asset bubble had burst. Big US banks were going bankrupt. The credit market had collapsed. My portfolio had halved.

What is it now?
Actually I think the nights are getting shorter. The market has bounced back. The recovery has been long and tiring but rewarding. On the way up I picked up many cheap but sound stocks. My portfolio is looking good again. May be I can make a tidy profit. Retire to the beach shack I keep on telling you about.

So you are happy?
I don’t know. Some solid stocks are coming with a hefty price tag. Tanking up my SUV costs more. And choosing smartphone and tablet upgrades is not as easy as comparing tech stocks. I think he does not like me.

Who is he?
I wish I could tell you. Even I am not sure. He is not always the same. He is a different person at different times.

Like?
He has a weakness for greenbacks. Kids’ gloves for foreigners and boxing gloves for Indians! GAAR!! He thinks he can be another Obama, all the talk about fiscal cliff. I think he is more like Robin Hood. Taking cash with one hand, transferring cash with the other. Good cop, bad cop!

Why do you think he does not like you?
It is not me he does not like. It is people like me he does not like. Don’t get me wrong. But is it my fault that I am who I am? How can harming me make others happy?

Has he hurt you?
Not so far but will soon, very soon. He is waiting for the right time to strike. The countdown has begun.

And when could that be?
I think before this year ends. I can make out. There are enough signs. He is preparing the groundwork. Letting others do the talking, creating the atmosphere so that his action becomes a necessity. He is drumming up alibis to back him.

Is this causing you anxiety?
You could say so. I mean there are ups and downs in the market. Things could go downhill tomorrow. The rupee is a cause of concern. Policy formulation and execution could suffer another attack of paralysis on eruption of yet another scandal. Will China hold up? Yet you have hope. Tomorrow will be better.

Now you don’t feel so?
How can it be? Can I pay you for just 60% of your time? Or may be 50%. How would that feel? Would you be sitting so smugly and provoking me instead of doing your job of calming my fears? May be you are also he! A conspiracy to rob what is mine! For what? To finance your welfare programs?

Isn’t your annual medical checkup due?
I know what it is going to say. BP, hypertension. Apart from saving some pennies in tax, how is it going to help?

You don’t feel the need?
Come to think of it, even small change counts in these inflationary times. You always come up with a solution though it costs a lot for your wise counsel.

I think our time is up. Same time next week?
Talking to you makes me feel better. I think I am more ready than before to face him. He may hate me but cannot do without me!

Cliffhangars

Can India pull back from fiscal and current account deficit, currency volatility, and commodity-fuelled inflation?

By Mohan Sule

The cliffhangar suspense of ‘Will they or will they not’ finally culminated into a predictable end. The US Congress agreed with the president to tax the wealthy, thereby saving the world from falling off a fiscal cliff. The massive tax hikes and spending cuts that otherwise would have been triggered were surefire recipes for another global recession. The worldwide rally in stocks that followed was on the belief that the worst may be over despite the Federal Reserve not bringing forward the timetable to increase interest rates from the near zero and the euro region showing no signs of recovery as austerity measures have stirred widespread discontent. Yet the last of turbulence in the equity market is not past us. The US now has to confront the debt cliff. China is the wild card, with confusing signals coming from its economy as reflected in the fluctuating metal prices. In India, a mini election is on cards as 10 states go to polls this year, raising concern that populist ingredients could blunt the potency of the budget to restore the country’s fiscal health. The third round of liquidity injection by the Fed is contributing to massive foreign portfolio investment. powering the Indian stock market to the rank of the best performer in Asia in 2012, but turning helpless to lift the currency. A bountiful rabi crop is expected to boost the purchasing power of rural India, making the task of taming inflation increasingly difficult even as the Reserve Bank of India comes under renewed pressure from the government to loosen its monetary policy.

Boosting income and moderating expenditure, crucial to reduce the fiscal deficit to 5.3% of GDP from 5.9% last year and consequently weaken inflation, have not made any sizeable progress so far. The two bets of the government to raise funds have gone wrong. The second-generation GSM spectrum auction collected only about one-third of the target. The base price for the second round to dispose of the pricey circles of Mumbai and Delhi, which were supposed to contribute 40% of the revenue but received no bids, has been scaled back by 30% and that for CDMA spectrum by half, proving to be a setback in the effort to raise the intended Rs 40000 crore from this source. Stake-sales in Hindustan Copper and NMDC, the only two PSUs to tap the market in the first nine months, totaled less than a quarter of the overall divestment goal of mopping Rs 30000 crore before March 2013. Not all of the 10 more government entities lined up can possibly enter in the remaining period. There is not much room for optimism that other streams of revenue will be able to make up the gap. If it maintains the current tempo, up about 17% in the seven months till October, indirect tax collection could meet the expected 27% annual increase. The performance of direct taxes, however, is miserable: till December 2012, the growth was slightly more than half of the 15% jump expected for the entire financial year. The biggest chunk of expenditure is subsidy on fuels, which is estimated to touch 2.4% of GDP instead of the budgeted 1.9% due to the 3.5% surge in crude prices in 2012. Prices of petrol were raised nearly 2.5%, LPG about 3%, and disel more than 15% this financial year so far. Another round on cards could fuel inflation rather than cap it.

The share of crude by value in imports is up 35% so far as against 32% last fiscal. Exports by value were down 5% in the first eight months as against the same period last year. Foreign capital inflows had surged 10% till October over a year ago, topping $34 billion. A major contribution was of the flighty foreign funds. At more than 25 time increase, they comprised about 35% of the receivables, while the share of the more steady foreign direct investment halved. The rupee is down to around 53 a US dollar from 51 at the start of the fiscal. The volatility in the currency is hurting exporters and importers and also bloating the overall import bill. The desperation is evident from the finance minister’s announcement to raise fiscal barriers to import gold, which by value is the next big import after oil. Reducing interest rates at this juncture will spur commodity-led inflation, raising the prospect of bubbles, thus trapping the country in a prolonged cycle of high inflation and growth. Currently at the 7% level, inflation is far off the mark from the central bank’s comfort level. India, therefore, will have to tackle the same problem that confronted the US prior to 2008: rising asset prices. The difference being consumption was driven by low interest rates in the US, while it will be accelerating due to rising income level in India. The current strategy seems to be to balance the subsidy-windup-led inflation with softening of interest rates to accelerate consumption- and investment-led growth: a risky gamble that could work, going by the market’s response.

Unnecessary distractions

The market watchdog should focus on insider trading, front running and disclosures rather than worrying over listing gains

By Mohan Sule

Companies coming out with share offerings have to follow a quiet period after filing their draft red herring prospectuses till the shares are listed. The idea is to provide investors a cooling period to dispassionately analyze the offering and to avoid influencing of the debut price by promoter hype. The government seems to be an exception from this enforcement. The cabinet can announce reforms whose impact may take a while to be felt at the ground level or whose divisive characteristics reduce the scope of getting approval of parliament, even as it unveils the PSU lineup for dilution. The finance minister can talk up the market in the run-up by asserting that meeting the fiscal deficit target is within reach. Injecting optimism, particularly during a depressing phase, is what rulers are supposed to do. Yet there is annoyance when it is discovered that the smooth-talking salesman sold at discount goods whose prices were inflated before the generous giveaways. Similarly, the recent sale of government stakes has been greeted with skepticism in the absence of inadequate price discovery of these illiquid stocks. Investors could also be excused for feeling restless as the sudden gush of issues at the first indication of market upswing could cap the market rally. The irritation is not only with the government’s opportunism in rushing through with its divestment candidates to take advantage of the up-tick before the close of the fiscal but also with the market regulator for insisting on sticking to its deadline of mid 2013 for minimum public float. This is another instance of good intentions gone awry.

Take, for instance, the fiasco of reverse book building, which seems to be on the cusp of demise. The idea was to protect the minority shareholders by giving them a decisive voice in the exit price. The results have been disappointing. Investors enter stocks in anticipation of de-listing, distorting the already skewed prices of the promoter-driven companies. Initially, many MNCs caved in but not any longer, with the shareholders left holding expensive stocks. Of late, these companies are opting to stay listed, by offering shares at depressed prices, hurting those already invested. Perhaps, the Securities and Exchange Board of India should re-examine the issue of minimum float including the deadline. It could revisit the success of de-materialization, which was introduced in a phased manner, and follow a top-down approach by setting an earlier deadline for PSUs, followed by large caps. This could avoid bunching of issues and provide relief to investors. The experiment of protecting mutual fund investors from carrying the cost of entry load in their investment is another reminder of the pitfalls of sudden cleanup measures. As inflow into mutual funds dried up, Sebi had to reintroduce distribution fees. The complex formula worked out to lighten the burden on small investors and at the same time attract them to the market has endeared it to no one. Another tinkering from this year completes the circle: no entry load on those taking exposure through asset management companies. Indeed leaving it to the industry to evolve their own fee structure would have been a competitive solution that would have seen commission fall in the fashion of brokerage charges hitting rock bottom.

The goal post of Sebi seems to be shifting from high pricing of issues and poor listing returns to, now, sabotaging of offerings by rivals. In fact, the market regulator should welcome complaints, however frivolous, as a window to know if the issuer has left out any vital facts from the DRHP. The abruptness with which issuers are coming out with their offerings, leaving very little time to examine the quality as against the days of the Controller of Capital Issues, when there was plenty of lead period to sell the fixed-price issues, is disorienting. Companies, however, have no restriction on the size and pricing of equity. Also, full disclosures enable different segments of investors with varying risk appetite to decide on exposure. For instance, junk bonds, too, have niche buyers. Many richly valued issues from the private sector have been under-subscribed or had to be withdrawn and those from the government had to be bailed out by financial institutions. Market forces, thus, have played out their role and Sebi should stop fretting over listing gains, lending weight to the increasing feeling that most subscribers merely want to flip the issue and that grading of equity issuances has been a spectacular failure. Instead, the capital market watchdog should be expending more time on insider trading, front running, and inadequate and discriminatory dissemination of sensitive information.

The year of the awakening

The apparent contradiction of keeping poor on welfare and at the same time boosting growth became stark

By Mohan Sule

The juiciest metaphor to illustrate the fall of the mighty in 2012 was the demotion of the mango from its exalted position of king of fruits. Yet the common man’s plate of woes did not get lighter. Instead his ordinary dessert of banana achieved the status of a national emblem. Even before cash transfers gained currency to buy oil refiners breathing space and to expose the poor to technology interfaces such as mobile banking, bypassing dated practices including minimum balance, they had already become fashionable in corporate corridors as book entries disguised as interest-free advances to win over influential friends. Not surprising really when it took an acidic report in a beltway newspaper in the US to shake off the policy paralysis rather than the beseeching by the who’s who of India’s power elite, downward revision of growth forecasts by multilateral institutions, and hints of downgrades by rating agencies. It was a year in which corruption charges, crony capitalism and coalition dharma took the country to the edge of the credibility cliff. Coal and gold, both were lusted, the difference being getting a block to mine was an acknowledgement of moving in the right circles while hankering to own a hedge against inflation was frowned upon as damaging to the country’s fiscal health. CAG was not the result of a precocious child’s stubborn refusal to get the alphabets right but symbolized nitpicking over decimals to put a figure on the magnitude of the loss to the treasury due to giveaways of scarce resources. As the hatchet job to transform a hero into zero got underway, a grounded king of good times spiritedly defended his kingdom, losing a crown jewel in the process.

Another abdication to grab attention was at Bombay House, as an era came to an end. From an India-centric conglomerate, one of the oldest groups in the country has taken a seat among global corporations, delighting some shareholders and testing the patience of others. Just like our western neighbor distinguishes between good jihadis (who want to dismember India) and bad jihadis (who are inward looking), our political class too differentiated between good FDI (in aviation) and bad FDI (in retail). Perhaps they were taking a cue from the US for whom China is a good Communist though its governing members are appointed in secrecy, keeps its currency low and lends some of the resultant surplus to buyers of its exports, but not our homegrown variety elected to rule West Bengal for years. US’s top diplomat rewarded the vanquisher with a visit soon after, though the mercurial politician is driving out rather than attracting investment. Now it is clear that the platter of cookies that might have been offered to the visitor could not have come from any MNC supermarket chain. What is not known is the brand of tea the chief minister served along with them. In retrospect, a few months too late for the touchdown, even this brew would have been a luxury, with the pullback of subsidies on fuels. While the demand-side pricing was being corrected, there was no clarity on supply-side policy. Should natural gas prices be hiked or not? The question remains unanswered despite a new minister for oil and gas.

Face-offs were not restricted between the government and the private sector. The psychological warfare between the finance minister and the central bank over interest rates did not deter foreign investors as the ruling party backed rural prosperity over keeping inflation low and favored loss in revenue due to tax avoidance rather than loss of face because of poor investment sentiment. The flood of inflows provided tailwinds for PSU divestment but complicated monetary loosening. Another spat that turned into much ado about nothing as the year drew to a close was the carpet-bombing of Corporate India by anti-corruption activists. Shell companies, Swiss accounts and string pulling to tailor policies were some of the sins of omission and commission of the rich and powerful. As eight states plunged into darkness following the tripping of the northern grid, the solution offered to tide over shortages by the frenzied people’s movement was to freeze payment of bills instead of letting power discoms charge market rates for uninterrupted supply. Perhaps this is the manifestation of applying varying sets of rules to different consumers. The typical example of the year is PSU banks, buffeted between government nudge to lend to favored sectors and the bank regulator’s mandate to increase provisioning for restructuring these assets. Similarly, investors were sandwiched between the CCI’s crackdown on the cement cartel for holding prices high and the PMO’s directive to supply coal at low prices. No wonder, GDP growth has become the casualty of politics of convenience. Truly, 2012 is the year marked by collusion of the corrupt and collision of contradictions.

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.

Disruptive force

Companies should engage with anti-corruption activists as both depend on the same constituency: the middle class

By Mohan Sule

Countries, industries and companies often have to confront with disruptive forces that challenge the existing equation. Outsourcing has wiped out thousands of blue- and white-collar jobs in the developed world, especially in the US. Brick-and-mortar businesses are fighting the onslaught of e-commerce as the penetration of Internet becomes pervasive. The CEO of Nokia, which till recently was the world’s largest seller of mobile phones, likened the situation his company is facing to an oil rig up in flames as smartphones and tablets upended its dominance. Closer home, Bajaj Auto had to jettison assembling scooters as new entrant Hero Honda’s motorcycles cornered a larger market share. The automobile industry in the US is in a decline since the 1973 oil shock after it did not embrace buyers’ preference for fuel-efficient imports. The labor-intensive textile sector in India is still on life support for failing to adapt to new technology and tastes. Once-upon-a-time leader in the watch segment PSU HMT was slow in responding to changes in consumer preference to viewing watches as feel-good accessories from merely functional timepieces. On the other side, some companies are displaying flexibility to catch the tailwinds. IBM got out of personal computing to focus on the big picture. The domestic drug industry is tapping the outsourcing segment to bypass stiff domestic regulations. The HCL group has successfully made the transition from a computer hardware producer to a leading software services provider.

A typical reaction to disruptive forces is to hunker down, hoping the storm will pass. In the aftermath, companies undergo the three classical symptoms of loss: denial, anger and, finally, acceptance. At the global level, the changes are more profound with the entire edifice of capitalism, of choice, of personal well being put on the block for review. The US electorate has cautiously but surely backed government’s role in determining the way healthcare is going to reach patients, in bailing out sick units like General Motors and Chrysler and Wall Street banks, and in responding to natural disasters like hurricanes. Right now, the Indian political class is in the second stage, after realising that their denial of charges of corruption and crony capitalism leveled by the civil society, led by Arvind Kejriwal, is not convincing the electorate to shrug off the muck-raking as inconsequential. The current strategy seems to discredit the accusers as unreliable and accusations as without substance, and credit unnamed ‘vested interests’ for the campaign of calumny. After pointing to the rot at the top of Congress and BJP, the anti-graft activists’ target of late has encompassed companies, too. Reliance Industries Chairman Mukesh Ambani is supposed to be holding the levers of power in India to the extent of influencing gas pricing and cabinet posts and HSBC is alleged to have acted as a conduit for black money into Swiss accounts. Both the companies predictably have dismissed the charges as baseless. What is surprising is the reaction of some other corporate bosses. Infosys co-founder-turned-philanthropist N R Narayan Murthy sought to put himself at arm’s length from the widening scope of the agitation by noting his charitable giveaway was to help Kejriwal’s apolitical NGO to raise awareness about the Right to Information Act. Contrary to Murthy’s assertion, the Tata group has denied that its social welfare trust gave any donation.

The attempt of Corporate India to distance itself from the anti-corruption campaign demonstrates that company bosses still believe caution is the best defence. It is essential that they engage with Kejriwal as his soon-to-be-formed political party might even hold the balance of power after the next election. Promoters should impress upon him the difficulties of doing business in an environment that encourages party leaders and their relatives to act as facilitators. They should probe the crusader-turn-politician’s views on the economy. Does he want to go back to the past when everything was rationed and subsidised and PSUs were the major job creators? Companies have to recognise that he represents the same constituency that they woo to sell products and services and raise funds: the middle class, whose size is going to explode as India rapidly urbanises. The contradiction should be emphasised: the middle class, which is propelling the ongoing wave of anger against the politician-business nexus, is the biggest beneficiary of the opening of the economy by gradual elimination of the role of government. At the same time, Kejriwal should heed to the advice Secretary of State Colin Powell gave to President George W Bush in 2001 on why the US should not invade Iraq: “You break (the system), you own it.”

Unintended consequence

High interest rates could accelerate the flow of foreign funds from low-yielding developed nations

By Mohan Sule
The market expressed its disapproval of the Reserve Bank of India’s steadfast refusal late last month to lower interest rates. The annoyance was understandable. Besides keeping the bank rate steady, the central bank increased the capital for banks’ restructured standard assets and downward revised the GDP growth forecast for the current fiscal for the second time. Perhaps the apparent contradiction in these positions has escaped the central bank. Low interest rates fuel growth and so also restructuring of loss-making companies, whose numbers increase during a downturn. How can the economy grow if obstacles are raised in the path of these contributors? From the policy composition, it is apparent that Mint Road believes that the major trigger has to come from the Central government and it can at best play a supporting rather than a leading role in scripting the growth story. The finance minister has to share the blame for the RBI’s obsession with inflation, particularly so with polls looming around the corner. His intention to nearly halve the fiscal deficit from the current level in another four years is fine as along the details of the roadmap are spelt out. Not a single rupee was collected from PSU divestment in the last seven months. Yet the market is supposed to trust the government in meeting the Rs 30000-crore target in the remaining period. The other three options — of trimming subsidies further, hiking taxes, and cutting spending — do not look feasible at this juncture. The recent increase in prices of fuels resulted in the walkout of UPA-II ally TMC and renewed attacks from opposition and civil society on the issue of corruption. There is the danger of the economy slipping into recession if indirect taxes are bumped up amid a slowdown. Instead of going down, spending tends to increase on the eve of election.

The inescapable conclusion is that the government is hoping for a gush of foreign funds into retail and aviation and inflows from auction of the second-generation spectrum to balance its spending spree. Why would foreign direct investors want to invest in a country that risks being slapped with a junk credit rating if it does not speedily reform seems to be beyond the comprehension of the policy makers. Against this backdrop, the RBI’s caution looks prudent. The stubborn stand, however, could backfire and create more harm than good. If inflation is the central bank’s core concern, the higher cost of money compared with other major economies, which are holding down interest rates to spur growth, could act as a magnet for hot money searching for better yields and release more liquidity. The silver lining is that high interest rates could achieve what the government has not been able to so far: foreign funds could revitalize the stock markets, boost business confidence to take up stalled expansion, and breathe life into failing companies. This means the Indian economy will no longer act in tandem with the global economy. The decoupling that did not happen post 2008 credit crisis in spite of the domestic orientation of the economy could be in the making now as a consequence of India’s reluctance to fully integrate with the rest of the globe by softening its lending rates.

There are two reasons for this unintended series of developments. First, India imported inflation along with foreign capital during the 2003-07 bull-run, which raised the affluence level. The wholesale price index more than doubled in September 2008 from five years ago. The heating of the economy was largely contributed by the surging prices of commodities. However, inflation in India did not cool down even though the collapse of Lehman Brothers halved it for OECD countries by September 2012. As a result, the gap between the middle class and the poor in India widened, spurring the launch of many welfare programs and preventing policy makers from correcting the fiscal imbalance by reducing subsidies. Together, these developments contributed to more than doubling the fiscal deficit in the four years to FY 2012. The consequence of higher interest rates and increased dollar inflows will strengthen the rupee, making imports and the cost of borrowing for Indian companies cheaper but also boost asset prices, and, in the process, squeeze the government to act. Cutting subsidies is going to fuel inflation in the short term before the impact of narrowing fiscal deficit allows the central bank to reduce interest rates. How long this period will be will depend on to what extent the government goes in slashing expenditure. Chances of the US economic recovery gaining momentum are bright after the presidential elections, providing a fillip to exports and helping in easing the pain of transition to a cleaner balance sheet. So the market should look at the current developments as half glass full.