The Ticking Time Bomb

All news is bad news. At least, this is what is happening in the Indian context today. From S&P downgrading India’s rating to the far-from-exciting core sectors numbers for the month of March 2012, and from the rather lacklustre quarterly numbers of leading Indian companies to the slower-than-expected growth clocked by the US economy, nothing seems to be going well from the market’s point of view. Nevertheless, there is still one piece of news in the waiting that could impact the economy and the market greatly. This has to do with the crude oil prices.

India’s average price of the crude oil basket as on 20th April, 2012 stood at USD 117.15 per barrel as against last year’s average of USD 111.86, up by 4.72 per cent. On the other hand, the rupee has been depreciating rapidly against the dollar, with the present rate standing at Rs 52.57 to a dollar as against last year’s average price of Rs 48. This means that India’s crude import bill is going up at a rapid pace. As per the latest data from the government, the daily under recovery on diesel, kerosene and LPG stands at Rs 562 crore. Unfortunately, the government doesn’t seem to be in any hurry to bring these under recoveries down by pushing the prices up.

The amount of under recoveries is increasing rapidly, and based on the current rate, the total under recoveries for the full year would stand at a whopping Rs 2.05 lakh crore. The latest budget papers have accounted for the oil subsidy to the tune of only Rs 43580 crore against a revised estimate of Rs 68481 crore for last year (FY2012).

In other words, the government would either need to account for a higher oil subsidy in the coming days, which will impact the already precarious fiscal deficit numbers, or would ask the oil marketing companies (OMCs) and upstream oil companies to share a higher burden of the subsidies. In all practicality, there is a limit to which the upstream companies can share the subsidy. The OMCs are anyway suffering from under recoveries of Rs 4.89 per litre, resulting in a monthly loss of Rs 600 crore.

In other words, India is sitting on a time bomb that could explode at any time, making its fiscal situation worse. The S&P downgrade is the first step in that direction. What Kaushik Basu said on the reforms front a few days ago (and later clarified to soothe the frayed nerves of the government) is a reality. Reforms are clearly on the back burner. The time has come when any delay in pushing reforms could jeopardise the economy severely, with the rupee sliding against the dollar making matters worse. It is high time that the political parties rise above party politics and allow the necessary adjustments to be made in the petro products prices to keep the country’s fiscal health in control. Else, the country would have to pay a heavy price for the delay.

This time, our cover story looks at inflation, which is turning out to be a big monster. It has already started impacting India Inc.’s margins, and the worst part is that the RBI has itself admitted in its April 2012 monetary policy that inflation would remain sticky throughout the year. A hike in the prices of diesel and petrol would further spike the inflation numbers. But don’t lose heart. We have selected nine companies that, we believe, would be impacted to a lesser extent by the vagaries of inflation. We also believe that these stocks would outperform the broader market. So, read the cover story to fight the inflation monster and protect your portfolio. As usual, I welcome your comments and feedback, so please keep writing to me at managingeditor@dsij.in.