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Govt can gain from the stock rally

Haseeb A Drabu | September 04, 2003

The corporate sector -- looking at its balance sheet reconstruction -- seems to have got its act together; the markets have recognised this and factored it into their calculations thereby engendering a rally.

Both, in other words, have done their bit for the rally. On its part, the Reserve Bank of India, has created the overall macroeconomic conditions -- low interest rates coupled with low inflation -- which is the textbook formula for economic growth. Now it is for the government to profit from the rally and, in the process, fuel it further.

The key to do so is to use the current rise in stock prices to manage some kind of an asset reflation -- through policy intervention and divestment action -- that will redress the stagnation in asset markets which has kept the investment trends depressed.

To be able to do so in a manner that helps sustain the rally, the government has to take care of its deficit and the debt situation, which is going from bad to worse. A crisis in government deficits is building across both levels of the government because the public spending commitments are being built on a temporary surge in revenues.

Plugging the deficits would mean sucking money out of consumers, either through cutting spending or raising taxes, neither of which will be good for shares. Not plugging them means more borrowing, which hurts real economic activity.

What better way to deal with this problem than cash in on the opportunity provided by the markets and use the stock of assets, which yield no great revenue flows, to restore the fiscal balance. The appreciation in the government holdings in listed public sector companies over the last four months is a whopping Rs 1,04,687 crore (Rs 1,046.87 billion).

The stock of assets could be used to stem the flow of deficits, which will allow them to provide fiscal support in the asset reflation strategy. The ideal way to do this would be to ensure that primary surpluses are increased.

The government has not had to make any special efforts to ensure that its investments grew so much. Stock markets have been rather benevolent.

All other investors across the board are seeing value of portfolios appreciate -- it is not really a question of whether or not you make money; it is about how much you make. Stocks, which have been lying low or not been traded for many years are seeing a surge in activity.

Foreign institutional investors continue to pour money into stock; domestic mutual funds are aggressively pitching their equity-oriented funds; and stockbrokers are selling equities to clients like there is no tomorrow. So why not one of the largest stakeholder on the Indian bourses -- the Government of India?

Nothing makes managements more bullish on business than a rising stock market. It is no coincidence that M&A's across the world witness a spectacular surge when equity markets are buoyant.

For buyers, it may not be the best time to make purchases because they may often end up paying a bit more than the fair value. However, going by the same logic, it is the best time for sellers to realise good value for business, if they wish to exit.

However, the dilemma most managements face during a business cycle turnaround (often foretold by stock markets) at such times is whether or not to exit a business. This is true when a management decides to exit an ailing business.

Obviously, when the business makes a turnaround, managements are forced to rethink whether to exit from the business or not. But for companies, which decide to exit a business for strategic reasons, there is hardly any justification for second thoughts. So practically, nothing should stop them from selling.

Given that the government's decision to sell out is more of a strategic decision, it makes imminent sense to try and make the best out of this rally to spearhead the divestment process. Finding strategic investors should be easy for the government in most of its businesses.

As far as prices go, one need not be half as doubtful. Public sector companies have actually been the biggest gainer in the current rally. Most of the state-owned oil companies have more than doubled since April even without any major initiative on the divestment front.

Public sector banks have also zoomed up quite a bit. The market-cap of 38 public sector companies on the bourses went up from Rs 1,58,714 crore (Rs 1,587.14 billion) to Rs 2,95,353 crore (Rs 2,953.53 billion), a phenomenal jump of 86 per cent!

Even if the government does not want to lose control, a divestment through the IPO route could fetch decent value for its holdings.

In turn the markets would benefit as it would increase the scope for growth style investing, which intrinsically relates the markets with the real growth in the economy.


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