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Bhupesh Bhandari: Why North Block's talking up the markets

Source : BUSINESS_STANDARD
Last Updated: Thu, Oct 11, 2012 19:40 hrs

When Palaniappan Chidambaram took over as finance minister on July 31, after Pranab Mukherjee decided to move to Rashtrapati Bhavan, the Sensex was at around 17,250. Now, it’s hovering around 18,600 — a gain of 7.8 per cent. Some investment analysts have forecast that it will cross 20,000 before the year is out. They are enthused by the slew of reforms unleashed by Mr Chidambaram: foreign direct investment in multi-brand retail and civil aviation, a cap on LPG subsidy, an increase in diesel prices, et cetera. But a few have said the reforms won’t put the slowing economy back on track or correct the government’s finances, which are spiralling out of control; and that the stock markets have risen only because global liquidity has improved following the third round of quantitative easing by the US Federal Reserve. Foreign institutional investors have pumped in large sums of money in the last one month or so — though retail investors are still cautious and are yet to pull investments out of other asset classes like bullion and bank deposits in order to invest in equity.

Actually, a rising stock market is good for the government. I suspect it may even want the markets to rise further. (Officially, it has always maintained that what happens in the stock market is none of its concern, but it comes out with reassuring statements quickly whenever there is a panic attack. And, when the indices were down some months ago, it had said that the market does not reflect the inherent strengths of the Indian economy.) The political dividends aren’t huge — a tiny fraction of the country’s 1.2 billion people invest in the stock market directly or through mutual funds. The investor community is too small to make or break the elections for the United Progressive Alliance. And general elections, in any case, are still far away. There are more pragmatic reasons why a bull run may help out the government. To avoid a rating downgrade, the government needs to rein in its fiscal deficit (targeted at 5.1 per cent of the gross domestic product in 2012-13). The revenue streams are far from buoyant, thanks to the economic slowdown. One way out is disinvestment. (The other is sale of spectrum to telecom companies.) The target for disinvestment this year is Rs 30,000 crore; so far, not a single rupee has been raised by the government.

To be fair, disinvestment has been on the finance ministry’s agenda for a while, but the move has been stalled by the “operating” ministries on the grounds that this is not the right time. Though it may have been driven by the desire to avoid any controversy (“look, they sold valuable public sector shares cheap, leading to a loss of...Let’s call it the disinvestment scam”), there is some merit in the argument. The government’s stock market wealth of Rs 12,38,734 crore (as on Wednesday, October 10) is 0.17 per cent lower than three months ago, 1.27 per cent higher than six months ago, and 1.75 per cent less than a year ago. Most public sector companies (Bharat Heavy Electricals Ltd, Coal India Ltd, Indian Oil Corporation, MTNL, Steel Authority of India Ltd, et al) are currently trading way below their 52-week peaks.

This is what stymied the proposed disinvestment in Rashtriya Ispat Nigam Ltd. Its initial public offer, for 10 per cent disinvestment, has been deferred not once but thrice, over differences between the steel ministry and the merchant bankers over the price band. In the latest round, while the steel ministry was unwilling to sell at anything less than the book value of Rs 22.50 per share, the merchant bankers had insisted on a price band of Rs 15-17 — what they thought was saleable in the current market conditions. But if the stock market were to rise further, the scenario could change. The RINL IPO may have been deferred, but the finance ministry is still pushing the envelope for other public sector units like National Mineral Development Corporation, Neyveli Lignite Corporation, Minerals & Metals Trading Corporation and Nalco.

It is difficult to provide conclusive evidence that the finance ministry these days is working with an eye on the markets. But the way news items have been appearing in the media tells a story. Ministry officials seem to be briefing beat reporters freely about what the ministry is planning to do next. Normally, there is great secrecy on such matters. Not now. Different news breaks are appearing in different newspapers. This could mean there is a coordinated campaign of information management. Also, many of the articles have been bang on target. There is no kite-flying this time.

Be that as it may, the private sector, too, could benefit from a sustained rise in the stock market — it will revive the primary market. One may argue that there aren’t too many large projects in the pipeline, so what do they need the money for? That may be true, but companies are in dire need of equity capital. For a while now, many large companies have been struggling with a huge debt burden, which has been made worse by the high interest rates. (The interest rates are high because the Reserve Bank of India wants to control inflation by keeping money supply on a tight leash. If the government cuts its fiscal deficit, which will lead to a lesser monetisation of its debt, the interest rates may fall. This is where disinvestment becomes so essential to help growth.) They need to replace the crippling debt with equity capital. Everybody has high stakes in a buoyant stock market.




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