The Hindu Business Line : Not really decoupled

It is difficult to believe that the financial crisis stemming from the irrational credit exuberance currently afflicting the United States would not cast its shadow on the performance of the Indian economy, as the Finance Minister, Mr P. Chidambaram, would have us believe. It is now well established that equity values in recent times have been pushed up to levels that were not justified by fundamentals of corporate performance. That this is due to the massive inflow of FII money has also now been well recognised. When such flows abate, and indeed there is now a reverse flow, valuations are bound to suffer. One may debate whether this sudden lack of appetite among FIIs stems from the emerging financial crisis in the West or other factors.

There is enough anecdotal evidence of swings in the Indian market resonating to movements in other emerging markets as also the markets of the West to vindicate the proposition of integrated nature of global markets. The surfeit of liquidity in the West that gave rise to the US home loan crisis is also the reason why some of that money flowed into the Indian and other emerging markets, and triggered the kind of rally witnessed recently. Now that the liquidity-driven credit excesses have come back to haunt the Western economies, the resultant squeeze cannot but affect the Indian market too. Even the argument that the correction in the Indian market is far in excess of what has been observed elsewhere must consider the fact that the Indian market rallied far more than most other markets.

Not just the stock market but the real economy too could be in for a tough time. Indian corporates, which, until now, didn’t have to worry about finding the money for overseas acquisitions or expansion of domestic capacities, may find the going a bit difficult. The last six-month rally in equity values also meant that share offerings by companies could be valued at an attractive multiple of current earnings. Also, there was no dearth of institutional investors that were only too willing to buy into the Indian growth story. But if the crisis in the West persists, not only would valuations become somewhat unattractive, funds themselves may be hard to come by. That would be a serious blow to the large number of infrastructure projects, such as a Metro rail or a port or an SEZ, that the private corporate sector is bidding to set up. The growth momentum in the economy can weaken if the overseas capital built into the funding assumptions for pipeline investments turn out to be overly optimistic. True, some economies are decoupling themselves from the rest of the world in terms of the growth rates they have registered. Equally, some asset markets have outperformed others. Still, the integrated nature of the global economy cannot be wished away.

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