Breathing space

Despite all the talk about not enough being done in New Delhi, the economy not being in fine fettle and the poor fiscal situation, the stock market is on a roll again. True, the market has an in-built discounting mechanism but there has never been a time when you have had so many mixed signals. For most developed and emerging markets, debt at the government level is going up. As any third-rate economist can parrot, a high debt to GDP ratio constrains an economy’s ability to grow.

Contrary to popular belief, much of the cheeriness is courtesy the latest round of quantitative easing. Super Mario, aka ECB’s Mario Monti, and Helicopter Ben, aka Fed chairman Ben Bernanke, have again turned on the liquidity spigot to recapitalise banks and reinvigorate growth. But all this monetary gasoline has failed to set alight animal spirits on the corporate side. Companies are flush with cash and refuse to spend or, more importantly, borrow afresh. The Western consumer is tapped out and de-leveraging. Thus, all the excess liquidity ends up chasing risk assets. 

All this monetary infusion is distorting markets, but that’s the way it is. For us, the bigger danger is one of renewed complacency. Till such time that the markets operate in a risk-on mode, India will continue to get its share of flows — perhaps a tad less if the internal economic issues do not get addressed quickly enough. But then, this addiction to flows only exposes the country to greater shocks because this money is also highly fickle and can switch constituency fairly quickly. The government needs to use the latest buffer of stability judiciously as the challenges facing the economy this time around are much severe and will only get resolved through a pro-active approach. 

In this special issue, we bring you a report from New York. Investors there are more than keen on investing in India but they are also equally vocal in expressing concern over lackadaisical government policy. The reading between the lines is that they will also be very quick to pull out on the first signs of a global dislocation or continued local complacency. Going from risk-on to risk-off is faster than flipping a light switch. That may be something our market needs to worry about.