No Quick Fix

It is true that the low level of interest in the markets is causing problems not merely for the governments disinvestment programme but for companies too. Bankers say that they are unable to lend because companies are unable to get in the matching funds required, which they may otherwise have raised from the markets. The dismal state of the primary markets results in excessive reliance on borrowings, with corresponding upward pressure on interest rates. But to blame the markets for the problem is putting the cart before the horse. The markets reflect expectations about the economy, and if they are in semi-paralysis today, it is because expectations of corporate growth and profitability are bleak. Surveys of business expectations indicate that the mood is definitely downbeat, with good reason. Half-yearly results have been bad, and the full year promises to be no better. Export growth is under pressure. The liquidity in the banking system is not being transmitted to corporates. A slackening of demand and piling up of inventories are evident. Under these circumstances, the governments exhortations to financial institutions and banks to bail the markets out will only result in weakening the position of these institutions. There remain plenty of investors who will take advantage of temporary rises in a bear market to unload their non-performing assets.

 

It will be recalled that last December, too, the markets were near their annual lows, and the outlook seemed gloomy. But all that was changed by massive FII buying in the first half of this year. Will 1997 see a repeat of that scenario? There are several factors against that. The continuity of economic reforms is now mainly rhetoric. Political deadlock and uncertainty have increased. Infrastructure is crumbling.

Add to that the slowdown in corporate earnings, and the consistent losses made by the country funds, and the storyline for higher allocations for India look rather weak. The government must put its own finances in order, while opening up the economy faster. Only then will the environment for more optimistic markets be in place.