Janani Janma Bhoomi

Indian Capital Markets: From here where?

The year 2011 has opened with a mixed bag. Hopes and aspirations of both investors as well as the business community are hanging on a precipice. The question is whether the markets will harden and start moving north or whether it will hover around at current levels. Many leading lights in the capital market are giving their guestimates for Sensex and Nifty as on 31.12.2011. A better idea may be to predict the price of onions. Onions truly seem to have replaced Sensex as the talk of the town. Jokes apart, the broader issue is not about the market itself but rather about the sustainability of the India Shining Story.

Although the liberalization story should rightly be traced to the decisions of the young and intrepid Prime Minister Rajiv Gandhi, his untimely death at Sriperumbudur led India down a slightly different tunnel into the wonderland of economic development. Liberalization continued with two other policies resulting in the coining of the aconym LPG—Liberalization, Privatization and Globalization. The author’s of the new India Growth story were, of course, Narasimha Rao and Manmohan Singh.

There is an apocryphal story about the Liberalization story which goes like this: Manmohan then Finance Minister, goes to Rao’s house one morning almost as soon as he took over as Prime Minister. It’s early in the morning and the FM has a sheaf of papers in his hand. Rao opens the main door still in his lungi and asks him what he wants. Manmohan says, “Sir, we are proposing to partially liberalize the economy. This is the new industrial policy and the Government Orders where we are delicensing 14 industries. Will you please sign them?”

Rao looks at Manmohan and asks, “How many industries are we planning to liberalize?” Manmohan informs him that on the whole there is proposal to liberalize 21 industries. Narasimha Rao says, “Why are you delaying the process. Bring all the GOs to me in one shot, I will clear them all!”

Whether this story is true or not, the haste that the then Prime Minister showed was laudable as India had nearly a decade of economic growth back log to make up when compared with China, Taiwan and Korea. But, once the policy framework was put in place, the statutes were slowly amended to suit the policy. Rival governments might have differed on political ideologies but they have not wavered from the common LPG agenda.

The proof of the pudding was proved in the eating. The India growth story has not lost its steam. The global financial melt-down has left India comparatively unscathed. This is also due to the decision not to make the rupee fully convertible. Full convertibility is not economically bad, as such. In fact the relative indifference with which most Indian Business men have treated the Liberalized Remittance scheme seems to indicate that India is seen as the best investment destination. Similarly the rush of qualified professionals abroad has abated post Global Melt down. There are many Indians working abroad who wouldn’t mind coming back to Bangalore or Chennai given half the chance. They seem to echo the feelings of Lord Rama addressing Lakshmana in Lanka.

When Lord Rama defeated Ravana in the historical battle of Lanka, Lakshman, Lord Rama's brother asked him to settle in that beautiful city of Lanka which was supposedly made of bricks of Gold. This is the actual quote from Valmiki Ramayan of Lord Rama's answer to Lakshmana's request.

अपि स्वर्णमयी लंका न मे लक्ष्मण रोचते ।

जननी जन्मभूमिश्च स्वर्गादपि गरीयसी ॥

Api swarnamayee lankaa na me Lakshmana rochate

janaanee janmabhoomishcha swargaadapi gareeyasee

(O Lakshmana, I don't like Lanka though made up of gold

(because) mother & motherland are greater than heaven.)

I think it’s the right time to accept the power of our motherland and our capability to emerge as a super power in the world. This is one of the greatest times to be an Indian in India! 2011 marks the beginning of an epoch in the annals of our nation which may never occur again. 1991 to 2010 saw two decades of growth which was steady but slow. The next one decade as we move towards 2020 will see growth as we have never seen before. Whole cityscapes will change. New cities will be born. In this story of growth the beneficiaries would be those companies that do not simply accept or adapt to change but those that initiate and embrace change.

As investors we need to watch out for companies that have a proven track record of innovation and change. We should look for business models that work on changing with customer needs and profiles. Classic examples are the Telecom and Software sector where the customer base is growing steadily. Companies like Bharthi Airtel deserve a glance even at the current price levels keeping in mind a long term perspective. In the Software and Information Sector, we should wait and watch for opportunities to buy scrips like Infosys and TCS, when the markets take a dive in March-April.

The Infrastructure and Construction story are yet to happen. The potential scrips are not yet listed. But, with increasing opportunities, the huge construction contracting companies with huge order books on hand will access the primary markets. The length of the roads to be laid; number of new airports to be enlarged or built anew will be reflected in the huge bottomline of these companies. Some players like VA Tech Wabag Ltd and CCCL will be potential gainers. But ethical practices, corporate governance and professionalism in management will distinguish the winners from the also-rans. The fall-out of this would fuel the successs stories of cyclical like Steel and Cement.

Banking is a service sector line that is going to see a continuous progression growth followed by consolidation. Some of the potential targets for acquisition like IOB, Karnataka Bank and the small Kerala based banks are the best bets. A larger bank which may come out of the consolidation phase as winner is HDFC.

But all this will need an environment or climate that nurtures independent entrepreneurial effort as well as a level playing field where the Indian business houses can consolidate their position before taking flight as emerging transnationals with global reach and control.

Let me conclude this article with the wish list for India Inc as well as the Indian Investor:

· Rational, if not lower direct and indirect tax structures with clarity in the implementation issues.

· A Government where an honest administration service works outside the stranglehold of political bosses and their convoluted and self-serving agenda.

· Better Infrastructure in the form of smoother roads, larger harbours and broader telecommunication bandwidths.

· Reduction in the cost of raising finance through the development of more stock exchanges and other Market Infrastructure Intermediaries.

In the words of the immortal poet Rabindranath Tagore in his Gitanjali, “into that heaven of freedom let our country awake.”