(This is the concluding part of the article titled `Will Reserve Bank's prescription work?' The author spoke about how the RBI was taking steps to prevent the Asian contagion from touching the shores of the subcontinent. He also touched upon the process of liberalisation and compared it with the other emerging market economies)The excess liquidity of the commercial banks is finding an easy way into government securities. It has risen over a year by 24.5 per cent, while the commercial bank non-food credit to the commercial sector has increased by only 11 per cent. The liquidity overhand is so much in the economy that compared to the last year's total gold import of 300 tonnes, the import this year is expected to be 500 tonnes. It was wise to partially open the gold window for imports earlier and almost fully now. If this had not happened the gold prices in India would have gone through the roof and then brought tremendous pressure on the rupee exchange rate due to demands of the havala market tofinance this pent up demand for gold. What is remarkable is that this level of gold import has not brought any pressure on the BoP situation, forex reserves and the rupee rate. The market mechanism has taken care of gold imports without disturbing the BoP.
At the most critical phase in our economy when the capital market was required to generate financial resources and risk capital to bridge the gap caused by the slowing government investment, it has turned shy. The liberalisation of industry, mining, transport, power and other infrastructural sectors has opened up opportunities. But who is to bring the risk capital whose requirement has grown manifolds? The risk capital comes from promoters as well as households directly or through mutual fund and financial institutions. Over the last few years the Indian promoters and business groups seemed to have already leveraged so heavily on their existing equity in order to fresh equity in new projects. The slump in equity valuations have further eroded theircapacity to go further as well as brought tremendous pressure of interest burden on existing leveraging.They seem to be already overstretched in the current stock market condition.
The household investor who either directly or through mutual funds and financial institutions provided large portion of risk capital and badly beaten in the stock market of 1995-96 is yet to recover from the shock. Although the corporate profitability did get affected in 1996-97 due to high interest rates, fall in corporate valuations only indicate the absence of market making and inadequate financial liquidity for the stock market to run a normal speed when the market structure was undergoing reform.
With the state of the risk capital market what it is today with respect to market pricing of capital assets, the supplies of financial resources for equity has remained flat. In spite of a substantial growth in the household resources and savings which is evident in several economic indicators, the economy is caught in a largeand serious mismatch in demand and supply or risk capital. The debt market and floatations are receiving excellent response from household investors. If the equity issues are to get a trigger, it must come from the secondary market sustained rally.
The support for equity financing in large infrastructure projects has to come from foreign direct investment which has the year crossed the figure of $ 3billion. It was this route which allowed Asian miracle to happen. If India is able to attract foreign direct investment of $ 10 billion in infrastructure and other projects which have low import intensity, it would transform the domestic economy by setting the chain of demand, employment and incomes growth in motion at a higher pace. India's low import propensity is a boon, and high foreign direct investment would in addition to strengthening the balance of payments give greater thrust to the domestic industry. The virtuous cycle of growth would also recreate buoyancy in the stock market and revive the supply ofrisk capital to the industry. In the context of the Asian crisis which would limit foreign direct investment and growth in the region for at least next two years, India stands in a comfortable position as a centre for attracting lucrative foreign investment. In this scenario the economic growth could be easily pushed up from six per cent to eight-nine per cent.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
