thematic destruction

Posted in ramblings by Gautam on May 19, 2009

A friend displayed his status on messenger which sufficiently puts the word across on India’s elective outcome and its economic consequences.  “the market is getting orgasmic even before the government begins foreplay.”

Advent of the recent election result saw stocks jumping more than a 1000 points yesterday; very unusual and reason for envy to a lot of people.  The Left would most certainly not be part of the new government which is what guided most pre-poll market speculation.  Post poll speculation is guided by a few notable factors, a lot of which is reckoned primarily against the Congress manifesto.  So, looking at the congress manifesto this election a particular statement caught my eye; this post about it.

“The Indian National Congress rejects the policy of blind privatisation followed by the BJP-led NDA government, but believes that the Indian people have every right to own part of the shares of public sector companies while the government retains majority shareholding.”

The Congress has been supporting divestment as a major political agenda in both public and private sector industries all through its previous tenure at the Centre.  Mr. Vijay Kelkar, Chairman of the 13th Law Commission and a key figure in economic policy formation in India aptly says that in India political reform and economic reform are related like nowhere else.  In his address to the ASSOCHAM, given the overburdened administrative machinery and an inefficient  and grossly underperforming vagabond public sector, he supplies that even if it is essential to retain government control over these industries, it would do no harm- and only exponential good- to increase people participation in this sphere of industry.  Thus divestment.

Post poll markets as a consequence of this agenda on the Central Governments palate, witnessed share prices of the stocks of these public sector companies jump by more than 20%; Morgan Stanley revised its growth predictions FY ’10 from 4.4% to 5.8% assuming reforms in this sector; Goldman Sachs raised its estimate at 5.5%.

Today, while reacting to this surge in stock prices Mr.P Chidambaram and Kamal Nath reiterated government policies in this direction.  Government steps in this direction would be quite well timed; a recovery from the economic downturn coupled with  increased liquidity and investment appetite will supplement the benefits of divestment.  The end result is increased people’s participation in these companies.  The nation should make use of this opportunity; a concern I would like to express is also that relating to the need, now more than ever, of healthy trends in corporate governance laws and standards to support government plans towards divestment.

To better understand ‘healthy trends’ it might be interesting to look at the Divesment Laws adopted in the United Sates in 2005 where State investments in companies which directly or indirectly supported the Sudanese Government- with the exception of those providing financial aid – were required to be phased out by 2008.  This law affects some $2.16 Billion in investments.  Increased peoples participation in industry has not only economic incentives, but also social and administrative.  The role played by corporate governance is aimed at just that.

Peoples participation ensures accountability and greater transparency.  The responsibility owed now, is not just to the government, but directly to the people.  This is an indication of true democracy in play where people participation extends not just to electing a government, but to all levels of government functioning at all points of time.  The existing administrative machinery suffers from acute under performance and severe unaccountability of losses;  divestment, reduces the parameters of loss and increases the nature of the responsibility owed by the management of the companies.  Therefore, even if as the minister for Commerce rightly points out, the management will still be the affair of the government, no longer will it be a function of political clout and power alone, but now of efficiency and execution.  The approach will shift from a politicised one to a stakeholder and profit oriented one.  The example of Hong Kong’s divestment of its three major industries of railways, toll tunnels and bridges and public housing estates sets some critical examples that must not be overlooked.  The lessons from its implications must likewise not be understated.

Things currently look good as far as stability of the government and its policies are concerned.  Major Initial Public Offerings expected shortly include the NHPC, Oil India,m Rail India Technical and Economic Services, Cochin Shipyard, Manganese Ore India, etc.  However, considering the market’s positive reaction to the election results, it is a critical issue that further movements in this direction be well timed and well planned.


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