Most of the
economists in our country have backed the move Mr. Raghuram Rajan took as the
Governor of RBI to make no hasty steps in lowering the interest rates. This is
surely a good move and right step in the right direction for our country’s
economy. There may be apprehension in some quarter and this is especially in
areas where these people have other preferences or biasness. The fact is that
the real economy hasn’t shown any sign of wakening up and therefore whatever
liquidity is allowed to create will go for cheaper credit to the stock market
which is at dizzying heights already. True, some money may also go for
investing in real estate and a small percentage of that in construction sector
yet all are not still rosy enough for liquidity dreams. In fact, there is little to show about
economic growth if you study the stock market.
Worst still is the
way rupee is losing value with that of dollar and with interest tightening in
US you may still see further downside of it. So what we actually gained out of
cheap oil has been lost with the rupee devaluation. Yet in spite of all these
warnings we still embrace the stock market a little too much which incidentally
has been a parking area for funds and not in helping out the real economy.
In short this
statement would speak about it.
‘THERE IS A TOTAL
MISMATCH BETWEEN THE STOCK MARKET AND THE REAL ECONOMY’.
It is therefore
much reassuring that the rate of interest is still high and people are saving
their money and not investing in the stock market to make it go even further up
with no consequences to the real economy and nothing whatsoever positive on the
employment scenario. From the look of it
there are no active investors in the real economy. And besides, the oil prices
are low for now yet who knows they may spiral up as fast again with the OPEC cartel
cutting down on outputs and thereby spiking up inflation a bit more in India.
An analogous
example would highlight the position of the stock market, the real economy, the
employment scene and also IPO (Initial Public Offering) and also the
environmentalists.
Story
At a busy street in
Delhi decked from one end to the other are numerous diamond sellers with
established shops selling precious and semi-precious stones. They are presently
doing much less business than before due to lack of customers. This is the real
economy of the street. There have been layoffs from some big diamond shops as
they wanted to cut overhead costs and the unemployed either sat at one of the
few tea stalls or walked from one end of the street to the other hoping to find
someone calling them for even odd jobs.
A few days had gone
by when one of the youth spotted a couple of almost prism like glass lying on a
compound and started to examine it. The shinning object attracted his friend
too standing nearby and they both started to look at the pieces of shining
stone with amazement. The friends knew it was more of a fake than what they
earlier thought as real diamonds.
Soon they were
advertising around and refused to part with the stones when some of their other
friends asked for them. A few who passed
that way took no notice while several did and this created a frenzy and some
people started offering a hundred and some two hundred for the valueless glass
pieces to the youths. Soon enough after an hour had gone by the amount betting
over the two worthless stones were ranging in thousand of rupees. Before noon
the amount had swelled to nearly fifty thousand rupees.
Naturally,
everyone betting didn’t have the money and hence there stepped in those who had
enough money for a good rate of interest (Bankers and Financial institutions)
in return. The price of the stones obviously went up and so did the crowd and
the two youths (Stock Exchanges) who had agreed to sell the
stones to the highest bidder were doing their best as to project that the
stones were the best in the world.
The shop keepers (Real
Economy) who were doing very little business these days were astonished to
see two worthless pieces of stones beating the cost of their real diamonds
lying in their showroom with no buyers. Meanwhile the crowd swelled and there
were brokers (Middlemen and Fund Managers) appearing on the scene as well.
A few middlemen
were inducing other passerby to invest while others offered spaces on the
footpath to squat or stand in return for money. Few very very very long term
investors (Long Term Bulk Stock Investors} simply sat on
makeshift tools reading newspapers, totally indifferent to the commotions near
to the place where they sat. They had already advertised to stay invested in
the betting frenzy till weekend. Naturally, this instilled more men and women
to bet their money that ranged anywhere between 100 to 5000 rupees as margin through
brokers so that they can test their luck on future price movement of the stones
and reap a profit (Futures Trading).
Suddenly one of
the shop keepers (Real Economy) appears with a semi-precious stone
offering it at par with the value of the other stones stating it to be original
and that too guaranteed (Initial Public Offering). Everyone pooh-poohs
and spats at him.
“But this is
original and authentic” he protests.
“Bah! Who says
so’, snarls a few brokers irritated. ‘These two stones here are the originator
of all the other originals anywhere.
By afternoon a few
seats of the very very very long term investors were seen lying vacant. With
more and more public showing enthusiasm in betting for the two stones they have
sold their positions reaping huge profits and vanished from the scene
altogether. A few enthusiasts have thrown in good deal of money. Although it
transpired to be not good rupee notes (hawala and money laundering) still
nobody bothered as there were as many winners as there were losers.
A local politician
(Government) had come to the street too and so were a few policemen (market
regulators, CBI). A few shopkeepers (Real Economy) protested to the
politician about the unnecessary crowd and the resulting lack luster business
at their establishments. They protest that they need assurance of good customer
demand so as to pay utility bills and other establishment costs including
labor.
The politician
takes a rough count of the people inside the shops and the public street and
goes the street way as he is sure to get more support for the next election
here. Hearing the protests coming from a few shopkeepers (Real Economy),
a few men and women (Environmentalists) come charging in. They point to
one of their child who got scratched on the foot to the local politician and
the policemen. They state that a glass piece thrown out from one the shops has
done this mischief (Pollution).
They (Environmentalists)
want the local politician (Government) to stop the activities of all the
shops at once and instead allow the street betting. They emphasize the point
that the government may even shut down the shops of this street and instead
allow the betting to survive. They reason that with more money being poured in
more people would get jobs and if possible even allow more money to flow in (Liquidity)
as these are by their terms non-polluting and clean and friendly way of doing
business.
The above story is
self explanatory as to what actually happens to our own economy when there is
excess liquidity driven into the system where the potential of doing real
economy business have been coming down over the years.
Hence, what is the
solution? The solution is simple yet not quite welcome in most quarters and
that is to assess the real economy properly. It is in fact, a gruesome,
irritating, arduous, mind boggling, sweating it out on the field, going through
each and every unit through a system of networks including very active bureaucracy,
auditors, business promoters, taxes, labor audits, smart banking and finance
and so on.
It is no more the
old system of banking where you simply pour money and then forget all about it
till the company runs into trouble or remain simply smiling over the counter
sheepishly. The banks must themselves have technically qualified inspectors,
market analyzers for each particular industry including technical staff to
bring out industry specific advices with out of the box thinking mechanism.
This would make the public and private sector banks almost like a full time
partner in the development of the industry. This would keep the banking
monetary funding in touch with the real economy for a long period of time or on
a sustainable basis.
Gone are those
fortunate days when we used to eulogize investors and names that were prominent
in the field of industry where you ponder about their expertise, tenacity and
arduous ways of running smoking factories, hard gained foothold in certain
areas of production, made astonishing invention and revolutionized a product
and such like. Nowadays you simply hear the best part of the population aiming
to be a hawala merchant, money launderer or a narcotic dealer or a black
marketer who without doing anything much make huge fortunes and indulge in
globe trotting with harems of woman in all major cities of the world.
If a small
percentage of population aims for this kind of easy money then the economy will
be stressed and there will be unemployment. It is high time government showed
that manufacturing is more respected, meritorious and gentlemanly thing to
consider than the easy money lobbying way. The system will sooner or later
adjust accordingly.
