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| Time for sane and timely decisions | | MARKET INSIGHT |
| Devangshu Datta / New Delhi May 24, 2009, 00:26 IST |
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The new government faces a lot of challenges, but reforming the power sector is key.
The ecstatic initial reaction to the United Progressive Alliance's (UPA) victory has pushed the market up to unsustainable levels. There's likely to be profit-booking in the short-term. Post-euphoria, the market will have to soberly discount the pros and cons of the new Cabinet and portfolio allocations.
Several portfolios pertaining to various infrastructure sectors are crucial to development. Who gets these will make a big difference. One major UPA partner is Mamata Banerjee and she's unlikely to be an economic asset. As Railways Minister for the National Democratic Alliance (NDA), she did a terrible job. If she receives the Railways portfolio again, she may well unravel the improvements wrought by Laloo Prasad Yadav.
Indian Railways (IR) has ambitious plans. These include tackling problems of network saturation by building the Dedicated Freight Corridor, connecting North-Eastern capitals, improving railway stations everywhere, improving port connectivity, improving technology, delivering better customer-oriented services, and so on.
The downstream impact of IR's performance is huge. IR's extraordinary turnaround was a cornerstone of strong macro-economic growth during the past five years. In particular, the logistics sector's fortunes depend on IR.
Another key portfolio is telecom and information technology. The musical chairs involving Maran and Rajah has led to massive delays and litigation. Raja reviewed plenty of Maran decisions and whoever gets the job this time around, will presumably “re-review” Raja's decisions.
The national exchequer has suffered huge losses due to the delays. If 3G auctions had been held before the global bust occurred, the bids would have been much higher. A year or so of revenue share and taxes has been lost as well, given that rollouts could have taken place that long ago.
The advent of a new telecom minister could mean further delay in 3G auctions and more mess in the already-litigated domain. Telecom is delivering massive volume growth. But it also requires big investments and the industry trends include falling average revenue per user (ARPU) and massive subscriber churn. Delays and legal wrangles are dangerous.
Two other key portfolios are roads (and surface transport) and the power sector. These are both key to future economic growth and progress depends on energetic policy-making and implementation. In roads, there's been a slowdown in project allocations and completions over the past three years. A new minister as energetic as B C Khanduri, who originally kick-started the entire road-building process, could recover lost momentum.
In the case of power, reforms have barely taken hold. Financial losses on this front (incurred by State Electricity Boards run as political fiefdoms) still amount to several per cent of GDP. Under-performance on the power front retards GDP growth by another several per cent. Peaking shortfalls now amount to 15 per cent. If the UPA carries out its commitment to electrifying all villages, without cleaning up the sector dynamics, the financial losses will spike and so will the shortfalls.
At best, schemes like Accelerated Power Development and Reform Programme, the unbundling of SEBs, the franchising out of distribution, independent tariff setting through electricity regulatory commissions, etc., have stemmed the rot, not reversed it. Reforms have been piecemeal, or non-existent in areas like open access. There are problems across the entire value chain from fuel availability (in case of thermal generators), to fears of environmental damage, to issues of grid discipline, large transmission and distribution losses, and inane caps on trader-commissions.
If UPA-II does little else but succeeds in cleaning up the mess in power, it would have done more to foster economic growth than any government since 1991. Mega projects like Sasan and Mundra have achieved financial closure without trouble. This indicates tapping into private sector funding will not be an issue. But the will to reform has to be there.
The above would be focus areas for the new government. Sane and timely policy-decisions and fast implementation in each of these sectors would have a huge positive impact on the economy and the stock market. A very wide range of cyclicals depend on these sectors for their core business.
Overall market valuations are uncomfortable. On the basis of the last four quarters, the Nifty's PE is at 19.9. PE ratios tend to be normally distributed and that means a tendency to move towards the average. In the past 10 years, the average market PE has been around 17.5. Valuations have exceeded 21 only 31 per cent of the time. Anybody who is buying with a long-term perspective should look to enter only after a correction.
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