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The Rediff Interview/Basudeb Sen

'We intend to stick to the Deepak Parekh panel recommendations'

India's stockmarkets are on a roller-coaster rise, with heavy volatility marking the movement of the indices. The new economy scrips have set the markets afire, with the old economy sectors finding the going tough.

However, Basudeb Sen, Executive Director, Unit Trust of India, while speaking to The Money Bureau, seemed quite bullish about the old economy. He sees the ICE sector pushing up the old economy stocks too. He also feels that in the next 2-3 years a near-foolproof system would be in place at the bourses.

What is your view on the current state of the markets?

The sudden shock that the market has undergone since the end of March is beginning to wear off. It has now come back to the level it was ruling at before these problems occurred.

Is this run-up sustainable?

First of all, we should not think that what happened in the last few days was a run-up. It is just that there was a run-down of a sudden nature, which had to be corrected.

The run-down had happened without the apparent existence of any fundamental or technical reason. There was some uncertainty about double-taxation on Mauritius-based FIIs. Now, those concerns are over and the market has stabilised somewhat. This is not strictly a run-up, but just a correction for the fall which was quite sudden.

However, the medium-term potential of the market is to go up. Before the market dropped suddenly, it was consolidating for a while at 5000 levels before rising. Now we have to see how it consolidates above these levels before there's a rally again.

What triggered this fall?

The fall was due to two reasons. When the market was consolidating, the perception about Internet stocks changed at the NASDAQ. The next was the issue of taxation on investments routed through Mauritius. These were the basic reasons.

The issue of taxation has been sorted out. Therefore, the market would have normally corrected for the run-down and gone up, which has happened. Additionally, the perception about technology stocks which was causing concern towards the end of March that seems to have brightened. Thus, the market has become more bullish. Overall, I think the market will go up further.

What is UTI's view on the 'new economy'?

We are actually talking about a lot of things when we say 'new economy'. In India, 'new economy' has for quite sometime. India's dependence on agriculture and industry has been declining. In the 90s, the addition to the gross domestic product, or GDP, growth essentially came from the services sector.

From the economic development point of view, the services sector was the best geared to grow rapidly. I am not suggesting that the 'old economy' sectors will not grow: they will continue to grow, maybe even faster than they grew earlier. But the services sector will easily outpace the old economy.

Information technology, entertainment and communications, or ICE, sectors spell the new economy. Among themselves these three interact with each other to a great extent because of the nature of their relationship and have strong inter-linkages. This has led to convergence. Each is contributing to the growth of the other.

Moreover, the new economy is making a great impact on the way the old economy operates, particularly industry and trade. The new economy is not a replacement of the old-economy, it is an additional dimension. It has two components: they will grow very fast, and they will also have a positive impact on the growth of the old economy.

What are UTI's views on the manufacturing sector?

The manufacturing sector will witness the same high growth we have seen since the reforms process began. I see the sector growing at the rate of 7-8 per cent, overall. The reason is that liberalisation and reforms have allowed many enterprises to come in: we find restructuring at the corporate level, cost-cutting everywhere, corporates readjusting themselves to global competition and getting ready to meet the challenge.

Add to this the impact of new technology, and it is safe to surmise that the manufacturing sector has ample potential for growth.

How additional earnings by the manufacturing sector get reflected in the stock markets may vary from time to time depending on the investors' interest. Some stocks in the new economic sector will give higher appreciation in the capital markets, but the bulk of the money will still flow and be held in the instruments issued by old economy sectors.

If that is the case, why are the manufacturing, FMCG and pharma stocks not attracting the kind of investments they deserve?

We can't say that they are not attracting investments. At some point in time, commodity-sector valuation dropped drastically, but within one year they again went up.

The FMCG sector went up even before the new economy began to attract attention. It is a matter of relative investments. What is happening is that in the short term, the additional money going into stocks is being invested in new economy stocks.

This additional purchase of equity in that sector, drives prices up. However, despite this surge in new economy stocks, people still hold a substantial amount of FMCG stocks.

Isn't it time to link US-64 to its net asset value?

The Deepak Parekh Committee had given us three years to get certain things done. We'll surely go by what the committee has suggested.

What regulatory changes do you feel will affect the Indian capital markets?

I don't think we require any major regulatory gimmicks to provide a positive impact to the markets. The major areas which the market regulator should address include expansion of the list of scrips in rolling settlement, moving towards derivatives trading, and how quickly are we able to contain naked short sales.

Over a period of one or two years, we will have a nice system in place in the market.

Many changes have already taken place, but the alteration has been in bits and pieces. However, these changes have already transformed the market.

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