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Risk factors rising for equities

If our government and all our politicians were now to emulate Rip Van Winkle and go off to sleep, the economy would boom!

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The dastardly terrorist attacks on suburban trains in Mumbai failed to deter the spirit of its people who came out on the streets in droves to assist in any way they could. The Sensex also cocked a snook and rallied 357 points on Wednesday. It fell back thereafter, to end the week at 10,678, for a weekly gain of 169 points (1.6%).

This came mainly from three stocks; Infosys contributed 69 points, Reliance 40 and Reliance Communication 27. If our government and all our politicians were now to emulate Rip Van Winkle and go off to sleep, the economy would boom! They pose the largest risk factor to the continuation of the bull run.

One could divide the risk factors into political, terrorism and economic. They are intertwined and cannot be shrugged off. In political risks, the bill seeking exemption from disqualification of those holding ‘offices of profit’ could be a minefield. On the one hand, several MPs would stand disqualified if it were not pushed through. On the other, the president may have qualms signing it, if it were.

Terrorism is a global menace but the difference in India is that all security forces have been made subservient to political whimsicalities. Action taken by policemen or securitymen against anyone with political connections leads to his transfer. As a result, the route to seniority is based more on pliability than on merit. Hardly the backdrop against which they can counter terrorism!

People with political connections can, and have, gotten away with murder! If we are serious about fighting terrorism we must depoliticise the security forces. We must also get our priorities right. One of the reasons for lack of adequate information is because several cops were busy shutting down dance bars, on threat of transfer. Imposing one’s own sense of morality on others seems to have greater priority than ensuring citizens’ safety.

The third factor is economic, both international factors as well as domestic. Amongst the biggest threats is the rising oil price, which has already crossed $ 77 per barrel. Add the warped manner in which petroleum product prices are fixed at home and we have a financially grotesque situation.

Prices of kerosene and LPG are subsidised on the ground that they are cooking fuels for the poor. They are, but only a small proportion of subsidised kerosene/LPG reaches the deserving, and no one grudges them that. The larger part of the subsidised kerosene finds its way into adulteration of diesel, fetching huge illicit gains.

The subsidy burden is first borne by public sector oil and gas companies, which have been converted from navratnas to now-rotten-ers. These companies are later partially compensated in the form of oil bonds.

Since the subsidy is ostensibly for the poor, it is politically unwise to challenge it. A far more sensible way would be to identify those who deserve the subsidised product and give them coupons to claim it. But then that would deny illicit gains to the oil mafia, and to those who share in it.

Subsidised kerosene used for adulteration not only affects the environment and has health consequences, but it also distorts market pricing signals and does not help curb fuel consumption. Witness how customs duty collections are up 34% (mostly oil) while excise collections are up only 8%.

So the government is not doing what it is supposed to, either in terms of fiscal discipline, or in economic reforms, or in providing security. The public sector as a whole is a net dis-saver. Compulsions of coalition politics do not allow these dis-saving entities to be sold, as any prudent person would do, to an asset that was draining his kitty. It is not so much political compulsion as the absence of political will that results in this situation. It is the private sector that is the main reason for economic growth.

Infosys, for example, came out with stunning results with a 50% increase in first quarter (Q1) net profits to Rs 800 crore and a guidance that hikes annual sales growth by 10% over the previous guidance, to Rs 13,400 crore.  This stock was one of the main reasons for the 357-point jump on Wednesday.

UTI Bank’s Q1 profits increased 30% to Rs 120 crore on an income of Rs 1,170 crore (up 52%). It has opened an office in Singapore and plans a Tier 1 issue this year.

The market, however, will soon start noticing the risks associated with poor management of the country, political and economic. It’s thus better to be prudent and sell on rallies. At least till our political class shows that they care about the nation.

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