From US Shutdown to Bihar Polls: Market Optimism, Terror Attacks, and Corporate Realities
Shutdowns averted, markets soared, Bihar voted, and Musk got richer—global chaos met Indian calm in a week of high drama.
The Gist
The US government shutdown may soon end as Senate Democrats align with Republicans.
- Assurances regarding Obama care subsidies have improved market sentiment.
- Expectations of a trade deal with India are rising, boosting investor confidence.
- Political turmoil in Sudan and a recent terrorist attack in India highlight global instability.
The US government shutdown is inching closer to an end, with a bunch of Senate democrats choosing to vote with Republicans to end the stalemate, purely on the strength of an assurance that the Obama care health insurance subsidies that Trump’s One Big Beautiful Bill Act scrapped would be put to another vote. This has lifted market spirits in the US and the rest of the world. Expectations have gained ground that a trade deal with India, with tariffs of 15%, is round the corner. Nifty has climbed Mount 26,000 once again, mainly on the strength of domestic climbers, while foreign portfolio investors pretended to be sherpas early this month but left for foreign shores.
Tesla shareholders have agreed to a pay package for the CEO Elon Musk that would grant him company shares worth $ trillion, provided he meets some steep performance targets.
Sudan has replaced Gaza in the matter of atrocity headlines. A rebel militia has been killing, maiming, raping and starving non-Arab Sudanese by the thousands.
Trump’s chances of a Nobel peace prize have eroded, with the ceasefire between Thailand and Cambodia unravelling faster than anyone had expected.
Indian investors’ enthusiasm has not been dampened by a major explosion near Delhi’s Red Fort on Monday, 10 November, now determined to be a terrorist attack. A car being driven by a doctor, who reportedly got radicalized over the last three years and led a team of educated, white collar professionals to carry out attacks in different parts of the country, exploded in the evening, killing 13 and injuring many more. A major haul of explosives and raw materials to improvise explosives was made, following the unearthing of a terror plot centred on Faridabad. The resurfacing of domestic terror based on Islamic radicalism is a cause for concern.
Bihar Elections and Political Economy
The Bihar elections got over on 11 November, and the results are due on 14 November. Exit polls predict a return of the BJP-led National Democratic Alliance in the state. A pre-poll announcement that the incumbent government would credit one crore women in Bihar with Rs 10,000 each for self-employment ventures will probably play a role in determining voting patterns. In India’s poorest state, expectations from the government are generally low. Any sign of state empathy is, therefore, expected to generate much appreciation.
The Bihar elections are the latest state elections to institute lavish giveaways as a permanent fixture of India’s new political economy. This will emaciate state governments and leave them ill-resourced for carrying out serious development work or even governance.
Political parties are not the only ones taking the lazy way to success. Infosys is buying back Rs 18,000 crore worth of its own shares. At a time when the entire tech world is abuzz with new opportunities and new applications, Infosys has made it clear that it cannot find anything substantial in which to invest, other than a share buyback to boost share prices and placate shareholders. Its expenditure on R&D rarely comes close to 1% of revenue, at a time when companies like China’s tech champion Huawei spend upward of 20% of revenue on R&D.
Risk Averse Corporate India
Perhaps, we ask too much of Infosys, when we expect it to invest in productivity-boosting R&D. It is, after all, steeped in a philosophy of deriving value from the quantity of work, rather than from ever-improving quality of work — founder NR Narayana Murthy is proud of his conviction that young people should work 70-hour weeks while being paid a pittance. The starting salary at the company, and its competitors, has been stagnant for the last 15 years. Unmindful of these companies’ constraints, prices have more than doubled over the period, meaning that real salaries have halved.
Nor is it just the tech industry that fails to invest in R&D. Hardly any company other than in the pharma sector bothers to spend much on R&D. Strictly speaking, creating new knowledge runs the risk, these days, of being labelled anti-national. It has long been the mainstay of Indian culture to hold that all knowledge is contained in the Vedas, and the most anyone can do is to find new ways to interpret this stock of pre-existing knowledge. This inhibits questioning of existing knowledge and creating new ideas.
Tata Motors has split itself into two separate arms, one to produce commercial vehicles and the other to make cars. The decision is welcome as it would force both divisions to stand on their own feet, without receiving cross-subsidies from the other. It is time the Tatas adopted this philosophy across the board, and removed the structure of assorted trusts holding stakes in operating companies.
Ideally, a market for corporate control should operate for any company, to keep its share price at the optimal level. If a company’s management is sub-optimal, it would be reflected in its share price. Someone who hopes to run the company better then has the incentive to buy up sufficient shares to take over control, sending share prices rising. The takeover bid can be frustrated by rival bidders, including the incumbent management.
Once the share price has risen to a level that reflects the earnings from optimal running of the company, further takeover interest would wane. If the incumbent management retains control, it would have to run it better, to justify the higher share price. If a new manager arising from an acquisition is in charge, it has to increase performance to justify the capital outlay on acquisition. A functional market for corporate control benefits shareholders and the economy, by encouraging optimal utilisation of corporate resources.
Trusts and crossholdings by group companies interfere with the working of a market for corporate control. While who gets to be a trustee in a Tata Trust and on what basis have avidly been discussed by the media recently, the fact that the public interest lies in enabling a proper market for corporate control for any and every Tata company has not received enough attention.
Ola’s Market Reality Check
Ola’s parent company has undergone a rating downgrade. This is much more of a reality check than a company’s failure to register steep listing gains after an initial public offering. Retail investors tend to view companies with high listing gains as star performers, and those with modest listing gains as underperformers. This is myopic. Shares that went up sharply after listing were evidently underpriced when they were offered to the public. Shares with modest listing gains were priced better. An IPO must strike a balance between attractiveness for investors and optimal capital raising for the company issuing shares. An IPO that yields modest listing gains is one that was priced for efficient capital raising for the issuer.
