Will the flows be sustained? That will depend entirely on what happens to the US economy.

As Anand Rathi Securities director Kamal Sen points out, the US economy, with its record current account deficit, has become the pivot on which the world turns. Any fall in the stockmarkets will be catastrophical to the US economy, because of the very high level of personal indebtedness built up. The growth of the US economy has been based on the wealth effect, and any faltering of the market, with its cascading effect on lower collateral values and consequent liquidation of debt, could have a tremendous negative impact.

Will a decline in the US be offset by a resurgence of Asia and Europe? Unlikely, as a decline in the wealth effect will immediately lead to a contraction in imports. That will badly affect the Asian countries. India, whose software firms have led the market, will be hit very badly.

Engineering a soft landing has been the aim of the Fed for quite some time, but so far they have proved unsuccessful. However, the resurgence of Europe and Asia does give US policymakers more leeway.

Opinion in the US is now evenly divided between the optimists and the pessimists. The optimists argue that e-commerce and IT has resulted in a productivity boom, the effects of which can only lift valuations to a new plane, not to be compared with life before e-commerce.

But that isn't the end of the matter. Even if we assume that the e-commerce revolution ushers in a new era, the fact remains that it will be only a few of the new e-companies which will survive. The negative wealth effects of the death of the rest could well implode the US economy, with the attendant meltdown for the rest of the world. The good news is, economists like Samuelson and Krugman have been predicting the end of the bubble for a long time, with nil results to date.

Fiscal deficit
The end-November fiscal deficit is 80.6 per cent of the target for the current financial year, at Rs 64,459 crore. For the period April to November 1998, the comparable period last fiscal, the deficit was 75.8 per cent of the budgeted amount.

But that is not really the problem. What is more relevant is the fiscal deficit last year, as at end-November when compared with the actual deficit at year-end. This works out to 61.4 per cent, meaning that as at end-November 1998, the Government still had 38.6 per cent of its borrowings left. If the borrowing this year is of the same magnitude, the fiscal deficit target will be left far behind. Small wonder then that Monday's rally in the bond markets ended with a flurry of profit-taking.

For the stockmarkets, this fact will slowly sink in as the budget nears. It will be realised that if fresh taxes are imposed, as is very likely given the runaway deficit, the losers will be the sectors other than software. That will mean a diversion of funds from other sectors to software.

Indian Railways
Newsreports suggest that the Government is planning some reduction in freight rates in the forthcoming Railway Budget. Could this well be a candid confession by the Indian Railways for arresting the decline in goods traffic? It seems that the Railway Board has been asked to consider such a proposal to regain some of the dry bulk cargo traffic, that the railways has lost to the road transport sector. Interestingly, the railways also appear to have lost a part of the liquid bulk cargo traffic, particularly crude oil and petroleum products to pipelines. A clear reflection of which is the continual drop in POL (Petroleum, Oil and Lubricant) traffic, which dipped by a further 1.5 per cent in October 1999.

Adding to the railway's woes is the loss of coal movement to road transport and to some extent the advent of coastal shipping. Reiterating which is the poor 3.1 per cent growth for the period from April to October 1999, compared to the double digit growths earlier. A sign of the changing times is the fact that the Indian Railways now account for 40 per cent of the freight traffic, with the road transport sector accounting for the remaining 60 per cent, a reversal of the trends some 15 years ago.

Interestingly, though analysts point out that the alarm bells should have started ringing at the Railway Board as far back as October 1999. Which is when the week-long road transport strike in late October also failed to have any major favourable impact in terms of freight carried, increasing a mere 3 per cent in volume terms during October 1999. Interestingly, revenue earnings from goods traffic on the Indian Railways had witnessed a 2 per cent drop for the period from April 1998 to March 1999.

Thus, with the Government having no option but to contemplate a reduction in freight rates in order to get competitive and with an immediate increase in volumes a distinct impracticality. How will the Indian Railway sure its bottom line? The obvious answer here is by hiking railway passenger fares, which seems inevitable. But with the fares already having reached a saturation point as far as upper class fares are concerned, analysts state that it would be the lower and middle class fares which would be hit. But here again, there is a glitch.

Analysts state that a 10 per cent hike in lower and middle class fares would fetch an additional Rs 700-800 crore. However, this would only cover the burden arising out of the increase in diesel prices. Thus it looks like the Indian masses, could well be staring down the barrel of a steeper hike in fares!

Intriguingly though, help for the Indian Railways could well come from the most unexpected of quarters. What with the All India Motor Transport Congress directing all its members to hike freight rates by a minimum of 18 per cent all over the country, could well save the Railways from the revenue blushes.

Emcee (with contributions from Percy Dubash)