Reforms Burst during August-November 2012?

Let me begin by saying how proud I feel on hearing that the government has contingency plans in case of more global madness if Greece exits the EU. Wow! Something is working in the government at last! But such plans can at best contain damage from the contagion that will follow and can not insulate India. It is not the Greek exit that will matter so much but the sentiment of panic that will spread across the globe that will be the greatest threat to all countries. Stockmarkets, banks, every economic activity that is bound to be affected. Lenders will have even lesser confidence in weaker European economies like Spain, Portugal and Italy and their access to capital markets will effectively get denied thanks to risk premiums demanded, something that is already happening with Spain.

Back at home, the Congress party has asked the Government  to pull up its socks. Somebody needs to tell these wise people that in the last six months no effort has worked. Haven't they heard of Newton's first law of motion which talks of bodies being in permanent state of inertia or motion unless acted upon? Once you go into a slumber it is difficult to get out, especially when your allies and the opposition want to ensure that you end up doing nothing. So does this mean that this will continue for the next two years till fresh elections happen? I am talking aboit a lack of reforms that is impacting the economy big time. Let me say what I think might happen till 2012-end from now on.

Once the  Presidential elections get over in July, you can expect a short reforms burst during August- December 2012. Government wants to do it badly. In December, many states go to the poll. This probably the last time the UPA II will be able to reform anything. What could happen during this period? Well, with the support of Samajwadi Party, government is likely to raise diesel prices somewhat. This will not be too difficult. Any hike will help. The government can raise Rs 4 and then roll it back to Rs 2 under pressure from official and unofficial allies. We now have a rich history of rollback starting from the time of Yashwant Sinha,  finance minister during the NDA regime. Second is likely to be the Pension Bill as it can bring in large amount of long-term foreign money. BJP supports the legislation and the Parliamentary Standing Committee had its own Yashwant Sinha chairing it. With some more tinkering TMC might be pacified. A 26 per cent foreign stake is not a bad start. It will bring some more dollars. Then, FDI in civil aviation could open up. the whole sector badly needs it. What else? Well, my hunch takes me only this far and then we shouldn't be too greedy, should we? From 2013 onwards, you can expect little on the reform front with all focus on being re-elected. I don't expect any of the principal political parties to be come out entirely happy with the year-end elections. Then, that's a topic for another day.

P.S By the way, Nouriel Roubini, "Dr Doom" does have many nice things to predict in 2013. A google search will help in reaching videos and articles. http://www.roubini.com/analysis/174887.php. All the stuff got uploaded yesterday

Markets' Weakness Ahead?

Talking about the future direction of stock markets is difficult yet tempting. At a radio show on Thursday, April 5 where I was invited as an expert, I was asked the same question by the host. It is quite clear that when markets open on Monday, April 9, 2012, a few things will be at play. The bad news from Europe will be working on investors' minds, especially foreign ones. Bar Germany, the news from Europe is  not great. It is quite clear that what the continent is going through is not "shallow recession" as some had suspected but something deeper. Spain's debt markets don't really believe that it's government can pull things off and maybe that's why the bond yields increased. It seems Portugal, one of the earliest, in the list of troubled European economies will need another cash transfusion later this year. Incidents like public suicides in Greece and Italy that happened last week will make things very difficult for lawmakers trying to take tough decisons. In short, no end of the Euro misery is in sight. Plus, Fed chairman Bernanke has ruled out another pumping of cash into the US economy that would have found its way into the global economy and thereby raised the prices of many assets be it stocks or commodities such as oil. My answer roughly moved around these two major factors. As I write this post, it seems that the latest US jobs data is not too flattering. This will add some more impact to the negative sentiment. It was suspected that US companies would be adjusting to the reality of tepid growth and not step up hiring. That seems to have come true. Add information of a slowdown in China and there is a lot of negatives at work. In India, the markets and the economy could have benefitted if something had been done to negate these effects by moving positively on some of the areas where supply constraints are making life hell. But the government doesn't seem to be getting any of its moves right be it ensuring coal supply to power plants to clarifying aspects of its recent tax avoidance proposals. Looks like any expectation from the government is too much. 

Now Italy, Next France?

Well, the whole eurozone mess is broadly playing out according to the sequence people like me had expected. After Greece, attention had to go to Italy, the larger and vulnerable European country, though the mess in Greece is far from over. For a country with so many coalation governments since World War II, I am constantly amazed to see how much Italy has acutally achieved economically. But now with the kind of prime minister it has and the kind of political squabbling that is expected, it is keeping global markets on the edge. If things get worse, it's France's turn. While most European countries have flouted the fiscal norms for eurozone, including Germany, perhaps countries like Italy and Greece just went over the top. If things get bad in Europe, we are talking about more forex flowing out of India, rupee depreciating, imports getting costlier and inflation fire getting some more pumping. Then how can we expect RBI not to raise interest rates in December, 2011? Well, looks like its a better idea to talk about the weather. Darn! The weather in Delhi is also not good. There you go.