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Raghuvir Srinivasan

IS it a knee-jerk reaction? Or is there some justification in the fears of the financial markets over the statements of our could-be rulers on the economy? Investors are sure to be troubled by these thoughts over the weekend what with the bloodbath in the stock market and the drubbing of the rupee on Friday.

Left reliance not right?

The biggest worry for the market is over the critical reliance of the incoming government on the Left parties whose views on reforms collide head on with the market's. The apprehensions over the continuation of privatisation are just one part of that worry. The statements of some of the leaders of the Left as also of the Congress(I) questioning the need for disinvestment and privatisation have only confirmed the market's fears.

There is a genuine worry in the market that we could be returning to the era of subsidies and administered pricing. The grant of free power by the new Congress Government in Andhra Pradesh is seen as an indicator of the party's thoughts on this issue.

Power sector reform is being carried out amidst great difficulties and is just beginning to take off following the enactment of the Electricity Act in 2003. Any return to a system of free power without adequate support to the State electricity boards from the government will only serve to tip them over the edge. Private power and power equipment companies have committed large investments based on the continuity of the reforms. Their projects and plans will be in trouble if reforms are halted.

Any government that wants to hand out largesse in the form of subsidies also has to look at ways of generating resources for the same. What better way to do that than by increasing income-tax, especially corporate tax? The position of the Left on this issue is again at wide dissonance with that of the stock market. The first Budget of the new government will be revealing, but any move to raise corporate tax rates will prove disastrous not just to the corporate sector but also the stock market.

These are the fears driving market sentiment now. Yet, if the past is any guide, much of these fears may turn out to be just that.

Reality is different

What the Left now wants at Centre may not be market-friendly, but it is the same Left that has turned the reformist in West Bengal. The Buddhadeb Bhattacharya Government has in recent times quietly reined in militant trade unionism in the State even as the Chief Minister himself has taken the lead in wooing private investments to West Bengal.

Indeed, the State has even made bold to experiment with closure of some loss-making companies apart from vigorously targeting foreign investments.

Mr Buddhadeb Bhattacharya, was proudly stating on television the other day that the largest Japanese investment in India is in his State. West Bengal has also been wooing information technology companies. Clearly the Left is trying to change with the times.

Again, much of the reforms that have taken place till now are irreversible. For instance, in the area of trade reforms and intellectual property rights such as patent laws for the pharmaceutical industry, commitments to multilateral agencies have already been made. A new government cannot go back on these commitments without adverse fall-out.

The Congress(I) is, after all, the original initiator of reforms and it is not likely to do an volte face now. The major spot of bother now appears to be on the disinvestment policy. Some Congress leaders have already made the point that it will be reviewed and that there will be no strategic sale of the profitable PSUs.

An interesting point to note here is that the Reliance group has a major stake in the continuation of the strategic sale process. Its refinery has no retail network and the company is banking on bagging either Hindustan Petroleum or Bharat Petroleum. Given this, the Ambanis can be expected to lobby hard for the continuation of the privatisation process.

The statements of the Congress leaders on economic policy, particularly disinvestment, need not be taken too seriously because they seem to be aimed more at gathering support for the government.

Reality, once the government is formed, may turn out to be different.

Therefore, it appears to be no more than a knee-jerk reaction from the market that is nervous with the character and composition of the new political dispensation.

Positive vibes

To be sure, there are a lot of positives to look forward to. We are in the middle of the corporate results reporting season and a number of important companies are due to bring out their excellent report cards. Major industries are reporting good growth; for instance, the automobile industry continued its good performance in April. Initial predictions for the monsoon are encouraging.

With such positive vibes around, it is unlikely that the market will remain depressed for long. There will be some uncertainty till the new government settles down and presents its first budget, which will really be the best indicator of its policies.

Last week's carnage on the bourses has laid low the stocks of numerous fundamentally strong companies that are performing exceptionally well. This may really be the time for some bargain buying for investors who should exercise care in picking the right stocks for investment.

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