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Thursday, October 4, 2012

Is the Government’s policy overdrive a ploy to boost the stock market?

From a condition of growth deceleration, threat of credit downgrade, scams coming out of the woodwork and total policy paralysis, India is now being swept along by a sudden policy overdrive that has changed stock market sentiment from extremely bearish to almost wildly bullish.

After the recent announcements of 51% FDI in retail and a long overdue hike in diesel price, the UPA government’s largest ally, Mamata Banerjee’s Trina Mool Congress (TMC – literally ‘Grass Roots’ Congress), walked out of the government in a huff. That perhaps paved the way for three big-ticket reforms announcements this evening:

  1. Passing of the Insurance Bill, including enhanced 49% FDI limit (from the earlier 26%)
  2. Passing of the Pension Bill, including 26% FDI limit, and giving statutory authority to PFRDA
  3. Passing of the Companies Bill, 2011 (a bill pending for nearly 2 decades)

Passing of the three bills by the Cabinet is only the first, albeit a big, step. All three bills need to be ratified by the Parliament, which will be a tough task because the UPA government has been reduced to a minority due to TMC’s withdrawal of support.

The BJP has already announced its opposition to the Insurance and Pension Bills. The Left parties and TMC will surely be joining hands with them. The UPA government will need to do some deft floor management to turn around allies providing outside support – like Mulayam’s SP, Karunanidhi’s DMK, Mayawati’s BSP. Needless to say, the latter will try to extract their respective ‘pounds of flesh’.

The Companies Bill may go through because the BJP is unlikely to oppose it – but one never knows in politics. So, why this sudden policy overdrive by a government that appeared almost moribund just a couple of months ago? The answer depends on who you ask!

Mamata Banerjee has already gone on record – in her typically eccentric and irreverent way – that all these so-called reform announcements have been made to deflect the public’s attention from the slew of scams in which the Congress Party has got mired in. The allegation may not be incorrect.

UPA policy makers are probably trying to make hay while Mamata fails to shine. Her recent protest rally in Delhi was a bit of a damp squib, and Sharad Jadav’s presence next to her on the dais has effectively negated her grand plan of forming a third front with Mulayam’s SP for the 2014 Lok Sabha elections.

Another reason could very well be a ploy to boost the stock market. Why? Because of its various welfare and subsidy schemes, the government is fast running out of money. Foreign credit-rating agencies and the RBI have told the government in no uncertain terms to cut its fiscal deficit, or face rating downgrades and continued low GDP growth.

Reducing spending should be the prudent option, but could cost the government dearly in the next polls. An alternative is to generate cash by reviving the divestment policy. A bullish stock market is a pre-requisite for absorbing large FPO and IPO offerings from PSU companies.

Tomorrow (Fri. Oct 5 ‘12) may bring a further surge in Sensex and Nifty indices. Use it to book part profits. Once the FPO and IPO offerings start hitting the market, a lot of liquidity will get sucked out.

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