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

Hindustan Times (Lucknow) - - HT BUSINESS - J Mul­raj ■ let­ters@hin­dus­tan­times.com (J Mul­raj is a stock mar­ket com­men­ta­tor and In­dia head for Euromoney Con­fer­ences)

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.

IL­LUS­TRA­TION: AB­HI­MANYU SINHA

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