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Krishnan Thiagarajan

PHEW! What a week it was? Be it the merry go-round on the political front or the incessant gyrations of the stock market, it was, by any yardstick, a week with few parallels in Indian history. Clearly, the FUD factor was at play, in all its dimensions; the "fear, uncertainty and doubt" that policymaking process in key sectors by a Congress-led coalition government, with support from the Left parties, may be turned on its head. This factor wreaked havoc at the market. In a single trading session on Monday, the Sensex witnessed the highest intra-day fall in the history of the BSE, index-based circuit filters came into play for the first time, halting trading twice during the day and even at the end of the day, the Sensex suffered the second biggest decline in its history.

Right noises from Dr Manmohan Singh, then PM-designate, SEBI, and the RBI and buying by domestic institutions and mutual funds went a long way in calming the frayed nerves of operators in a panic-stricken market. As it also became evident that no payment crisis was brewing, the markets staged a swift comeback. The Sensex which was staring at a 15 per cent loss in the first few hours of trading on Monday, clawed back from the brink to end the week with a mere 2.1 per cent decline.

Crossing the three hurdles

With the Sensex closing lower than the previous week, however, shows that there are at least three more hurdles to be crossed before a clear direction of the markets emerge:

Cabinet formation: The composition of the Cabinet will hold the key to the reform process in several sensitive sectors, such as power, oil and gas and commerce and industry. The profile of the minister in these key Cabinet posts will influence the policy-making process to a large extent, as has been the case in the past.

The Common Minimum programme: The draft CMP, put out by the United Progressive Alliance, only talks about disinvestment, FDI (foreign direct investment) and banking reforms.

The thinking of the UPA, particularly of the Left parties, on several tricky issues such as subsidies (LPG /kerosene), reforms in infrastructure, power and labour is not clear yet.

The Budget: According to preliminary indications, the Budget may be announced in the first week of July. That will probably unveil the complete picture of the reformist mindset of the Congress, the original architect of reforms in 1991.

Over the next one month or so, greater clarity will also emerge on how the new government deftly handles the twin centres of power residing with Dr Manmohan Singh as the PM and Ms Sonia Gandhi as the Leader of the main ruling party.

Markets: The sum of all fears

Even after the unprecedented roller-coaster, the markets is still groping for direction. This is obvious on at least two counts. The bullish wave in the market which preceded the elections was dictated by policy-linked sectors that were at a take-off stage. Second, it cannot be said categorically that the market was not prepared for a new political dispensation at the Centre. After all, between April 25 (before the second round of polling) and May 14 (a day after the election results), Sensex and Nifty had shed 855 points (or 14.4 per cent) and nearly 310 points (or 16.3 per cent) respectively.

Clearly, in the near term, the market is looking for a clear direction on the policy front. Since the structural changes are also shaping the global economy, four areas will be keenly watched:

Disinvestment/banking: Both from the economic vision of Dr Manmohan Singh and the draft CMP, it is clear that this government will not favour disinvestment in profit-making PSUs. Since these are indications that privatisation through the strategic sale route will be put on the backburner.

The question which instantly arises is: How will the government raise finances to bridge its fiscal deficit, given the limited leeway it may have in tinkering with subsidies? Especially, if this government places greater emphasis on agriculture, education and labour reforms. It may well be in the form of higher taxes, from both the corporate sector and individuals. As for banking reforms, the tentative decision to retain the government holding in banks at 51 per cent may delay the consolidation activity, especially between public sector and private sector banks, which was expected to unlock significant market value.

Moreover, the posture of the government on relaxing the FDI limit in insurance will also be critical to future investment activities.

Power reforms: Dr Manmohan Singh has indicated that he favours power reforms, his view even in this earlier stint as Finance Minister between 1991 and 1996. But pressure from the coalition partners may put the power reforms process on a slower track than it was before elections.

The sell-off in select power related stocks seems to suggest that the market is pricing in delays in the policy direction, say, on the Accelerated Power Development Reform Programme and in spelling out modalities such as tariff setting. Second, the announcement of free power in Andhra Pradesh and restoration of this benefit in Tamil Nadu have also added to the market jitters in power/infrastructure equipment stocks.

Oil and gas policy: Apart from the prospects of privatisation of HPCL/BPCL receding, there are two key policy moves to watch out for.

One, the decision of the government to hike petroleum product prices which has been frozen since January 2004. Both the scale and manner in which this hike is put through will determine the impact on inflation and future interest rates.

As crude oil prices are likely to remain firm in the foreseeable future, the impact on the operating margins of the corporate sector will also have to be factored in.

Two, the stance of this government on reducing the subsidy on LPG/Kerosene will have to be seen carefully. In the past, the high subsidy element has contributed to a dent in the bottomline of oil companies.

Infrastructure: As for road projects, especially the Golden Quadrilateral and NS/EW (North-South/East-West) corridor, the likelihood of a rollback seems improbable. But policy moves beyond that, looking at the ambitious port projects or NHAI's next big project involving roads linking State capitals/tourist spots may hold the key to the growth of this sector. In turn, the construction and engineering sector companies, in particular, which are sitting on a healthy order book position will definitely look out for firm policy signals in power, oil and infrastructure segments.

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