The Hindu Business Line : Enhanced liquidity may push up benchmarks

Quite a few eyebrows were raised in July last year when CLSA issued an alarm noting that 165 districts of 14 (as of November 2005) resource-rich States were affected by naxalites, an euphemism for extreme Left armed movement. It felt that at stake were investments worth over $85 billion, the legitimacy as also credibility of the Government, and the socio-economic stability of the country.

“It remains to be seen when the Government of India will stop treating the Maoist movement as just a law and order issue and look at it comprehensively along with its strategic implications and its consequent ramifications”, it had concluded.

Things have not changed much since the time of the CLSA report, which had pointed out that the so-called “red corridor” was the most economically deprived part of the country.

But today, there is a growing consensus that it, along with a number of other emerging socio-economic conflict situations witnessed in recent years, if not addressed adequately now, may cast shadows on the sustainability of the GDP growth and its long-term prospects. As the economy attempts to push itself fast forward, emerging social tensions are slowly occupying a place in the global investors’ mind space because those have bearing on the performance of the India Inc.

Speed breaker?

Some global market experts now think that many of the emerging markets could face a combustible situation in the months ahead. Emerging markets, including India, may face challenges of instability and sustainability of rule of law, necessary for a torrid growth rate. At the same time, they may float on liquidity, which cannot be utilised productively in the near term.

India, despite its rickety systems and inequalities, may achieve 9 per cent growth this fiscal. But caution and concern are surfacing as the long-term global investment strategies gradually tilt more towards emerging markets.

A November 15 report by India Knowledge @ Wharton notes that, the world’s economic balance of power has already begun to shift, as the oil-rich nations rake in ever larger quantities of wealth and Asian central banks acquire enormous pools of capital – with growth in Asian pension funds and private investment vehicles sure to follow.

As the US and Europe perceptibly enter a slow-down mode, the global liquidity is trying to find a new level. According to a Goldman Sachs forecast, the BRIC economies are likely to exceed the US consumer spending this year. India’s par capita income is also growing. If this is a yardstick for attracting overseas investments, the concentration of consumption pockets among a few is also a reality.

Near-term reality

In the near term, Dalal Street may begin getting the overseas money flow back starting from this month. The benchmark indices can also break out of the short-term range. But, a new risk perception from the socio-economic front may hold back yet another round of euphoria.

This week, the benchmark indices may move up on enhanced liquidity. But, select stocks beyond the narrow indices, are likely to do even better on positive news flow and expectation of better fundamentals.

IT sector stocks, may also move up as the impression gains ground that rupee has bottomed out in the short-to-medium term.

(Responses may be sent to jayanta_mallick@thehindu.co.in)