The markets went crazy last week on the back of strong global news and also news flow from India. After the German court held the ECB bailout plan as valid, FED announced QE3 and decided to buy bonds worth US$ 40 billion a month. Thursday evening the Indian government finally announced a price hike in diesel prices of Rs 5 per litre. It also at the same time reduced the excise duty on petrol but did not pass it on to consumers. The third thing it did was to restrict the number of LPG cylinders per connection to six a year. All these measures saw the markets zoom over 2.4% in a single day.
The OMC companies opened with a huge gap and gained between 6-10% intraday before profit taking and bull liquidation saw these gains not only being surrendered, but the stocks ended the day negative. HPCL previous day Rs 308.10 rose on Friday to Rs 327 and closed at Rs 300.05. Similarly IOC from 254.40 rose to Rs 269.90 and closed at Rs 248.70. BPCL rose from Rs 354.55 to Rs 378.90 and closed at Rs 350.05. ONGC which shares in the subsidy and contributes to the under recoveries of the OMC’s fared similarly rising from Rs 283.05 to Rs 294.15 and closing at Rs 282.
The markets were rising and cheering the price rise even as inflation numbers were poor and the opposition parties and some UPA constituents demanded a roll back. As if this was not enough the government announced a slew of measures on Friday evening concerning FDI. The government has allowed 51% FDI in multi brand retail, hiked FDI to 100% in single brand retail and allowed 49% FDI in aviation with foreign carriers permitted to invest upto 26% through FDI and 23% through FII route. It has also increased FDI investment in broadcast services to 74% and 49% in power exchanges. The impact of these measures would be felt in the markets when they open for trading on Monday.
The impact would certainly be positive and there would be another gap up opening after what we saw on Friday with a 222 gap on the SENSEX and 79 point on NIFTY.Why these measures back to back on Thursday and Friday?
This is the interesting part and answers would be difficult. The current government under the leadership of the PM has been dubbed as a non performing government affected with policy paralysis. A mere 5 months remain for the last budget to be presented in February 2013, which is expected to be populist in view of scheduled general elections in May 2014. The budget in February 2014 would be a vote on account. Secondly elections are to be held in Gujarat and Himachal Pradesh in November and December 2012. So it was now or never.
The government is trying to divert attention from the ‘Coalgate’ scandal where the Supreme Court has also intervened and asked the government to reply. This matter is also taking the path of the earlier mega scandal of telecom 2G. The IMG or inter-ministerial group has over the last few days de-allocated a few blocks and also encashed the bank guarantees issued by these entities. Many more would follow.
By announcing first the diesel hike and then the FDI in various sectors, they have managed to divert the attention of the political parties and also divided their focus. What is a greater evil, price hike or FDI? Secondly they have been able to pump up the stock markets which are supposed to be a barometer of the economy and with markets at new 52 week highs, they have achieved it. Thirdly assuming something goes wrong and for some reason they are forced to announce earlier polls they could use a plank that they chose to sacrifice the government by being performers and policy makers and reformist rather than be seen as fence sitters. Fourthly FDI announcements are expenditure neutral for the centre and revenue positive. Something may or may not happen immediately and there could be many changes in the near term but the government has fired a salvo where they could be winners. Their stand hereon would be important.
The diesel price hike issue is the making of the government itself. For almost 15 months they chose to keep prices unchanged for diesel even though the Indian Rupee depreciated by about 20%. If they had kept on changing prices every month by even 50 paise it would have been digested and there would not have been a hue and cry as is expected now. The issue of 6 LPG cylinders would create some sort of a parallel trade in the commodity where the price differential is huge. The subsidised price is half of the normal price giving rise to a huge differential in pricing. It may also be mentioned that even in this diesel hike the government has extracted its pound of flesh. The price hike of Rs 5 includes an excise duty component of Rs 1.50 per litre which has been given back in the form of lower excise on petrol. Effectively on a net net basis it is revenue neutral for the government but its subsidy bill comes down to the extent of under recoveries reducing.
The only touchy subject in FDI is retail and this is a state subject. Individual states have to take a decision on the same and it would be interesting how these states react. Many of the opposition states have voiced their protest over 51% FDI in multi brand retail and a nationwide stir is planned for the 20th of September. The West Bengal CM is against the policy and has threatened the government with a 72 hour ultimatum. The last time FDI in multi brand policy was introduced, the same was withdrawn and the same has been introduced with consultation as the government would want us to believe.
RBI would at its review meet take a call on rates post the government’s diesel hike and FDI announcements. This meeting would be in the wake of higher inflation and the ECB and FED decisions to buy bonds in Europe and the US. Would RBI governor SubbaRao accept the government’s arguments and lower rates or remain unmoved would be known in a few hours. This event could act as a big trigger which could move markets either way on Dalal Street.
The markets and the nation are two different things and this week would be yet another crucial week for the markets. I believe there would be a gap up opening and a rally on the announcements but with virtually no shorts remaining in the market to be squeezed, sustaining of the rally would be another issue. Handling of the FDI issue on multi brand retail and the government’s stand on the issue will be the focus for the time being and could be critical for UPA-11.Extreme caution needs to be advertised.
