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Waiting for Bubble 2.0

A leakage from the global stimulus festival into India may be plausible, but a reinflation of the same bubble is just wishful thinking, writes Dhirendra Kumar.

india Updated: Apr 12, 2009 21:55 IST
Dhirendra Kumar

As I wrote a week ago, there’s a remarkable lifting of mood in the world’s investment markets. A week ago, this was part of the G20’s achievements spin, but that connection has been stretched as far as it goes. To all appearances, this lift is looking like a resilient phenomenon.

Just as the markets were unwilling to ignore any bit if bad news till some time back, they are now willing to ignore all bad news and look only on the brighter side.

In India, even the prospect of a decidedly unstable political situation has left traders unfazed.

As had been the case many a time since the global crisis started gathering steam many months ago, both the pessimists and the optimists have arguments they believe in.

Regardless of what the stock markets are doing, there are huge negatives that are deeply embedded in the situation. For a start, corporate India has not yet declared even one complete quarterly result after the global panic started.

Banking and business circles are awash with stories about companies that are increasingly desperate for funds. Lower interest rates are about the only good news for business but it remains a largely theoretical exercise. The government is clearly going to be borrowing such a huge amount of money in the foreseeable future that it has completely distorted whatever impact lower rates should have had on credit availability to businesses.

The actual quantity of credit available to businesses which need it has nose-dived. At the grassroots level, bankers have reverted to the old principle of ‘anyone who needs credit must be a bad credit risk’. Even worse than the credit squeeze is the insidious impact of low business and individual confidence.

The impact of widespread job insecurity certainly hasn’t shown up in corporate statements yet. Spending cut-backs are yet to show their effect. So why are stocks booming again?

One pop theory is that we are heading for Bubble 2.0, based on the assumption that a sooner or later, a chunk of the huge liquidity being poured into the global system will find its way to India.

On a relative scale, India is even more attractive than it was during the Bubble 1.0 years.

This theory is truly seductive in its appeal because what it’s basically saying to its believers is that they’re going to get a second chance to get filthy rich. Whether you have a pile of penny stocks or a formerly sellable ‘real-estate investment’ 60 km outside the city, it’s all going to be worth a fortune once again.

To me, this theory has the feel of something out of a child’s plaintive letter to Santa Claus: “Dear Santa, can we have the same bubble again? Please?”

A leakage from the global stimulus festival into India may be plausible, but a reinflation of the same bubble is just wishful thinking.