Wednesday, March 13, 2013

Lead me to light


Lead me to light

The market reaction to the news flow this week has been unwarranted though not completely unexpected; given the overemphasis on the expected RBI decision on policy rates in the next week policy review meeting.
In our view, the economic news flow, viz., February exports & CPI, and January IIP is important to take note but may not be acceptable as indicator to any change or reversal in trend. Moreover, the data was mostly on expected lines, except IIP which anyways is notorious for its wild gyrations and revisions.

The hypothesis that better than expected (though still extremely poor) IIP numbers and elevated CPI for just one month would impact RBI decision dramatically prima facie appears flawed. In our view, we are fast approaching the breaking point where RBI will have to save its concerns for inflation for a later date. The US Federal Reserve which was focused on inflation for many years is concerned about jobs only. They had the luxury of owning USD printing press. RBI could hardly afford any luxury. In our view, a repeat of 2009 is more likely in 2H2013, when RBI did cut relentlessly to support growth.

The following news flow has drawn our attention recently, which in our view ought to influence the policy formulation in coming years.

(a)   As per a report in Business Standard many small and medium size pharmaceutical manufacturing firms located in Baddi (Himachal Pradesh) are facing the threat of closure. These units were lured into this location 10yrs back by tax concessions and capital subsidy given under special status state category. Despite huge influx of benefit seekers, the infrastructure in this area could not be developed. The connectivity remained poor. As the tax (Excise and income tax) concessions expire next year, many of the 250 odd units would be incurring losses and face closure. In our view, many industrial units in Kashipur and Rudrapur areas of Uttrakhand may also meet similar fate.

We feel, this should initiate a serious nationwide political debate over the efficient allocation of scarce resources vs. parochial regionalism, and even more important “enablement vs. provision”.
Gujarat model of development based on enablement has attracted more investment and hence created more growth opportunities, rather than the model based on “provision” adopted through special status mechanism. Nitish Kumar and Mamta Banerjee might have few tips to take from Baddi instance.

(b)   Chinese government is reportedly considering scrapping some ministries, including the Railways, to check corruption. The Indian government may also want to examine this possibility.

(c)   Yet another failed spectrum auction, CBI status report on Coalgate and changes proposed in defense procurement policy ought to lead to some structural changes in governance structure and make it more transparent and accountable.

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