Diwali Lights

 

Diwali Lights

 Diesel deregulation is the first of the big bang economic reforms undertaken by the Narendra Modi Government, and will eliminate up to one lakh crore in subsidies. To bring down fuel prices further, impacting, as it does, the prices of everything, the Government should perhaps consider cutting down the onerous central and state taxes. These make Indian petrol and diesel prices higher than most places in the world.

India has layers of indirect taxes on nearly everything except the air we breathe. And all this money is used very inefficiently by an obscenely bloated and wasteful Government apparatus, with little or no accountability. The CAG keeps pointing this out on nearly everything it audits. The Finance Ministry, now making ready to bring about far-reaching structural reform, must look at how all the lazy taxation affects the competitiveness of this country in the global market place.

Diesel deregulation however, coming  in tandem with the slight hike in gas prices will make further exploration, particularly in the deep well areas, and resultant production more viable, particularly as it will be periodically reviewed. But should the case be made to remove subsidies on largely gas-fuelled chemical fertilizer as well?

Meanwhile, the big wins in Maharashtra and Haryana has placed an estimated 40% of the GDP producing engines under direct BJP rule. Coupled with reforms that will encourage and render viable ‘Make in India’ and the resultant FDI, this percentage should gradually represent much larger absolute numbers, if not a lion’s share of India’s profitable manufacturing establishments. Of course, it is hoped that the Modi Government’s manufacturing push will equally benefit all parts of the country simultaneously, including, and particularly those regions which are lagging behind at present.

The stock markets have opened 1.5% up on Monday 20^th October, at the beginning of Diwali week, to reflect a renewed optimism. With a relief rally, if not a revival in the global stock markets to back the resurgence in India, it is poised once again to reach new all-time highs. The market gurus and analysts are reasserting afresh that India is in a multi-year bull market.
To take advantage of this favourable wind, let us hope there are a slew of financial  market reforms to create a state-of-the-art and international grade set of bourses, with the investment products to suit, so that greater amounts of FII can comfortably be accommodated.

There are international jitters to contend with, now and going forward, particularly with bad economic performance emerging from the last bastions of the EU, namely Germany and France, slowed growth in China, as well as wobbly recovery in the US and Japan. And then there is the paranoid fear of an Ebola epidemic.

The Chicago Board Options Exchange (CBOE) VIX Index of Volatility, popularly known as the Fear Index, currently sits at about 24.64, up 80% from the beginning of the year, and 50% up this month alone. This level was last seen in 2012 when the Eurozone Debt Crisis was particularly threatening. This may be an exaggeration, because the US markets may well bottom out at these levels, but still, these indications, above the 20 year average of 20, are nothing to be sniffed at. Nevertheless, the VIX is presently 80% below the shrieking panic that ensued after the collapse of Wall Street in 2008.

The Indian VIX, based on Nifty Options, is at 16.40 now, and the volatility here is not, as yet, particularly alarming, moving in a band of 4 points in this and the last several months, but with an upwards bias month on month, over the last six months. The idea, that with improving economic parameters, that India can de-link from global trends is impracticable; but when the worm turns, and the CBOE VIX  calms down, to say, 10, as it was at in July 2014, India will get a better funds flow as the best performing Emerging Market (EM).

Outside of the headline news, the bringing in of Rajiv Mehrishi, the author of Rajasthan reforms in recent months, as Finance Secretary, augurs well. The arrival of Arvind Subramanian, thought to also be a strong reformer, as Chief Economic Advisor, should also result in early interest rate cuts.

The time for rate cuts has already arrived, thanks to lower inflation on the back of lower fuel prices, and the sooner the Government moves on this the better. The light, administrative moves on the Labour Laws are welcome, but they urgently need radical legislative surgery. 

There is now a sense of movement on the big economic issues, neglected for years by the previous Government. While the Modi Government has to be commended to have got cracking within five months of its advent, can we hope to see much more, between now, the Winter Session of Parliament, and the Annual Budget in February 2015?    

 (802 words)

October 20^th , 2014
Gautam Mukherjee