Time To Short The Market

Time to short the market

Mr. D. Subbarao, our RBI Governor, about to remit office, has failed to control inflation with his tight monetary policy over the last five years. Three- times Finance Minister Mr. P.Chidambaram, has, over the one year since he moved from Home to Finance, failed to promote domestic growth in the economy. Nor has he managed to enthuse domestic players and foreigners to invest in India.

Mr. Anand Sharma in Commerce & Industry has fared no better at stimulating exports. Everyone, from the Prime Minister downwards, has been caught up in short term bureaucratic measures designed to fire-fight, without delivering the desired results.

So much so, that the economy is now in some peril of total collapse. The deficits are likely to spiral out of control at the macro-economic level, bringing on an unprecedented crisis. Price rises at the micro-economic level are becoming increasingly dramatic and causing great hardship to millions of people.

The welfare measures, motivated or well- intended as they might be, are inadequate, inefficient, and the financing of which are also putting a great strain on the economy.

And the key reason for this all around alarming situation is because the Government has not taken one bold step to stimulate the economy in the last five years! Nothing dynamic or effective has been done to promote growth, either on the infrastructure investment side or by way of consumption.

Inflation, that Governor Subbarao has tried  so hard to battle by choking off liquidity and throttling growth, is largely imported, along with 70%  of our petroleum needs, and therefore beyond our control.

As for the investors in the stock markets around the country, the clarion call has gone out from the experts to ‘short’ everything, meaning bet on lower and lower prices on even intrinsically good stocks. Foreign experts think only our ‘small-caps’, already beaten down to minimal levels, are long term good value, while the rest are over-priced at current levels.

The thumbs down has come as the rupee continues to lose value and company results are getting steadily worse. The pundits are therefore confident there is money to be made only as the market goes down.

How much downside is expected? Perhaps 14,000 or 15,000 on the Sensex, 4000 or 3,500 on the Nifty, in short order, and then who knows? The opinion polls that show no clear winner in the general elections are also depressing sentiment. It is important for the BJP and NDA to consolidate its lead in the coming months. Meanwhile, India is about to exit the $ 1 trillion mark in total size of market value as well.

China and Hong Kong together account for more than $ 6 trillion market capitalisation on their separate stock markets by way of contrast. Even Australia, with its limited population, has a stock market capitalisation of $1.3 million, ahead of us at $1.03 million today.

Mr. Chidambaram says he will be able to finance this fiscal’s ever rising current account deficit. But this is a desperate admission.  He is just about technically right, because our remaining foreign exchange reserves, lowest in years, can pay for seven months of imports at current levels, and the financial year ends in March of 2014.   

Mr. Chidambaram is credited with staving off a ratings downgrade by the international agencies a couple of months ago, but he did it by restricting and deferring expenses and cutting planned capital expenditure, thereby also slowing the economy.

Perhaps there are too many contradictory pulls and tugs on our economic thinking. Economist Prime Minister Mr. Manmohan Singh and his acolyte Mr. Montek Singh Ahluwalia at the Planning Commission, are instinctively liberalisers. But they are constrained by the thinking of arch- Socialists Mrs Sonia Gandhi and Mr. Rahul Gandhi in the Congress Party.

The Opposition and the allies of the UPA also have largely Socialist views. This is in addition to the perspective of the Ministry of Finance, the large PSU banks, the RBI, the tax authorities, all making for a thorough kedgeree of our economic policies.

Besides, the impact of the urban voter, most concerned with economic issues, is not yet fully appreciated by the political class. Will the 60% of the rural population continue to be seduced by traditional postures or will they also demonstrate rising aspirations along with the 40% of urban voters? Or will the fragmentation in the polity between the collection of the regional parties and the two national parties postpone serious consideration of the economic needs of the country? Will we descend into banana republic status in the meantime?

As far as the objective observer of our economy goes, we have failed to strengthen the capital account of the country by attracting long- term investment. Many things and services in India are over-priced. And India has continued to depend on short- term portfolio investment via FIIs to manage its current account obligations. This supported by the large and steady inward remittances from migrant workers, NRIs and PIOs abroad. The inward remittances actually rival the FII investments, and are economic life- savers because they are not volatile.

Recent Government steps to check the further fall in the value of the rupee impacted both the banks and the markets squarely. It resulted in a mass exodus of FII money in the debt and equity markets to the tune of over $10 billion in two months.

This exodus has also resulted in further pressure on corporate borrowers and lending institutions alike. The retail interest rates are also being forced up for individual borrowers and deposit rates may also have to be raised.   

The possibility of raising money abroad via external bonds being mooted now will expose the country to greater dependency on the circumstances prevailing in the global economy. Meanwhile we are projecting a further shrinkage in the GDP figures which casts doubt on its success beyond a committed NRI population.

The overall report card shows a total failure to manage the economy in UPA 2.Growth, already halved, is vaporising away. Inflation, partially because of the staged removal of subsidies on oil and gas, increase in the price of electricity, sharp upswing in all FMCG goods, let alone consumer durables and capital goods, is and will continue to play havoc. The price rise issue is getting ever bigger by the day.

Every person is being painfully affected; and the increase in the price of even ordinary food items across the board is not going to go away anytime soon.

(1,075 words)

August  1^st, 2013

Gautam Mukherjee