Reforms on track, but more needed
Hike in insurance FDI limit, changes in Land Acquisition Bill, sale of sick PSUs — these are steps in the right direction; Indian economy under threat more from global factors
LAST WEEK, Indian stockmarkets rallied sharply, thanks to the infusion of liquidity by the Bank of Japan through its huge stimulus programme.
Whether or not it succeeds in stimulating the economy, liquidity boosts asset prices, especially stock markets. This is because Japanese investors can borrow in yen at extremely low interest rates and invest in, say, Indian bourses.
So long as the yen depreciates faster than the rupee, and the yield on its investment is more than the cost of borrowing, it is a money pie.
At the other end of the world, a German bank has started charging its customers for retaining money. The German investor may decide to invest in India, where stocks may yield 3%, rather than pay his
IN ORDER TO KEEP THE STOCK MARKET RALLY GOING, THE GOVT HAS TO INSTITUTE REFORMS, WHICH IT HAS STARTED
banker. It is the cross border flow from such zero-interest rate policies that are fuelling the rally in the domestic markets.
The monetary intoxication was, however, quick to wear off as this week the markets ended flat. In order to keep the rally going, the government has to institute reforms, which it has begun.
Reforms also involve new legislation, such as the longawaited Goods & Services Tax (GST), introduction of which will boost the economy and streamline indirect tax collection. It is heartening that the Congress will support passage of this bill in the Rajya Sabha.
Also the insurance bill, which seeks to raise foreign investment limit to 49%, is to be tabled in the winter session along with the coal bill that will help in transparent auction of coal blocks.
However, the market is also expecting the European Central Bank (ECB) to do more quantitative easing, a hope that may not materialise. The hope that the Reserve Bank of India will ease interest rates in December will also see the same fate.
The telecom sector, which was once a poster boy for success-
THE GOVT IS NOW WILLING TO SELL SICK PSUs, A MOVE THAT IS LIKELY TO PROVIDE INVESTMENT OPPORTUNITIES
ful economic reforms, has gone into a tizzy due to the Supreme Court’s decision to henceforth auction all spectrum following the allocation imbroglio.
The next round of auction of scarce spectrum in the 900 MHz band will be brutal as the prices will be too high. Future availability of spectrum in the 2,100 MHz band is also uncertain. So, weaker players will have to sell out to those with deeper pockets.
The government is now will- ing to sell sick public sector undertakings. This could provide investment opportunities if it results in the transfer of ownership through a transparent process, and an improvement in productivity.
It also wants to alter the Land Acquisition Bill for public-private partnership projects, to make acquisition of land easier. This would be welcomed by the industry, for it would permit the stalled investment cycle to pick up. In some other reforms, the government plans to use the Aadhaar number to curb black money in real estate transactions. It also plans to introduce electronic toll collection, which will lead to transparent revenue collection.
The Indian markets, too, needs policy intervention as they are threatened by global and domestic factors.
Among domestic threats, the biggest one is the feeling of vulnerability among retail investors. Investor protection assumes more importance in light of scams such as those perpetrated by the National Stock Exchange Ltd.
On the global front, the malinvestment of funds because of the excess money generated by quantitative easing is one. A lot of this excess money has gone into risky, high yielding bonds. Martin Fridson, chief investment officer at Lehman Livian Fridson Advisors, expects a $1.6-trillion default in high-yield bonds. This is a big risk factor.