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Yes, the global financial system has gone into shock, after Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch and AIG. But while it is true that US financial markets face problems, this is a narrower issue than the broader one of US macroeconomic imbalances. While there is a question of inadequate information disclosure, corporate mis-governance and perhaps even regulatory failure in an accepted advanced market and, therefore, its possible replication in markets less developed, that imponderable isn’t the epicentre of shock. Financial markets don’t quite replicate the behaviour of real ones and the proposition about the world catching a cold when the US sneezes has been weakened for the real sector. However, it is still true for the financial sector, which is why other economies rejoice when government bailouts are announced in the US. Having said this, is gloom and doom in Indian capital markets warranted? The economy is clearly on a cyclical downturn that may last for a couple of years, if not more. The reasons are diverse: global slowdown, tight monetary policy, stagnation on policy reform, political uncertainty. But the most pessimistic of projections has real GDP growth of more than 7% in 2008-09, with 8% reached thereafter.
This is not doom, though one would prefer 9%. The shaving off of growth in China is also of that order of a percentage point and both economies will therefore grow fairly fast, with China India’s largest trading partner now. The Indian trade basket has diversified to East Asia and is less impacted by developments in North America or Europe. Given growth of this order, average corporate profitability in India should be 18%. Hence, fundamentals are strong, though the stock market needs broadening by bringing in more scrips (privatisation of PSUs) and drawing in more investors (so that it is less sensitive to pull-outs by foreign investors, inevitable when such investors face problems back home). What needs highlighting is that the much-hyped Sensex is only a limited segment of the capital market. The 20,000-plus peak of the Sensex was undoubtedly excessive, but reactions since January 2008 are also unwarranted. If anything, this is the time to stay invested in India. There are few economies that will grow this fast and generate comparable returns, unless one is driven by the motive of making a fast buck. Don’t be depressed.
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