On a bright sunny morning on May 18th 2009 history was created in the Indian stock markets. Within a minute of trading the stock market indices had hit an upper circuit of 10% and trading was halted. When trading resumed the stock market indices had hit the final upper circuit of 20% and trading was suspended for the day. So why did the stock market’s rise to such gigantic heights on a single day?
This feel good factor resulted in a resounding upward movement in the stock markets
Non uniform policies / Policy paralysis
The inability to make the right decisions at the right time by the Government in power results in a stalled economy.
The nexus between politicians and businessmen – When they are exposed
Popularly known as crony capitalism it is a close relationship between business and politics.
Political infighting leads to a lack of consensus among political parties which makes economic reforms very difficult to pass.
Vote bank politics
Policies framed or opposed with a hope of support from a particular community and an eye on victory in elections.
Result : Share prices of industries who have their projects delayed drop resulting in a severe loss to investors.
How does delay in obtaining environmental clearances affect growth of industries and thereby their share prices?
Environmental clearances play a massive role in the operations of infrastructure and mining Companies. Environmental and forest clearances are mandatory for some of their projects and inordinate delays can lead to projects being held up for years. Better to err on the side of caution than face the wrath of the people is the agenda followed by the political rulers of our nation. Shares of Infrastructure and mining Companies rise rapidly when news of them bagging or starting major projects comes in. However the delays in obtaining the necessary clearances can drag on for many years and subsequently their share prices fall.
So what effect does failure to obtain environmental clearances have on the stock market?
Banning of mining affects the share prices of Companies exporting iron ore fines to China which has a guzzling appetite for steel and construction.
Result : Shares of Iron ore mining Company in the dumps.
Cancellation of coal blocks allotted to Companies due to delay in production of coal from these blocks results in a shortage of raw coal feed for these Companies owning power plants. Costly coal has to be imported and this pushes up the cost of power produced.
Result : Shortage of coal impacts power stocks and the power sector in India is down in the dumps.
Coal is an important natural resource and control and operations of coal mines known as captive coal blocks are the prime focus of industries involved in the power sector.
If an industry bigwig has captive coal blocks he rules the power industry. Supply of precious coal is assured. In a country starved of power and energy this industry bigwig is a King. So how can this industry bigwig obtain a captive coal mine? The answer is obvious. Connections in the right places. Simple isn’t it “Use political connections to procure coal mines. This access to a vital power and energy producing source powers the power plant producing vital electricity sold at a high cost. Allow the Company to be taken over by a powerful acquirer and sell out at a massive profit may be a practice used.
Result : Imagine the share price of a Company having its own captive coal mines. Acquire the coal mine …Watch the share price skyrocket.
One has read about the 2G and 3G spectrum allocation and how scarce spectrum is the lifeblood of the telecom industry. Whichever business house owns spectrum in the maximum possible circles controls its own telecom destiny and businessmen involved in this industry want to procure scarce spectrum at any cost.
Political nexus helps procure scarce spectrum which increases the hold of the business in the circles (territories where he owns scarce spectrum).
Result : Stocks of telecom Companies owning scarce spectrum rise.
FDI in Multi Brand retail
Entry of multi brand retail into the country…Small traders in India tremble in fear…Politicians line up behind these traders to protect local industry and garner votes. Political vendetta or settling of old scores between politicians engaging in petty politics is a severe dampener for business.
Sourcing norms :
The multi brand retailers need to source 30% of goods used in their products from local domestic Indian Companies for their operations. A thorn in the flesh for retail MNC’S as they view this local produce as sub standard affecting the final quality of their product.
New rules state the local small scale and medium industries being part of the sourcing must have an investment of $ 2 Million in plant and machinery instead of $ 1 Million stated earlier. A relief for MNC’S in multi brand retail.
Result : The multi brand retailers enter into joint ventures with local partners in India. The stocks of these local partners would rise.
Land is an asset which is in short supply in the nation more so for industry. Automobile industry involves large holdings of land for its operations and automobile big wigs wine and dine with politicians to get their way.
Result : Automobile shares go up on procuring land for their operations.
Farmers oppose the granting of agricultural land to be converted to industrial use. Farmers serve as a very large vote base and politicians in many states in India yield to them as they do not want to affect their vote banks.
Result : Automobile shares take a tumble.
There is a famous saying on politics “ In politics there are no permanent friends or enemies only interests”. Business has a similar saying “ There are no friends and enemies in business”. There is only business. The coupling of business and politics cannot be wished way and stock market movements will depend on politics for many years to come.
The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.
Subscribe to our Youtube Channel