Tuesday, 9 August 2011

Stop watching the stock market ticker

As stock markets fell on Monday there was the predictable response from governments. Take for example the Indian Finance Minister. He says "we are prepared to address any concern that may arise on account of the present situation".  He should do no such thing. Stock markets should not drive government policy.

Have you noticed that the bleating and braying is all one sided. When markets are rising, nobody wants the government within one million miles of their trying to fill their pockets as fast as possible. When markets are falling , governments should come and "help them". Nonsense. Just as stock markets fell, you see the price of gold skyrocketing. I am yet to hear anybody express concern on where that market is heading.

For that matter, why be only concerned about stock markets ? Why not debt markets. Or, as above, gold markets. Or platinum markets. Or whatever.

Governments should simply adopt the right economic policy for the long term. Of course, they have to react to economic events, but that would be in the form of reacting to say a recession or overheating. Not to stock markets falling.  Stock markets, in the short term, are largely in the hands of speculators. More than 95% of transactions are speculative in nature. They perform a useful economic function - that of providing liquidity. But they need no support and certainly not an ounce of the time of the Finance Minister. If they mint money gambling, good luck to them. If they lose their shirts, well tough luck.

India is not in a bad position in the current situation. Unlike China, its not so dependant on exports and therefore the impact of a possible global recession will be lesser. India's growth will continue to be strong. The falling oil prices is a huge boon ; this can be the solution to controlling inflation, the most serious problem facing the nation today. Speculative inflows may dry up, but investment is not a problem - the country remains one of the most attractive markets in the world. The demographic dividend continues - India has a young population and not a dwindling supply of productive individuals. The Finance Minister has many things on his plate. Controlling corruption. Eliminating wastes and handouts. Restraining the burgeoning national debt. Continuing with reform and remove the current malaise of masterly inactivity. He doesn't need to watch the Sensex. When the shrill, loud, breathless "journalist" from CNBC asks him about it, the correct response should be - Sensex ? What Sensex ?


Prats said...

I agree...But then the Urban population would still be hit with recession

zeno said...

I think he is just doing a politician job of allaying fears of the public. What about the software exports and the real estate boom associated with it?

Niraj Dhupia said...

I guess someone needs to send this post of yours to the Finance Minister. May be he would learn a thing or two out of this :)A brilliant post.

Ramesh said...

@Prats - True; there is pain . All I am saying is that the pain would be lesser than say a Brit would bear.

@zeno - Yes, he is indeed soothing the public, but I am precisely saying that he should not do so. People should learn that when they take risks they should not expect somebody to bail them out. I can udnerstand his soothing that the Indian economy would do well, there would be growth,etc etc. Not on the stock market.

Afraid that all sectors will see some dampening : IT more so.

@Niraj - Hey thanks. The FM is a wily old man. He knows all of it and more. He knows it is better to make a few noises.

Sandhya Sriram said...

what i dont understand in this whole piece is that we all knew that American Debt position was not healthy and we knew it before they increased the debt cieling, before they got downgraded. the downgrading was only like a symbolic indication of completion of the predicatable chain of events, then why all this ado?

having said this, while at a macro level, whatever obama is planning to do in the run up to the election may not bring down the Indian economy, it is going to impact the sentiments for sure and it is going to impact in pockets

From that perspective, i kind of agree with PC to be prepared to handle the situation. what can be the preparation is of course a good question to ask.

As you said, get the foundation right - focus on strengthening the economy on its own foot. hit the virus of corruption, have an impartial take on mismanagement state economies and put them on the right track, bring about tax predictability and certainity for industries (things like GST and DTC must live in substance and not in form), find a way to break this viscious circle of inflation, tightening interest rates and increased cost of living and then look out and see whats happening in the US of A.

the sad part is that at one end which PC or any one for that matter has no teeth to do most of this in the dirty game of politics, the shrill loud breathless reporter from CNBC also do not have any breath to bring out this perspective. he is more worried about what he can break on his TV screens the next moment rather than flexing his strong information muscle and bring holistic perspectives of the economic condition to the people at large

Phew..... i think i should stop here, i have like made up for the two lines that i put in the last post by many many times and must shut my mouth for the next 10 post with defined word limit of 10 words for the sin that i have committed on this post.

Venkat.. said...

Having less knowledge about finance I guess this time recession will bring good fortune only, India could be a safe place for investing on this trouble time for foreign investors.

Ramesh said...

@Sandhya - Well said . Do the basics and let everything else take care of itelf. The implementation of GST, for example, will be a huge step.

You are hereby barred from comemting in anything less than 750 words on the grounds that your comments are invariably better than the post itself :)

@Venkat - Unfortunately not so Venkat. It can't bring good fortune. At best it may bring less bad fortune !

Vishal said...

Only if the finmin has time to think the right way. A government which is yet to try doing right things is marred by a spate of scams. Sometimes, I wonder how can someone really be corrupt of highest levels? Thousands of Millions of Dollars! Just can't digest.

Indian market is ruled by the sentiments with every Tom, Dick and Harry buying and selling based on speculations. Some make money and some loose. What they do however by following this method is to bring instability in a rather stable economy!

Ramesh said...

@Vishal - Corruption has no limits. The more you have, the more you want.

Can never understand what sentiments have to do with stock markets. You don't sell a stock because you are sad or afraid :)

rads said...

Thankd God a large chunk of Indian economy does NOT depend on Exports...the recent Akash Tablet is a hope...recession will not beat us...i guess

Ramesh said...

@Rads - Yes in that sense India isdifferent from China. But no country , not even America, can be immune to the economic ills of the rest of the world, these days.

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