The brokeback debt mountain


In order to stave off the global financial crisis their own bankers had created, aided by poor ratings by rating agencies and by brokers selling all sorts of junk, Governments have pumped in huge amounts of money to replace private consumption. An article on the BBC website says the cost is $ 10.8 trillion, which translates to $10,000 per person in the developed world! Of the $10.8 trillion, the US shared $ 3.6 t, the UK $ 2.4 and others $3.2. China and other countries pipped in with $ 1.6 t. As a percentage of GDP, the US bailout is 25.8%, which is enormously high. Compare it to the approximately 8% of GDP during the great depression and one sees why; the current recession is not yet over and one may see a double dip.


But the UK figure is even more startling! Its bailout is a whopping 94.4% of its GDP, translating to $ 50,000 per person! How on earth will the UK Government get out of this debt mountain? Debt of both US and UK is enough to break their backs. This is what is worrying investors.

Also of concern everywhere is when is a good time to withdraw the stimulus packages. The US non farm jobless figures were depressing, at 85,000 for Dec 09. Look at the serious decline, over decades, in non farm employment from the website www.chartoftheday.com

In India, Finance Secretary Ashok Chawla feels that the Indian economy is healthy enough to start withdrawing the stimulus packages; he is also looking to the deteriorating fiscal situation. On the other hand, Commerce Minister Anand Sharma warns that early withdrawal could be painful; witness how Japan has not recovered 20 years after its asset bubble burst in Dec 1989. (see Economist Jan 2, 2010 ) In the 80s Japan used to be a contender to become the world's leading economy. Its stock market was booming, the Nikkei nearly hitting 40,000, the most expensive stock in the world was NTT Docomo, 7 of the top 10 global banks were Japanese (there is one now), Japan was buying US assets such as the Rockefeller Centre and Universal Studios. It has lost 2 decades with no economic growth and an aging population. It is now China that is threatening to take over the mantle of economic leadership. It has just overtaken Germany in exports.

India's fiscal situation is strained because of inept management. Consider this. Direct tax collections are up 8.5% in the first half of the year and corporate taxes are up 44% in December. Yet the Government has no money to pay the promised fertiliser subsidy (estimated at Rs 70,000 crores) and is seeking to further subvert its oil marketing companies by capping its share of recompense for subsidy to Rs 15,000 crores. ONGC and Oil India are asked to bear the cost of diesel and petrol subsidies whilst the Government bears the cost of LPG and kerosene which it now wishes to cap at Rs 15,000 crores. This, despite higher tax revenues!

What is the result? The three oil marketing companies, IOCL, HPCL and BPCL, are bathed in red ink and so unable to upgrade refineries in 4 regions, Kerala, J&K, North East and Bihar, to meet Euro III emission standards of fuel. Ergo, auto makers cannot sell Euro III cars in those regions. Ergo, pollution is higher (hey, what about our commitment at Copenhagen?)

The Prime Minister says that India's GDP would grow at 9%, but this would require much better governance than has been displayed. LN Mittal is chagrined at the delays in clearing large projects and says India is unprepared for large investments. Good governance is what has enabled Bihar, one of the states that used to be known as Bimaru, or sickly, to achieve an 11% growth rate! This would have been unbelievable a year ago!

In corporate news of interest, there may be a postponement of plans for an IPO by BSNL and Coal India, until their valuations are as desired by Government. BSNL's current valuation as advised to Government is Rs 58,000 crores, which is half what it used to be. This is largely due to the senseless delays in awarding of contracts to expand its network. It had completed the tender process for it when one of the (losing) contenders filed a writ petition and stalled the award. BSNL also has to bear, almost entirely, the unviable cost of a rural telephone network, and is asking for a waiver of licence fees for such loss making network, which, if agreed to, would save it Rs 1800 crores a year. Coal India is currently valued at Rs 75,000 crores, but is, according to Government, worth more.

In other corporate news, RIL has upped its bid for Llyondell by 13%, to $ 13.5 b.

This columnist was expecting an explosive start in Indian stockmarkets but the start was muted. They replaced Sehwag with Dravid. The sensex went up the first 3 days and down the next 2, to end the week with a gain of 75, at 17,540. The Nifty ended at 5244, up 43. Interestingly, foreign investors were net buyers on all days, and domestic funds were net sellers on all days except Tuesday. It is thus the FIIs which are propping up the market at these levels.

The sensex is poised at the crossroads. It has reached the level of 17700, from whence it fell, in May 2008. It had fallen sharply to 7700 by Oct 08, causing investors to take double doses of Imodium.

It is likely that the market may meet resistance at current levels. They would not fall anywhere near the May 2008 to Oct 2008 fall. But buying on a dip may be advisable. As of now the high debt levels of the developed world have not manifested themselves too strongly. But they will, later.

By J Mulraj