Clueless Congress Wins Election

Congress Party, which few days back was sulking for allies in post-poll environment and predicting its own lack of numbers to form next government, surprised everyone with election results. Congress party won 201 seats much above its own expectations.

At the end of fifth phase of polling Congress General Secretary Rahul Gandhi had made admission of his party’s impending failure and his desperation to form government with support from his opposition parties, he even went on to name his Andhra Pradesh opponent Mr Naidu as his next possible ally just before Andhra Pradesh went to elections and Rahul Gandhi hadn’t expected that his party will gain even 29 seats ( that it held in 2004) against 33 that Congress Party won in this election.

Confusion was not only about one state, Congress Party was unsure of its own gambit in Uttar Pradesh, it hadn’t imagined its wildest dreams that the party would end up winning 22 seats, Congress had even second thought about its own ally but was quite sure of stupendous performance by party’s opponents be it Mayawati in UP or Jayalalitha in Tamil Nadu.

Congress is now as much surprised at its win in several states like Tamil Nadu, Andhra Pradesh and W Bengal and as it is at the success of Rahul Gandhi’s strategy of going alone in UP. Congress in not basking the glory it hadn’t dreamed for long time.

Alliances and Fronts for Fortune and Political Bargain

As India goes for polls, political parties are vying for electorate and even more for opponent political parities. Ever since alliances gained prominence in national governance, national parties have weakened. In last five years all the national parties, with exception of BSP, have lost their foothold and political might. This political development has made them increasingly dependent on regional parties.

This election, regional parties have gained a new prominence and notoriety in forming alliances some time multiple and confusing alliances. What is more atrocious about these alliances unlike the previous alliance formations like NDA/UPA, is that they have no agenda and political vision for this country nor do they intend to present the electorate with any vision document.

Parties don’t want to emphasize their development agenda as they are totally unsure of which political block they belong to, political parties such has BJD has created totally new political ideological dimension of “center-right-left” party where as NCP and RJD are toying with both right and left. Parties such as TDP, DMK,AIADMK, and numerous smaller parties with suffixes such as ‘lok dal’, “rastrawadi” and “samajwadi” don’t mind which party governs the nation if they get their political cut.

Then there is Communist block and BSP, who don’t mind anything about any political party if they are non-Congress and non-BJP. They have nothing do with the political ideology of such parties if they are willing to support their next government. No body seems to mind even if alliance partners are fighting each other unless their egos are satisfied. In some states BJP/Congress have to beg smaller parties to be allowed and accommodated with a few seats in such regions for promise of backing government at center.

This election almost every political party is worried about future of the party but not the country. Smaller regional parties have no vision for national development and they are not bothered either as their primary interest lies in the cabinet berth and sops for their region. None of them are interest in socio-economic plan of this country for next five years, which will benefit the nation as a whole and will percolate down to every state and region.

Government Gives Private Pension Funds Freedom to Increase Stock Market Exposure

Coming close on heels of ending the monopoly of SBI in managing EPF accounts, the government has now allowed private provident, pension and gratuity funds to invest up to 15% of their investible funds in the stock markets, one of the new financial sector reforms by the government.

This move is aimed at making the massive cash balances that provident funds sit on every December-January, in the absence of central government securities to park them in, history. In 2007-08, the EPFO had kept more than Rs 10,000 cr idle, as per a recent audit report. Incidentally, EPF’s earnings for 2007-08 are, therefore, only enough to pay 8.25% interest compared to 8.5% paid in the year before. The finance ministry’s new investment guidelines, that will become operational from April 1, 2009, can rectify this, going forward. The guidelines leave no room for provident fund managers to cite investment restrictions put in by government for lack of returns on the money put in by the 40 million organised sector workers as their retirement savings.

As per the new guidelines, the funds can soon directly invest in shares of companies on which derivatives are available in the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). Currently, about 228 single stock futures are traded in the futures and options segment of NSE, with about 39 more to be added from the last week of August.

The other changes made in the investment pattern include merger of Central Government Securities, State Government Securities and units of gilt Mutual Funds into a single category and allowing investment up to 55% of their corpus, providing a flexible ceiling for various category of instruments instead of fixed investment ceiling as at present; providing new category of instruments, such as rupee bonds of multilateral funding agencies, money market instruments and permitting investment in term deposit receipts of not less than one year duration issued by scheduled commercial banks.

The new investment pattern also recognises the fiduciary responsibility of the trustees and the need for exercise of due diligence by them. It gives them greater flexibility in terms of a wider variety of financial instruments as well as greater freedom to actively manage the portfolio. Moreover, the trustees will have freedom to exit from a rated financial instrument when their rating falls below investment grade as confirmed by one credit rating agency. The trustees have also been given freedom of trading in securities, subject to the turnover ratio (i.e., the value of securities traded in the year divided by average value of the portfolio at the beginning and end of the year) not exceeding two.

Significantly, the new guidelines have raised the cap on equity investments from 5% to 15%. Although when the draft guidelines for such a move were made in September last year, the finance ministry had suggested doubling their capital market exposure from 5% to 10% while reducing their exposure to government securities from 40% to 35%.

Interestingly, very few of the funds allowed to invest in equities have even utilised their cap of 5% present currently. Even the funds, which do invest in equities, have an exposure of only 1-2%. Further, with the recent spike in bond yields, government securities as well as corporate bonds have been giving returns of over 9%. This is well above the returns of 8.5% which these funds are supposed to guarantee.

While the bouquet of investment options has been expanded, trustees have been made more explicitly responsible for investment decisions. However, sections feel since India is yet to get professional trustee companies in place, the new options may remain unused as existing trustees may shy away from taking hard decisions. While market participants have welcomed this proposal, the general perception is that a number of other regulations need to change to make equity investments viable. The main bone of contention is that of the guaranteed returns of 8.5%. In case the fund fails to throw up an 8.5% return, the employers are expected to provide for the rest.

Hence only time will tell, how many of the funds will take the risk to increase their exposure to equity, given the current volatility in the markets and the history of investments by such funds in the stock markets. However if they do invest, it will provide a much needed fillip for the stock markets.

Economic fallout of Trust Vote

Now that government is done with trust vote and markets are about to wind up the sentimental rally, it the time to ask the question will government take tough economic decision as desired by the markets?

The coalition’s new partner SP has much neither much knowledge nor much penchant to interfere in economic policy until unless someone ask them to do it. So, in past four years they were very much against insurance, retail and pensions reform, which communist were insisting. But, in the new context they seem to be more concerned about their economic benefactor, which implies strict no-no to FDI in retail which may benefit Mukesh ambani. Also, petroleum ministry will be mired by all sorts of lobbying.

DMK is happy with its RamSethu bargain and rest like JMM has no clue whatsoever with the kind of reforms will take place. That leaves us with Congress, which is driving the UPA now.

Congress only faces the problem of perception and it matters a lot before elections. The party is already seen a failure in the economic matters concerning “Aam Admi” and its slogan is more or less read as “Congress ka hath NOTE ke sath”. Markets and traders will all like to see every bit of legislation that can benefit the markets get passed on, specially the Pension reform, which will benefit the markets most. A push in the market will also add to Congress’ election coffer. But it is the million dollar question; will Congress face all criticism just before elections to push the markets?