Hot capital: Global liquidity is chasing growth

A study by consultant McKinsey & Co called ‘Mapping the Global Capital Markets’ says the stock of global capital will grow from $118 trillion to over $210 trillion by 2010. It is a seriously large number, something difficult for the mind to fathom.

It would also be more than 16 times the current US GDP. This capital moves into different asset classes, including equity, chasing growth.

India’s November data show healthy growth, with production up 14.4% after being under 7% in October. This has led to a 17% growth in indirect (excise and customs) tax collection between April and December. Inflation is slightly higher but not too worrisome at 5.5%.

Thus the stock market, which dipped jarringly in the first three days with the Sensex losing 497 points to fall to 13362, bounced back sharper than a pesky yo-yo, gaining 693 points over the next two days, and ending the week with an overall gain of 196 at 14056 — a new high. The Nifty rose 69 points to end at 4052 — also a new high.
So things look good and whenever they do, one must be on the lookout for danger signals that could rock the boat.

The first of these is the likelihood of a confrontation between the legislature and an activist judiciary. The latter is pulling up both the legislative and the executive branches of government, which have not been doing their jobs, much to their discomfort. A controversy is likely over the Ninth Schedule to the Constitution, which was introduced later, and not by India’s founding fathers. Laws brought under this schedule were to be free of judicial scrutiny, thereby giving great room for mischief to the legislature. Everyone must be accountable.

The second is the adequate availability of oil. Saudi and other Opec countries are likely to cut supplies as prices have fallen significantly. In India, rising oil imports have worsened the current account deficit to $6.9 billion in the July-September quarter, compared with $3.6 billion in the same period last year. This could be reduced significantly if road and traffic management improves - much of the fuel burnt today is on idling vehicles.

Naturally the judiciary ought to come down heavily on an administration that does nothing to maintain roads or improve traffic flow. In the circumstances, it would be a good idea to privatise road management.

The third is that despite buoyancy in tax collection, expenditure is growing faster. It will grow even faster as elections approach, for politicians love to announce populist schemes which they don’t have to pay for. Thus, ever more perverse forms of taxation are thought of.

Fortunately for investors, the Income Tax Appellate Tribunal has held that capital gains on shares held for a year are subject to 10% tax and not to be treated as business income, no matter how frequently traded. This ludicrous demand was a fiction created to collect more tax.

More money is likely to flow into the financial system if the government introduces, as is being contemplated, another Resurgent India Bond issue for non-resident Indians, to be used to fund infrastructure.

But there is a significant worry: A group of ministers has opined that boards of public sector companies cannot decide, without government permission, when to tap the
markets for funds as this is, in their view, an ‘ownership’ issue and not a ‘management’ one.

This shows complete lack of good corporate governance, is utter oppression of minority shareholders, and definitely an area where judicial intervention is called for. In much the same vein, the attorney general has opined that despite having signed a shareholder’s agreement, the government need not sell residual stakes in companies such as VSNL and Balco. He maintains that a call option voluntarily granted to the buyer, fetters the government’s right to sell the shares freely. This is nonsense. What worth the government word if it can be so easily reneged?

The Cairn IPO listed at a discount to issue price of Rs 160 and closed at Rs 137.5. This is a function of aggressive pricing, which leaves nothing on the table for the retail investor. Perhaps someone should start a website giving details of major IPOs brought out by lead managers and the track record of shares compared with indices. This could be a counterbalance to aggressiveness in pricing.

The Indian bull is roaring more than the Indian tiger! It will run up more next week, fed by global liquidity. It can only slip if, instead of running on the hard ground of economic reality, it were to step into the squishy muck of political inanity.

jmulraj@gmail.com