Worrying international scenarios

Worrying international scenarios

Other than economic factors, such as the slow pace of recovery in the developed world, the rising crude oil prices and the depressed mortgage markets, there are areas of growing concern.


The Economist of Jan 1, 2011 has a cover story on the huge risks of a new Arab-Israeli conflict. Armed by Iran and Syria, Hizbullah has a stock of 50,000 missiles and rockets, which, unlike in previous wars, have the ability to hit Israeli cities and cause civilian casualties. Iran itself continues pursuing its nuclear ambitions, which, it is feared, may lead Israel to launch a preemptive strike and an escalation of the war. The editorial urges Obama to take a firmer line with Israel to stop the spread of its settlements and avoid another horrible war.

North Korea is as nastily billigerant as ever, with tacit Chinese support. China has achieved surface to ship missiles, and is close to developing a stealth aircraft, both of which will escalate tensions in the South China sea. Closer home, the assassination of moderate Governor Salman Taseer, by his security guard, for his stand on blasphemy laws, is causing jitters, for fear that Pakistan's nuclear arms may fall into the wrong hands.

These are all serious concerns and, coming as they do on top of the economic woes, one is not the least bit envious of President Obama's job! As the chart, taken from www.chartoftheday.com shows, non farm job growth in the US in the first decade of this century, is very low, compared to earlier decades which were the baby boom years.

In order to create more jobs the US Government is pumping huge dollops of liquidity into the system, which is keeping interest rates low (thus helping equity markets since the benchmark for risk free returns, or Government debt, is low) but, at the same time, creating asset bubbles. Indian stockmarkets have been a beneficiary of this enhanced liquidity, driving up stock prices in 2010.

However, if the US needs to get involved in any of the potential skirmishes outlined above, its spending would be further increased and something would have to give.

Domestically we have our own set of problems, caused mainly by awful governance. Food inflation hit an unacceptable high of 18.3% and high onion prices are creating a stink. Interest rates are rising to counter inflation and this will negatively impact stockmarkets. The current account deficit is increasingly financed by short term flows, which may flee any time and create a crisis. FDI flows need to be increased but would need better governance and action against corruption, to encourage. The Prime Minister needs to get his act together.

The Petroleum Minister has ruled out any hike in the administered price of diesel, which would push up transportation cost and add to inflation. This would drive the oil marketing companies, IOCL, BPCL and HPCL into the red, besides fetching a lower price when a part of ONGC is divested, in the first quarter of the year. This means that the target of Rs 40,000 crores from disinvestment may not be met. Fortunately for the FM, tax collections are up, and estimates for this have been increased by Rs 20,000 crores.

Bad governance is seen in the inexplicable delay in the 'grilling' of Suresh Kalmadi, head of the Olympic Organising Committee, three months after the games ended and many more after news of the blatantly exorbitant purchase of things by the OC surfaced. These columns had even provided a link to a site where toilet paper could be reasonably procured! The point is, why does it take so long to act against perceived abuse of power and disgusting degrees of corruption? Is complicity the reason for the delay?

Despite this abysmally poor governance, the Indian economy is growing well, and slated to grow well! Rating agency CRISIL forecasts it will grow 8.4% a year for the next 5 years! That, in itself, will attract foreign investors, once the current downslide ends.

The lament is that CRISIL feels the figure would have been 10% were it not for supply side constraints, including the governance deficit. Other supply side constraints include, as everyone knows, poor infrastructure (the Government plans spending Rs 1 trillion in the 12th plan on infrastructure alone), skills shortage (thanks to subsidising things like diesel we have less to spend on things like education and health), faltering agricultural productivity (we have seriously damaged the soil quality by continuing to subsidise urea, leading to its overuse, whilst freeing prices of nitro and potassic fertilisers).

There is a complaint that licenses for solar power are being sold by the acquirers at a premium. This begs the question why it needs a license in the first place, if the policy is to encourage its use? A prime example of governance deficit.

In corporate news of interest, L&T plans to have an amoebic split into 9 companies, organised along strategic business lines, each with its own CEO, CFO and P&L, which may be spun off into separate companies, and listed, later. The move may ironically make it less difficult to take over.

The market took a beating last week, on rising interest rates and higher inflation, with the sensex losing 817 points, to end at 19691, and the Nifty dropping 229 to close at 5904. The sensex ought to make its first stop at around 18500 – 19000 level. Domestic mutual funds were net sellers the whole of last week and foreign investors also turned net sellers end of the week. A wait and watch policy may be advisable.

by J Mulraj