MARKETS AT NEW HIGH - WHAT EXACTLY ARE WE CELEBRATING?
By Ruma Dubey
A pertinent question which may irk many – what exactly are the markets celebrating?
Willing to take the risk of being called a party pooper, one cannot understand the reason for this surge at this juncture. Pre-budget rally? That’s fine but then are the markets expecting a populist budget and not a prudent one? Is that what we are setting up the markets for – super high expectations when we really cannot afford to have any?
But it has indeed become a habit of the markets – to expect too much or rather setting very high hopes and thus forcing those in power to pay heed to the hopes or else face the repercussions. This aggressive but subtle way of arm twisting the Govt, letting them know what the market wants, which is today perceived as what the FIIs want is all wrong. This is akin to holding debates on TV where the anchor wants to give a verdict much before the Court does. Calling it what the people want, are we all responsible for the skewed policies and handicapped economy?
Take the case of the railway fare hike. The Govt had to rollback because of pressure from the people – it did not want to crush their ‘positive’ perception of the new Govt. But at the same time, the very same people want world class railways. How can both go together? And is that all that people want – lower prices? Are those the only expectations?
Talking about celebrating ahead of time, take the case of Lavasa, subsidiary of HCC filing its DRHP for the Rs.750 crore IPO. There are various sections of the media which have gone ahead and proclaimed that this marks the revival of the IPO market. Well, only a DRHP has been filed; there are no approvals yet. One does not know how the secondary markets will be till then given the vagaries of monsoon and Iraq crisis, yet the proclamation of Lavasa DRHP reviving the IPO markets. What about those filed by GMR Energy and Adlabs Entertainment? Companies will all approvals have still not gone the IPOs so why are we so quick to draw conclusions? By the way, onion prices have hit the sky despite supply constraint removals – is this no longer an issue today or have we come to accept the higher prices as the norm just as we have accepted crude at above $110/barrel as normal?
In that context, we need to get real about expectations from the Union Budget. The ground reality is such that the road to get to that ‘acche din’ is very rocky and contentious. Monsoon is a big crisis which could throw every policy, every sop to naught. Today there is news, which is hardly covered by any media – severe water crisis in 22 districts of Maharashtra, with drought-like situation. Some six farmers in Marathwada have committed suicide as they had sown seeds, expecting rains which never came.
This apart, the recent report of IMF was pretty scary. Giving its report on Asia-Pacific economic stability, it is clear that the health of Indian economy is fragile. IMF has stated that Indian companies are most leveraged in the region with more than 30% of the firms having a debt equity of more than 3, another 25% have a ratio of more than 2 and another 30% had more than one. That means only 15% of the firms in India have a debt equity of less than one or less than 20% of India Inc is debt free. This, against the fact that 70% firms in Hong Kong are debt free, shows a very sick India Inc.
Given this background, even if Govt gives sops to boost investment, will banks lend more to the already leveraged companies? And that too, when banks themselves need a lot of cleaning up. What is the point of lower excise duty when interest rates will remain high – both in a sense nullify each other. And interest rates are not going to come down in a hurry.
Expecting the Budget to wipe off all these ugly realities like a magic wand is being plain stupid. Thus the rise of the market is illusory and not the ground reality. Really, Jaitley has a very tough task ahead of him – keeping popularity intact while taking tough fiscal measures. He very rightly said yesterday, "If you indulge in mindless populism you burden the exchequer...you convert yourself into a high taxation society. It does not work. Therefore if you have to follow a path of fiscal prudence, have a certain amount of discipline." He has said that the Govt will take tough measures and shun populism. Hope that will be the theme of the Budget on 10th – without a bitter medicine, no ailment can be cured and we are here talking about the very sick, almost terminal illness.
Well, time will tell whether the Govt gave priority to fiscal prudence or like the UPA, toed the line and went for populism, risking the entire future of the country.
Thus either way, there is really no reason for the market to hit new highs every day – tread with extreme caution. This not being bullish or bearish - it is just being prudent. It is always very easy to get carried away with good tidings.......