The Letdown and After

The Indian stock market has been under the arc lights since mid-May when the Congress’ coalition romped home with near-majority. Freed from the yoke of coalition governance with the Communists as partners, expectations regarding Manmohan Singh’s will to push ahead with critical policy reforms ran high. The radically reformist tone of the Economic Survey before the budget only stoked the fervid enthusiasm of the neophytes.

The budget faithfully represents the fundamental economic beliefs of the Congress Party — small doses of relatively painless policy reform combined with a strong emphasis on “socially inclusive growth”. The finance minister is clearly happy to live with the scary consequences of a 6.8 percent federal government deficit. Combined with the fiscal profligacy of the states, this amounts to an 11 percent plus overall deficit and is bound to stoke inflation, sooner rather than later. The strange irony is that rising prices wreak far greater damage on the economically underprivileged compared to higher taxes!

Mukherjee deserves credit for his determination to tackle rising unemployment and push ahead with focussed spending on infrastructure. The commitment to implement a unified goods and services tax by April 2010 and the desire to comprehensively revamp the existing direct tax code within the next couple of months bode well for dramatic improvements in tax administration.

The attempt at rationalising subsidies (fertilizer) is half-hearted and short on detail. Equally, Mukherjee has failed to come up with a plan that minimises leakage and aims to increase public expenditure productivity.

But where the finance minister has truly fallen short is in outlining a statement of intent with regard to privatisation and foreign direct investment. There has been virtually no attempt at articulating a cohesive, well thought out agenda which sends out a signal to international investors about India’s respect for free enterprise and efficient utilisation of capital. The faith of hitherto trusting investors has been dented.

More importantly, India has clearly missed another chance to become a meaningful player in the world financial markets. However, the immediate disappointment of unfulfilled expectations among investors is bound to give way to a weary acceptance that India and China are bound to lead any prospect of sustained global economic recovery in the coming months. Consequently, barring any nasty global shocks, there is limited downside for the patient investor in Indian stocks.

Disappointment and uncertainty always lead to attractive prices for those willing to focus on economic fundamentals. Two companies — Goodricke and Proctor & Gamble — stand out as attractive opportunities keeping in mind the current economic context. Goodricke (Rs. 94) is India’s second largest owner of tea plantations and is a major beneficiary of the crop failure in Kenya, and to a lesser extent, Sri Lanka. A long barren stretch for the tea industry has seriously damaged the balance sheet of most plantation companies. Goodricke is a solitary exception given the inherent conservatism of senior management.

Given the location of its gardens in the Dooars, strict cost control and emphasis on capital efficiency, the stock is a genuine bargain at just over five times current earnings.

Proctor & Gamble (Rs. 910) has an outstanding consumer franchise, a global CEO keen to bet on favourable demographics and amazingly predictable cash-flows. The company has operating margins upward of 30 percent and is bound to double sales in five years even in a hostile economic environment. Keeping in mind a dividend yield of just under 3 percent and a dominant position of major brands, it is well worth owning at a multiple of 18 times year ending June 2009 earnings.

Wise men believe that you progress not through improving what has been done, but by reaching toward what has yet to be done. Mukherjee is bound to draw inspiration from that thought!