Last week we saw the UPA wake up from its slumber. The government showed resolve by hiking diesel prices as well as capping subsidised LPG cylinders. This was quickly followed by the notification of permitting FDI in to the retail sector. While it is natural for the Opposition to shout, the financial markets and ind-ustry are seeing this as the light at the end of the tunnel.

If the government caves in to demands for a rollback by the time you read this, the markets and industry will not cheer the government. What these actions signify is a willingness to heed to fiscal discipline as also a desire to better investment climate in the country. Over the last year, the mood has been battered by scam after scam and the UPA 2 has been like the proverbial deer, caught in the headlights.

A bruised government now seems to be reacting. Pranab Mukherjee’s exit from the finance ministry and his replacement by the pro-reform Chidambaram is also being viewed very positively. However, these few steps will not alter the fiscal position or the government finances significantly.
The diesel price hike merely trims losses by around Rs 20,000 crore. However, what it does is to change the perception of investors looking at India.

India was the ‘flavour of the season’ once, but that image has taken a beating in the last three years due to government inaction and increasingly populist measures. This has taken the economy to a combination of slow growth and very high inflation. While my take is that our stock markets are not cheap, some analysts are throwing in various estimates to prove that the markets are cheap.

Our markets are trading at over 17 times FY 2011-12 earnings. Even if the earnings were to grow by 15 per cent, the markets are not cheap by any yardstick. In the near-term, the markets may be lulled into a kind of sense of comfort. With interest rates not coming off the highs and inflation unlikely to cool, I do not see any reason for re-rating the markets.

Indian companies have been cashing in on the fact that they have not expanded capacities in the last dec-ade or more and are enjoying high capacity utilisation thanks to high consu-mer demand pushed by in-your-face personal loans and consumer financing. Political shenanigans continue in a manner that no one wants early polls and hence anyone is willing to offer support, ideology (if any) be damned.

The lure of power has never been so blatant since independence. The Oppos-ition is also disintegrating, with nothing positive to show. This will probably mean that the UPA 2 will last the full term, the scam a day notwithstanding. New projects, infrastructure creation, power generating capacity — there is a political deadlock on most of these critical issues. A simple FDI in retail is not going to help form a queue of investors. In fact, in retail, most of the big players are already present in some disguise or the other.

They will surely be more disturbed since they will now have to deal with multiple state governments. The foreign investment policy changes will at best benefit a handful of Indian promoters who have pre-empted the sector and will sell out partly or fully to the foreign players.

What we are seeing is not reform. We need infrastructure. We need reforms in agriculture laws. We need reforms in the way the government spends money. We need reforms in the way the PSU banks are run — they sho-uld be stopped from lending to defaulters who then come back to the taxpayer for shoring up capital.

What we are seeing is some kind of desperation from the UPA to try and stem the rot. They want to bring back the foreign investor and create an environment where PSU disinvestment can happen.
However, we are likely to see a bubble in the stock markets based on sheer liquidity. Brokers are talking about 6,500 on the Nifty and 23,000 on the Sensex.

At these levels, the markets would perhaps be discounting 2016-17 earnings. Exercise caution. If you want to participate, be calculative. Measure possible losses. Markets will keep see-sawing with political mood swings.

Fundamentally, the markets are already at more than fair value. If you have to play the bubble, it is best to pick up poor quality, commodity and cyclical scrips that have fallen off quite a bit.

This is a very high risk game. I envisage money shifting from high quality stocks like FMCG, Pharma, private banks to the adventure category like metals, PSU banks, commodities, and so on and so forth. Personally, I would rat-her remain on the sidelines and miss out this bubble.

(The writer is an independent analyst and can be contacted at balakrishnanr@gmail.com)