Sudip Bandyopadhyay’s Blog

 “Freedom!” is a perennial rallying cry, but “free markets!” never had the same ring to it, even in years where the record of free markets looked impressive. 2008 has not been one of those years. So was 2008 the year that capitalism died? And if not, is 2009 the year that we should put capitalism out of its misery?  Answers: no, and no. At a time when so many commentators hark back to 1929, it is worth recalling more recent history, and the fall of the Berlin Wall in 1989. The contrast between the end of communism then and the much-exaggerated death of capitalism now is telling. Then, a popular movement swept away a brutal and long-discredited regime amid scenes of jubilation; now, voters are not celebrating, simply fretting that the good times might be over. Then, the hoped-for alternative to communism was clear: democracy and a market economy. Today, there is no convincing alternative.  Yet this is no time for complacency from friends of the market. It is time to remind ourselves not only of the limits of markets, but their strengths.  One of the things that markets do superbly well is to encourage experimentation: new ideas emerge, spreading quickly if they deliver what the market wants and disappearing if they do not.  The shock of 2008 was not the discovery that markets do not always work well. Everybody knew that, even the economists. What was shocking was the failure of disciplined pluralism.  Markets were supposed to shut down bad ideas in a gradual evolutionary process; what happened in 2008 was more like a mass extinction. Incompetence, and in some cases outright fraud, had grown so quickly that by the time market participants woke up to the problem, the entire financial system was threatened. 

Financial regulators must now shoulder the difficult and technical task of crafting the rules that will ensure that there is no repeat. But the problems, however astonishing and however severe, are symptoms of the financial sector alone. Yet governments are now being asked to intervene everywhere from the Detroit car industry to the Italian businesses, and without doubt will often give in to the temptation. They should resist, because there is no reason to believe that in such sectors the basic market mechanism has failed.  Because western governments have – rightly – intervened comprehensively to prop up the financial sector, some intervention in the rest of the economy is inevitable. Yet it must be minimized. It is a curious fact that soft loans, “infant industry” trade barriers and other forms of intervention rarely nurture genuine infant industries. Instead, they spoon-feed those with the most powerful lobby groups – typically mature industries with vast sunk costs to recoup. It would be nice if the humiliation of Wall Street and the City had somehow changed the calculus of industrial lobbying, but it has not.  Western Government Finance Ministries are unlikely to admit this. In the 1990s and early 2000s, they looked irrelevant; the crisis makes them seem important and powerful. Yet there is plenty for them to do without seeking to embrace the private sector any more tightly. They must try to strike a balance between allowing good businesses to fail for lack of funding and flooding the private sector with bad loans subsidised by the taxpayer. They must support the world economy during a recession without racking up dangerous levels of government debt. And having propped up the banks to protect the non-bank sector, they must figure out how and when to remove the scaffolding. That is a list of tasks to satisfy the most hyperactive US or European politician. 

Indian Capital Markets started the new year 2009 on a firm note with both the benchmark indices NIFTY and the SENSEX registering about 6% gains over the week. The buoyancy in market sentiment was aided by higher FII buying seen across stocks but more so in anticipation of the second fiscal package and rate cuts .   Government announced second fiscal package on Friday last, which the markets were eagerly awaiting. The package has an additional plan expenditure of Rs. 20,000 crs during current year, mainly for critical Rural, Infrastructure and Social Security sectors, across-the-board cut of 4% in ad-valorem Cen-vat , and measures to support Exports, Housing, Micro, Small & Medium Enterprises  and Textile sectors.  In this package, government has authorised the India Infrastructure Finance Company Limited (IIFCL) to raise Rs. 10,000 cr. to refinance bank lending for infrastructure projects  worth Rs 25000 crs. It has also envisaged funding of additional projects worth Rs 75000 crs at competitive rates over the next 18 months. Funding for these projects to IIFCL would be enabled in tranches of additional Rs 30000 crs by way of tax free bonds, once funds raised during current year are effectively utilised.   RBI  announced a Rate cuts on Friday last with  CRR cut by 50 bps to 5%, and both the Repo and Reverse Repo cut by 100 bps. The reduction in the CRR and benchmark rates are expected to infuse additional liquidity in the system and likely to result in Interest rate cuts from banks in the coming days. 

Both the above fiscal & monetary measures are definitely positive news for the markets and are  expected to boost the market sentiments in the coming week. These  measures  should provide the necessary push to the economy, provided the implementation of the package is done in a time-bound & expeditious  manner.  During the coming weeks, the market may show some amount of volatility on account of Q3 corporate results, despite the fact that stock prices have corrected sharply and to a great extent discounted the quarterly earnings. However  keeping in view tough earnings season ahead, we may  see some profit taking setting in at  higher levels. 

( ** this is the transcript of the weekly column I write for Economic Times )