These days a new term has permanently entered the lexicon of commentators on various business television channels. ?Government inaction? is routinely cited as a component of the domestic headwinds the stock markets are facing. Persistently high inflation, investment slowdown and government inaction are regularly blamed for depressed sentiments.
The interesting thing to note is that policy paralysis is now being treated as a sticky problem, which will not go away any time soon. This prompted us at The Financial Express to construct a Policy Sensitive Index (PSI) comprising stocks from the mid- to large-cap segments that have traditionally attracted high investor interest; essentially, over 20 companies that have underperformed the Sensex by 23%.
Policy sensitive stocks figure largely in sectors such as infrastructure, mining, real estate, oil & gas, aviation etc where government policies have a deep impact on the companies? performance. For instance, after the Comptroller and Auditor General (CAG) came out with its report on the spectrum allocation controversy last October, resulting in a series of cases launched by the CBI against various players, some telecom stocks, notably RCom, fell by over 60% in value. Telecom, as a sector, has entered a phase of stagnation, if one looks at the stock price movements. Even a company like Bharti Airtel, which is not directly being investigated, has seen its stock price stagnate over the past six months.
Similarly, the real estate sector too has stagnated partly because many well-run real estate companies are seen to have strong links with politicians. The other disadvantage of being linked to the political class is that these companies are naturally seen to have weak corporate governance. Then there are sectors such as sugar, where politicians play a big role in determining the fortune of companies by arbitrarily banning their exports?and opening them from time to time?to deal with food inflation. Sugar, in any case, is yet to be fully decontrolled. There are also listed companies in the media sector that are directly owned by political families. Sun TV is controlled by the Marans, part of the extended DMK family. It took a solid knock recently when Jayalalithaa came to power and threatened that the government would take over all cable TV networks.
More recently, the stock price of RIL has taken a few knocks because of the CAG draft report suggesting ?inflated capital costs? of the company?s prestigious gas exploration project at the KG basin.
Mind you, being politically well connected was not punished by the stock markets until mid-2007. It is interesting to note that policy sensitive stocks had outperformed the BSE index by the middle of May 2007. It is after the global meltdown in 2008 that the men got separated from the boys. Only companies with strong corporate governance and true resilience did well when the markets recovered after the global meltdown. During this period, companies that were seen as policy/politics sensitive somewhat stagnated. However, by end-2009 and mid-2010 they had also recovered partially from their lows seen in the aftermath of the global financial crises.
These stocks again started losing steam when scam season gripped our polity last year, with the Centre constantly firefighting on one front or the other. Through the latter half of 2010 and into 2011, the policy sensitive stocks started underperforming the index much more than before.
In fact, when UPA-2 came to power, the difference between the sensitive index and policy sensitive index was only marginal. The growing gap between the two indices actually tells you the story of how the UPA started losing the plot gradually in 2010.
The UPA government still has a chance to remedy the situation. The current political flux can be used by the UPA to take some big decisions that have a durable impact in terms of better governance and reform of the administrative system. The public procurement law is one such idea that must be implemented soon even if there is growing resistance from ministries like the railways and defence, which see such a law as impinging on their autonomy.
At a larger level, much of what is described as policy paralysis is nothing but the government?s inability to administratively reinvent itself to meet the needs of a $2-trillion economy and the corresponding change in the people?s aspirations. Civil society protests are but a manifestation of this.
An interesting book titled 30 years of China?s Reform, brought out by a research arm of the Chinese government, candidly admits that even that country faces a big problem in terms of reinventing the government administration. ?The reform of government itself and the transformation of its functions have lagged behind ? with functions in social administration and public services being fairly weak.?
The report says the road to industrialisation and social transformation makes the whole society restless and this causes more instability. ?Members of society are particularly anxious to seek economic benefits which is likely to trigger a series of conflicts ? The market economy nurtures in common people an entirely new awareness of fair competition and self improvement. This creates a conflict between unclean conduct of government and common people?s awareness of justice?.
Well, if a Communist government can figure this out so well, our elected politicians should do much better than that!
mk.venu@expressindia.com