The bigger picture: Looks good 20-30 years from now

Even though valuations are pointing a sizeable downside risk with a high probability, such a correction is unlikely to be deep enough until (these) sentiment indicators inflect toward a more euphoric state

As the Americans might say, go figure. The above snatch is from a very recent India Strategy report from the seemingly downbeat-for-ages JM Morgan Stanley's research desk, titled "Almost Everybody Is Bearish". An Indian investor, presumably retail, trying to make sense of the Indian market's future course amidst stomach-churning volatility, can do three things. One, get a hold of reports like the JM Morgan one, and attempt to digest them; if you succeed you would have obviously found Joyce's Ulysses eminently readable, too. Your second option is to panic. Keep your ears open and that won't take too long. After all, what do you hear now? The victory of the Left parties at the state hustings spells the end-if not the reversal-of reforms; hikes in interest rates and record crude prices are pulling down markets; humungous initial public offerings (IPOs)-like the Rs 13,000-crore issue from DLF-will suck the secondary market dry. And the weathermen apparently don't rule out an under-par monsoon.

Cashing out might not be a bad choice, particularly if you've entered the markets three years ago at the beginning of the boom, when the indices were at a quarter of what they are today. Yet, it's not the best choice. If your objectives are longer term, you might be just missing out on the big picture, which could play out in the next 20, even 30, years. Now taking a call on the next three decades may appear more outlandish than relying on Vulcan or Pluto to prophesise your lifespan. But consider: A majority of the Indian population is under 30, and it wouldn't be a bad idea-it isn't a bad time for sure-to invest with the retirement years in mind. That's not too different than what the Baby-boomers of the 80s in the us did, what with the Dow surging for nearly two decades as most of America grew older and older.

History of markets worldwide throws up two significant facts about bull rallies. That there have been more of them than bear markets. And that bull markets last longer than bear markets (the latter tend to be brutally sharper). There are of course those periods during which indices loll about (move sideways, in market lingo), but what works in favour of Indian markets is that they consolidated for 10 years before embarking on the current rally three years ago.

If you believe Indian economic growth will peak out over the next couple of decades, in double-digit territory, it should be easy to shut yourself from the noise around and begin-or continue-working on your long-term objectives.

New Formula Wanted

Red signal: Reduce taxes on oil

This magazine has consistently held that energy-and, indeed, all-prices should be determined by the market. Our stand on increasing the retail prices of petrol, diesel, kerosene and LPG to reflect the rising international prices of crude should, therefore, have been a no-brainer. Only, it's not. That's because the retail prices of these commodities are not just a function of the runaway bullishness in the global crude market; about 50 per cent of what we pay at petrol pumps and gas agencies goes to the government's kitty in the form of various taxes. And this tax component has become the bone of contention between opponents and proponents of a fuel price hike. The key dramatis personae in the debate are all reconciled to the fact that prices have to head north; the question is: by how much?

The government's Left Front allies argue that the Finance Ministry should cut the duties it levies on oil and oil products, thus, sparing consumers the burden of a steep price hike. There is merit in this argument. Oil, after all, is an essential commodity; for the government to treat IT as a milch cow that can be squeezed at will to maximise revenues is downright extortionist. Can it, for example, do the same with wheat, paddy, power or water? It obviously can't. So, why should oil be different? But Finance minister P. Chidambaram is not buying this logic. His argument: any cut in duties will adversely affect the National Rural Health Development Programme and the National Rural Employment Guarantee Programme. This argument, too, cannot be dismissed. There is another side to this debate. The government's decision to hold prices in check means oil marketing companies such as IOC, HPCL and BPCL are currently facing under-recoveries of Rs 72,000 crore. Any decision on pricing has to look at their interests as well.

Squaring so many concentric circles will not be easy. Our take: let the government, the oil marketing companies and the consumers share the hit this time. But the Finance Ministry should, at the same time, come up with a multi-year time-bound formula for progressively lowering the taxes it levies on oil to near zero levels; the consequent revenue loss will have to be made good from other sources (like taxing farm income, for instance). An in-principle decision on this is sine qua non. Otherwise, an oil shock-induced economic downturn cannot be ruled out as crude prices race towards $100 (Rs 4,500) per barrel.

Saving Bangalore

Chaos rules: But CM has a way out

There is a very real fear that Bangalore-constrained and hamstrung by choked, potholed roads, incomplete, rusting flyovers, frequent power breakdowns and lack of sufficient water-may be Bangalored by nimbler domestic (Hyderabad, Chennai, Pune, even Kolkata) and international (Shanghai, Prague, Dublin) competitors. The issue has attracted international attention primarily because the city accounts for a third of India's software exports (in 2005-06, it exported software worth Rs 37,600 crore); a lame and sick Bangalore, more than probably any other Indian city, can slow down India's overall growth story.

But there's hope: a hundred days after taking office, Karnataka Chief Minister H.D. Kumaaraswaamy has come out with a concrete, if expensive (Rs 36,000 crore-plus), plan to revive Bangalore's crumbling infrastructure. His antidote for Bangalore's traffic woes (at least 2.4 million vehicles ply on its roads daily, the second highest in the country after Delhi): invest Rs 350 crore on a new traffic management system. On the anvil: dedicated bus lines, induction of 1,000 new Volvo buses into the city's bus fleet, creation of no-auto zones and better parking management. A non-existent public transport system has long been considered the bane of the city. Kumaaraswaamy's plan addresses this by increasing the numbers of buses, getting clearance for an underground rail transport system from the Centre (stalled earlier because of opposition from his father H.D. Deve Gowda), and green lighting a monorail system to act as a feeder to the Metro. The first stretch of the monorail system, in fact, should be ready within the next 15 months.

To divert traffic from the central business district and improve its flow throughout the city, the plan envisages developing 400 kilometres of arterial ring roads and 262 kilometres of radial roads. The cost: Rs 6,000 crore. More importantly, the plan also envisages setting up five satellite townships at a cost of Rs 30,000 crore around Bangalore to decongest the city.

The proposal, highly appreciable and long overdue, however, raises as many questions as it answers. How will the state government, which is facing a major resource crunch, fund this ambitious project? No forthright answers have been forthcoming on this. There is also a massive question mark on the government's ability to implement such a mega project efficiently. Its track record, after all, does not inspire much confidence (witness the airport road flyover, incomplete and rusting three years after work on it started). The way out: involve all stakeholders in the process from the outset.