Global investors cheered the signing of two agreements last week. The first was by Greece, with its creditors for an 86 billion euro bailout and the second was between the countries of the UN Security Council and Iran on nuclear power.
Investors, who hate uncertainty, welcomed both deals and global markets rose. India’s did, too, with the BSE sensex rising 801 points last week, to close at 28,463.
But investors must view these deals with cautious optimism, for there are hurdles to cross.
The Greek deal is subject to clearance by various governments, by the Greek people and by IMF. IMF is of the opinion that Greece can only meet its debt obligations if part of existing debt is forgiven, and is willing to give more money. But European nations, fearful of similar requests from other weaker economies, are averse to forgiveness.
Never mind that Germany, the main advocate for Greek austerity and full debt payment, was itself in default, after the world war, and, because of debt forgiveness, came out economically stronger.
This is not to say that Greece is blameless; it has borrowed far more than it could afford, and has splurged more than it should, especially on generous pensions. Its rail system collects 80 million euro annually in ticket sales and pays 500 m. euro in salaries.
The deal, as struck, is harsh on Greece. According to Ambrose Evans-Pritchard, the international business editor of the Daily Telegraph, it calls, among other sacrifices, for a fiscal tightening of 2 per cent of GDP, which can impede an economic recovery; that is required to repay the debt.
So, the Greek deal is akin to kicking of the can down the road, and the problem will resurface. When (not if) that happens, investors will once again get nervous and markets will drop.
Crude prices
The deal with Iran is expected to lead, over the course of a year, to an increased supply of 1 million barrels/day of crude, which was blocked off by sanctions. The price of crude oil will thus remain low, benefitting a country like India, which imports nearly 80% of its requirement. It would take a year to invest in neglected Iranian fields to crank up production.
The unintended, and unforeseeable, consequences of the deal are the relationships the US has with Sunni Saudi Arabia (who is opposed to Shia Iran) and with Israel. Israeli Premier Netanyahu has warned of Iran’s ambitions to acquire nuclear weapons, and may be tempted to a misadventure. That would, again, be a bearish event, should it occur.
Investors should watch the shape these two deals take.
Impact on India
Meanwhile in India, politics is coming in the way of continuing economic reforms. With its Rajya Sabha strength the Congress is blocking legislation like the Land Acquisition Bill and the GST reform. Despite attempts to get the AIADMK support for the GST, it seems unlikely.
The current Land Acquisition Act makes it almost impossible for companies to acquire large tracts of land, thus impeding establishment of large projects that can provide much needed jobs. To get around the legislative challenge, the Government is contemplating allowing states to change the land laws pertaining to their state.
What the Indian economy now needs is for the capex cycle to kick in and boost growth. The Road Ministry has announced large road projects. Seven public sector companies are raising Rs 40,000 crores through tax free bonds, to invest in projects. With tax free rates of around 8.3% these would be more attractive than taxable bank deposits, and would also have an exit possibility in the secondary market. In the private sector, Pipavav Defence & Offshore Engineering is to make Russian frigates, and, possibly, submarines.
So the positives for India are falling prices of crude oil, after the Iran deal, though this can take time, the beginning of the investment cycle and a normal monsoon. The negatives are the blocking of key economic reforms, the inadequate or delayed protection to investors as in NSEL or Sarada cases and inflation, which has gone up to a 9 month high of 5.4 per cent.
Indian stock markets look good but Greek story and the Chinese market will influence it.