The sojourn of Sensex from 8000+ levels to 16000+ levels in a short span of 6 months is remarkable by even the most conservative estimates. While this is still (thankfully) well below the 20,870 peak the index closed at on September 1 2008, it is high enough to cheer the traders and rapid enough to encourage a speculative rush. Those having a bullish countenance would of course argue that investors, expecting a robust recovery, are implicitly factoring a possible torrent of future earnings rather than relying on earnings figures that are the legacy of a recession.
That would be stretching the case a bit too far. With the deficit on the government’s budget expected to reach extremely high levels this fiscal, a cutback of government expenditure is likely. Further, exports are still doing badly and the global recovery is widely expected to be gradual and limited. That would limit the stimulus provided by India’s foreign trade. And, finally, a bad monsoon threatens to limit agricultural growth and accelerate inflation which in turn would dampen the recovery in multiple ways.
Given these circumstances, the change in perception from one in which India was a country that weathered the crisis well to one that sees India as set to boom once again is not grounded in fundamentals of any kind. There are two noteworthy features of the close to one hundred per cent increase the index has registered in recent months. First, it occurs when the aftermath of the global crisis is still with us and the search for “green shoots and leaves” of recovery in the real economy is still on. Real fundamentals do not seem to warrant this remarkable recovery. Second, the speed with which this 100-percent rise has been delivered is dramatic even when compared with the boom years that preceded the 2008-09 crises.
This implies that the current bull run can be explained only as the result of a speculative surge that recreates the very conditions that led to the collapse of the Sensex from its close to 21,000 peak of around two years ago. This surge appears to have followed a two stage process. In the first, investors who had held back or withdrawn from the market during the slump appear to have seen India as a good bet once expectations of a global recovery had set in. This triggered a flow of capital that set the Sensex rising. Second, given the search for investment avenues in a world once again awash with liquidity, this initial spurt in the index appears to have attracted more capital, triggering the current speculative boom in the market.
It can be safely concluded therefore that using liquidity injection and credit expansion as the principal instrument to combat a downturn or recession amounts to creating a new bubble to replace the one that went bust. This is an error which is being made the world over, where the so-called stimulus involves injecting liquidity and cheap credit into the system rather than public spending to revive demand and alleviate distress. So entailed with this verve, optimism and Bull Run comes a real risk of another bubble which might explode in your face any moment. The crisis, clearly, has not taught us any lessons.
