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27 April 2017 Editorial


27 APRIL 2017 

Politics and the police

On reinstating Kerala DGP Senkumar 

The SC verdict reinstating a DGP limits the political executive's discretion in transfers

In 2006, the Supreme Court ruled in the Prakash Singh case that the chief of a State police force should have a fixed tenure of at least two years. Despite this, State governments have failed to protect Directors General of Police from arbitrary transfers. In the event of a regime change following an election, new political dispensations assume they have an unfettered right to reshuffle officers in the civil and police services. Rarely has this assumption been challenged. The Supreme Court's ruling reinstating T.P. Senkumar, who was replaced as head of the Kerala police soon after the Left Democratic Front assumed office last year, reinforces its 2006 judgment. It limits significantly the discretion enjoyed by the political executive in effecting transfers at whim. Expanding on the import of the Prakash Singh verdict, in which the court had given directions to insulate the police from external pressure and political influence, a two-judge Bench has delineated the limits of the State government's subjective satisfaction in removing the DGP. No longer is it valid for the government to justify a DGP's removal on the vague ground that it has reached a prima facie conclusion that the public is unhappy with the efficiency of the force. The government's ‘subjective satisfaction' about the state of affairs must be based on "cogent and rational material", the court has ruled. On going through the record, the Bench found there was no material adverse to Mr. Senkumar, except some opinions and views.

The verdict is undoubtedly a political setback to Kerala's LDF government, which is already battling controversies caused by the words and deeds of a few ministers. The Pinarayi Vijayan government had defended its transfer of Mr. Senkumar by citing dissatisfaction among the public about the efficiency of the police following the Puttingal fireworks tragedy in Kollam and the murder of a Dalit woman named Jisha in April 2016. However, the court noted that these issues had "suddenly resurfaced" more than a month after the incidents - that is, after the present regime assumed office. In a telling indictment, the court has observed: "This might perhaps be a coincidence, but it might also be politically motivated..." The LDF government must immediately abide by the order to reinstate Mr. Senkumar, whose original two-year tenure was to have ended on May 21, 2017, and who is due to retire in June. However, the legal import of the verdict is not confined to Kerala. State governments would do well to implement the measures outlined in Prakash Singh, the message of which was that the police must be answerable to the rule of law and not to political masters. In particular, every State should set up a State Security Commission - Kerala has one - to both guide the police and decide on top police appointments and transfers.


A stretched market

On Indian stock indices hitting a new peak 

Investors stay put to drive a historic rally in the Indian bourses

The major Indian stock indices have rallied strongly despite lingering concerns over their historically rich valuations. Both the BSE Sensex and NSE Nifty reached all-time highs on Wednesday, up about 13% and 14%, respectively, since the beginning of 2017 and well above the performance of developed markets. The Sensex surpassed its previous high to end the day at 30,133 while the Nifty settled on a record closing high of 9,351. Investors have attributed the rally to the better-than-expected earnings results of blue-chip companies (like Reliance Industries Limited that posted record earnings this week), strong fund inflows from foreign institutional investors (FIIs) and the strengthening of the rupee. Waning concerns over the election results in France, U.S. President Donald Trump's anticipated tax reforms, and the allaying of concerns about the long-term impact of demonetisation may have also helped fuel the rally. FIIs have been at the centre of action over the past few months, turning into bullish buyers after the temporary slump in their investments after the demonetisation exercise. In the first three months of 2017, FIIs have poured $6.75 billion into equities, up from inflows of just $3.19 billion and $3.18 billion in 2015 and 2016, respectively. Adding strength to the rally, domestic investors have been net buyers of equities, investing almost Rs16,000 crore since the beginning of 2017.

Going forward, despite the willingness of foreign buyers to pay higher multiples, there remains the substantial risk of a downside attached to this rally. The market capitalisation of Indian stocks, according to a report by Motilal Oswal Securities published in March before the rally, rose 40% over the last year compared to a 21% increase in the overall world market cap. This increased India's share of world market cap to 2.5%, marginally above the historical average of 2.4%. Yet corporate earnings, which determine equity returns in the long run, have been lacklustre despite showing early signs of recovery from the demonetisation shock. While the current earnings season has been modestly positive, overall, reasons to justify the high multiples remain elusive. The implementation of the Goods and Services Tax is expected to dampen earnings in the near term, and the absence of recovery in capital expenditure by India Inc. offers little hope to expect an earnings boost. The impact of the strengthening rupee on corporate earnings is another concern. Investors, especially foreigners who benefit from an appreciating rupee, have taken the strong rupee as a vote of confidence in the economy. But its likely impact on the earnings remains ignored. According to UBS, a 1% appreciation in the rupee could reduce the Nifty's earnings by some 0.6%. All that said, the bears in the Indian markets have been proven wrong for long. It would not be surprising if investors stretch themselves further to support the rally.

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